This article answers some of the most frequently asked questions regarding the new corporate offences of failure to prevent facilitation of UK and foreign tax evasion which will be introduced by the Criminal Finances Act 2017.

1.     What is changing?

The Criminal Finances Act 2017 (the “Act”), which is expected to receive Royal Assent in spring 2017, introduces two new corporate offences which are:

(i)     the offence of failure to prevent facilitation of UK tax evasion; and

(ii)     the offence of failure to prevent facilitation of foreign tax evasion.

Both offences constitute criminal offences in the UK and are particularly relevant to firms of lawyers, accountants, tax advisers, wealth managers and private bankers who advise on tax structuring matters, and the implementation of tax structures, in the context of corporate acquisitions or reorganisations or private client work.

2.     To whom do the new offences apply?

The new offences apply to what is known as a “relevant body”, which is defined as a body corporate (such as a private limited company (LTD), a public limited company (PLC) or limited liability partnership (LLP)) or a partnership (including a limited partnership (LP)), whether established in the UK or overseas.

Individuals (i.e. natural persons) cannot commit the new offences.

3.     When are the new offences committed?

(1)     Failure to Prevent Facilitation of UK Tax Evasion

A relevant body (B) commits the offence of failure to prevent facilitation of UK tax evasion if a person commits a UK tax evasion facilitation offence when acting in the capacity of a person associated with B.

A “UK tax evasion facilitation offence” is defined, in summary, as:

(i)     being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of UK tax; or

(ii)     aiding, abetting, counselling or procuring the commission of a UK tax evasion offence.

A “UK tax evasion offence” is defined for these purposes as:

(i)     an offence of cheating the UK public revenue; or

(ii)     an offence under the law of any part of the UK consisting of being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of UK tax.

A person (P) acts in the capacity of a person “associated” with a relevant body (B) if P is:

(i)     an employee of B who is acting in the capacity of an employee;

(ii)     an agent of B (other than an employee) who is acting in the capacity of an agent; or

(iii)     any other person who performs services for or on behalf of B who is acting in the capacity of a person performing such services.

(2)     Failure to Prevent Facilitation of Foreign Tax Evasion

A relevant body (B) commits the offence of failure to prevent facilitation of foreign tax evasion if:

(i)     a person commits a foreign tax evasion facilitation offence when acting in the capacity of a person “associated” with B; and

(ii)     any of the following conditions is satisfied: (a) B is a body incorporated, or a partnership formed, under the law of any part of the UK, (b) B carries on business or part of a business in the UK or (c) any conduct constituting part of the foreign tax evasion facilitation offence takes place in the UK.

For the above purposes, a “foreign tax evasion facilitation offence” is defined, in summary, as conduct which:

(i)     amounts to an offence under the law of a foreign country;

(ii)     relates to the commission by another person of a foreign tax evasion offence under that law; and

(iii)     would, if the foreign tax evasion offence were a UK tax evasion offence, amount to a UK tax evasion facilitation offence.

A “foreign tax evasion offence” means conduct which:

(i)     amounts to an offence under the law of a foreign country;

(ii)     relates to a breach of a duty relating to a tax imposed under the law of that country; and

(iii)     would be regarded by the UK courts as amounting to being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax.

The definition of a person “associated” with a relevant body is the same as that which applies for the purposes of the offence of failure to prevent a UK tax evasion facilitation offence (see sub-section (1) above).

4.     Can you give some examples?

Here are a few examples:

(1)     UK firm facilitating UK or foreign tax evasion    

A firm of lawyers, accountants, tax advisers, wealth managers or private bankers established in the UK is asked to advise a client on the implementation of an arrangement which is intended to facilitate the evasion by the client of taxes in the UK or overseas.

The employee of the firm who is working on the assignment becomes aware that the arrangement is intended to facilitate tax evasion but decides to continue to advise the client notwithstanding that fact and does not inform the firm’s partners, directors or senior managers.

In this case:

(i)     the client would have committed a UK or foreign tax evasion offence;

(ii)     the firm’s employee would have committed a UK or foreign tax evasion facilitation offence; and

(iii)     the firm could be prosecuted in the UK for failure to prevent the facilitation of UK or overseas tax evasion.

The position is the same whether the firm’s employee is based in the UK or overseas and whether the client is a UK or foreign client.

(2)     Non-UK firm facilitating UK tax evasion  

A firm of lawyers, accountants, tax advisers, wealth managers or private bankers established outside the UK is asked to advise a client on the implementation of an arrangement which is intended to facilitate the evasion by the client of taxes in the UK.

The employee of the firm who is working on the assignment becomes aware that the arrangement is intended to facilitate tax evasion but decides to continue to advise the client notwithstanding that fact and does not inform the firm’s partners, directors or senior managers.

In this case:

(i)     the client would have committed a UK tax evasion offence;

(ii)     the firm’s employee would have committed a UK tax evasion facilitation offence; and

(iii)     the firm could be prosecuted in the UK for failure to prevent the facilitation of UK tax evasion.

It does not matter for these purposes whether the firm has any office, branch or other permanent establishment in the UK and where the firm’s employee was based when the advice was given.

(3)     Non-UK firm facilitating foreign tax evasion      

A firm of lawyers, accountants, tax advisers, wealth managers or private bankers established outside the UK is asked to advise a client on the implementation of an arrangement which is intended to facilitate the evasion by the client of taxes in a foreign country.

The employee of the firm who is working on the assignment becomes aware that the arrangement is intended to facilitate tax evasion but decides to continue to advise the client notwithstanding that fact and does not inform the firm’s partners, directors or senior managers.

In this case:

(i)     the client would have committed a foreign tax evasion offence;

(ii)     the firm’s employee would have committed a foreign tax evasion facilitation offence; and

(iii)     the firm could be prosecuted in the UK for failure to prevent the facilitation of foreign tax evasion if (and only if): (a) the firm carries on business or part of a business in the UK (e.g. it has an office, branch or other permanent establishment in the UK) or (b) any conduct constituting part of the foreign tax evasion facilitation offence took place in the UK (e.g. the firm’s employee had meetings in the UK at which advice was given in relation to the proposed arrangement).

5.     Can a relevant body be liable under the new offences even if there has been no conviction for tax evasion at the taxpayer level?

Yes. The UK Government has stated that a conviction for tax evasion at the taxpayer level is not a pre-requisite for bringing a prosecution against a relevant body under the new offences.

For example, a taxpayer may voluntarily come forward and make a full and honest disclosure to the relevant tax authority of its actions and it may not be in the interests of justice to criminally prosecute that individual or organisation for tax evasion.

In such circumstances, however, a prosecution of the relevant body under the new offences would still be possible.

6.     Can a relevant body commit the new offences even if the tax evasion facilitation takes place outside the UK?

Yes. Subject to one exception (see below), it is immaterial for the purpose of the new offences whether:

(i)     any relevant conduct of a relevant body;

(ii)     any conduct which constitutes part of a relevant tax evasion facilitation offence; or

(iii)     any conduct which constitutes part of a relevant tax evasion offence;

takes place in the UK or elsewhere.

The exception is that a relevant body that is not established in the UK and does not carry on business or part of a business in the UK can be prosecuted in the UK for the offence of failure to prevent facilitation of foreign tax evasion only if any conduct constituting part of the foreign tax evasion facilitation offence took place in the UK.

To summarise therefore:

(i)     a relevant body can be prosecuted in the UK for the offence of failure to prevent facilitation of UK tax evasion even if (a) it is not established in the UK, (b) it does not carry on business or part of a business in the UK and (c) the conduct constituting facilitation of UK tax evasion took place entirely outside the UK;

(ii)     a relevant body can be prosecuted in the UK for the offence of failure to prevent facilitation of foreign tax evasion if (and only if) (a) it is established in the UK, (b) it carries on business or part of a business in the UK or (c) any conduct constituting part of the foreign tax evasion facilitation offence took place in the UK.

7.     What does “carries on business or part of a business in the UK” mean for the purposes of the offence of failure to prevent facilitation of foreign tax evasion?

The Act does not contain a definition of “carries on business or part of a business in the UK” for the purposes of the offence of failure to prevent facilitation of foreign tax evasion.

According to the UK Government, a relevant body that has an office, branch or other permanent establishment in the UK is likely to carry on business or part of a business in the UK for these purposes.

It cannot be ruled out however that a relevant body that carries on business in the UK without having any permanent establishment in the UK could also meet this test in certain circumstances (e.g. it has employees who travel frequently to the UK to provide advice to UK based clients or it specifically targets UK based clients through a website or other means of distance communication).

In any case, a relevant body established outside the UK which does not carry on business or part of a business in the UK can still be prosecuted in the UK for the offence of failure to prevent facilitation of foreign tax evasion if any conduct constituting part of the foreign tax evasion facilitation offence took place in the UK (e.g. the relevant body’s employees provided their advice, or part of their advice, to a tax evading client while they were in the UK).

8.     Can a relevant body be liable as a result of the actions of another firm to whom it has referred a client?

The UK Government has stated that where:

(i)     a relevant body (B) introduces a client to another firm in good faith;

(ii)     B believes that the other firm is unlikely to be involved in facilitating tax evasion; and

(iii)     B steps away from the transaction entirely;

then B is unlikely to fall within the scope of the new offences. This is because in this case the other firm would not be a person associated with B (i.e. a person who provides services for or on behalf of B).

If however:

(i)     B was aware that the motive of the client involved tax evasion;

(ii)     B was aware that the other firm was likely to be involved in facilitating tax evasion by the client; or

(iii)     B did not step away from the transaction entirely and continued instead to control the ongoing relationship with the client and the advice sought (e.g. by taking responsibility for the other firm’s fees and including those fees as a disbursement in its bill);

then B could fall within the scope of the new offences. This is because, in the cases under (i) and (ii) above, B could be deemed to have intentionally facilitated the tax evasion by making the referral and, in the case under (iii) above, the other firm could be deemed to be a person who provides services for or on behalf of B.

9.     Do the new offences mean that firms must become tax expert?

No. Under UK law, a person commits a tax evasion facilitation offence only if he or she:

(i)     “deliberately and dishonestly” facilitates the commission of revenue fraud by another person;

(ii)     is “knowingly” concerned in, or takes steps with a view to, another person fraudulently evading tax that they owe; or

(iii)     aids, abets, counsels or procures another person in committing or to commit a revenue fraud.

A person who only “accidentally”, “ignorantly” or even “negligently” facilitates in good faith tax evasion by another person does not generally commit a tax evasion facilitation offence.

A relevant body will not therefore generally be liable under the new offences if a person associated with it has inadvertently facilitated in good faith the commission of tax evasion by another person.

10.     Is there any defence available?

As shown by the examples set out in section 4 above, the new offences are “strict liability offences”, meaning that a relevant body may commit such offences even if its partners, directors or senior managers did not have any involvement in, or were not even aware of, the illegal activity committed by the person associated with the relevant body.

The Act provides however that a relevant body (B) is not liable under the new offences if it can prove that, when the tax evasion facilitation offence was committed:

(i)     B had in place such prevention procedures as it was reasonable in all the circumstances to expect B to have in place; or

(ii)     it was not reasonable in all the circumstances to expect B to have any prevention procedures in place.

The above defence is known as the “prevention procedures” defence.

11.     What exactly are these prevention procedures?

The Act defines “prevention procedures” as procedures designed to prevent persons acting in the capacity of a person associated with a relevant body from committing UK or foreign tax evasion facilitation offences.

The UK Government has published guidance intended to help relevant bodies understand the types of process and procedures that can be put in place to prevent associated persons from criminally facilitating tax evasion.

Such guidance is designed to be of general application and is formulated around the following six guiding principles:

(1)     Risk assessment

The relevant body must assess the nature and extent of its exposure to the risk of those who act for it or on its behalf engaging in activity during the course of business to criminally facilitate tax evasion.

(2)     Proportionality

Reasonable procedures must be proportionate to the risk a relevant body faces of persons associated with it committing tax facilitation offences. This will depend on the nature, scale and complexity of the relevant body’s activities.

The new offences do not require relevant bodies to undertake excessively burdensome procedures in order to eradicate all risk but they do demand more than mere lip-service to preventing the criminal facilitation of tax evasion.

(3)     Top level commitment

The top level management of a relevant body should be committed to preventing persons associated with it from engaging in criminal facilitation of tax evasion. They should foster a culture within the relevant body in which activity intended to facilitate tax evasion is never acceptable.

(4)     Due diligence

The organisation must apply due diligence procedures, taking an appropriate and risk based approach, in respect of persons who perform or will perform services on behalf of the organisation in order to mitigate identified risk. Specific anti-tax evasion facilitation terms and conditions should be used where appropriate in the contractual documentation entered into with such persons.

(5)     Communication (including training)

The organisation must seek to ensure that its prevention policies and procedures are communicated, embedded and understood throughout the organisation through internal and external communication, including training.

(6)     Monitoring and review

The organisation must monitor and review its prevention procedures and make improvements where necessary.

12.     Are there cases where it would be reasonable for a relevant body not to have any prevention procedures in place?

According to the UK Government, in some limited circumstances it may be reasonable for a relevant body not to have prevention procedures in place.

This may be the case, for example, where a relevant body has fully assessed all the risks and they are considered to be extremely low and the costs of implementing any prevention procedures are disproportionate or cost-prohibitive in relation to the negligible risks faced.

The UK Government has made it clear however that in its view it will rarely be reasonable for a relevant body to not even have conducted a risk assessment.

The UK Government has added that a relevant body should keep the risks under review and be able to articulate the outcome of its risk assessment, and the active decision not to implement any procedures, should a challenge be raised at a later stage.

13.     What happens if a relevant body is convicted under the new offences?

A relevant body convicted under the new offences faces an unlimited criminal fine.

If it operates in the regulated sector in the UK or overseas, it may also be subject to regulatory enforcement action which may result in the loss of its licence, the issue of a public censure and/or the imposition of a fine (e.g. as a result of systems and controls failings).

A relevant body operating in the public sector may also be prohibited from bidding for public contracts in the future.

A criminal prosecution or conviction is also likely to result in reputational damage to the relevant body and its partners, directors and senior managers.

14.     What steps should therefore an organisation take to minimise the risk of committing the new offences?

Our advice is that any relevant body which:

(i)     is established in the UK;

(ii)     is established outside the UK but has an office, branch or other permanent establishment in the UK; or

(iii)     is established outside the UK but otherwise conducts business in the UK or with UK clients;

should carry on as soon as reasonably practicable a risk assessment to determine what, if any, reasonable prevention procedures should be put in place in order to minimise the risk that a person associated with it (e.g. an employee, agent or consultant) commits a UK or foreign tax evasion facilitation offence.

FS REG is available to assist organisations to carry on such risk assessment and put in place any required prevention procedures.

15.     How much does FS REG charge for providing such assistance?

The fees of FS REG for providing such assistance vary depending on the nature, scale and complexity of the organisation but generally range between £2,000 and £4,000 (plus VAT if applicable).

The above fees include: (i) the performance of a comprehensive risk assessment, (ii) the preparation of tailored prevention procedures and (ii) the delivery of a training session to the organisation’s staff, directors and senior managers.

Disclaimer: This article provides general information only. It is not intended to be comprehensive and does not constitute the provision of legal or regulatory advice. FS REG is not responsible for any action taken or omitted to be taken on the basis of the information contained in this article. © FS REG 2017 All rights reserved.