Corporate Criminal Offence
Failure to prevent the facilitation of tax evasion
The Criminal Finances Act 2017 made it a crime for organisations to fail to implement procedures that prevent the facilitation of tax evasion by another party such as a supplier, customer or contractor. This is known as the Corporate Criminal Offence (CCO), designed to strengthen accountability and tax integrity across all organisations.
Could your organisation be affected?
.The legislation surrounding the CCO is extremely broad – it automatically attributes criminal liability to any corporate entity when its employees, contractors or any associated persons are seen to be facilitating tax evasion by another taxpayer, for example a client, customer or supplier. There are no exceptions to the rule; all taxes and all corporates, including partnerships and LLPs, irrespective of size or industry sector are impacted. Non-UK companies will also be caught if the tax evaded is UK tax.
What are the key elements under the offence?
| 1. | Criminal tax evasion by anyone - such cases are usually settled civilly under what is known as the Contractual Disclosure Facility (CDF) or Code of Practice 9 (COP 9) which means that there no need for a successful criminal prosecution for tax evasion to be established. |
| 2. | Facilitation of the offence by an employee or agent acting on behalf of the organisation - for example aiding the tax evasion by the taxpayer. |
| 3. | The organisation is then automatically guilty of having failed to prevent the facilitation of the tax offence. The defence applies if the organisation can demonstrate that reasonable prevention measures were in place. |
What prevention measures can organisation put in place?
An organisation can plead a defence that it has put in place suitable measures, procedures and safeguards to prevent such facilitation of tax evasion. The organisation is then potentially protected even if such tax evasion and facilitation of it does in fact take place.
Prevention procedures must be reasonable and it may be, for example, that for a particular low-risk situation it was reasonable to expect the organisation to have no such procedures in place. Specific facts and circumstances must always be taken into account.
HMRC regards the following as examples of reasonable steps to prevent the facilitation of tax evasion.
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Step 1 |
An initial assessment of the risk that the first two elements above (criminal evasion plus facilitation) could happen. The organisation should calculate, document and review potential exposure to the risk of any employees or associated persons engaging in activity which could help facilitate tax evasion. |
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Step 2 |
Have an executive commitment from the top to foster an environment where tax evasion is not acceptable under any circumstances. |
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Step 3 |
Implement a training and education programme for employees (and possibly agents). |
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Step 4 |
Conduct risk assessments as part of a due diligence programme for individual projects, particularly in high risk industries or countries where tax evasion may be more prevalent. |
Step 1 is fundamental – an assessment of the potential exposure to the risk that any employees or other associated persons (such as agents) engaging in activity, which could help facilitate someone’s tax evasion. This plays a very important role in demonstrating to HMRC that the company has actively sought to put reasonable prevention procedures in place.
The risk assessment:
- involves examining the organisation’s operations and procedures to identify where there is vulnerability
- examines mitigating factors for each risk
- helps identify what further action or changes may be need
- plays a vital role in demonstrating to HMRC that the organisation has actively sought to put reasonable prevention procedures in place.
Organisations should take steps immediately to ensure that their processes and controls are robust.
How can a breach occur and who is affected?
Tax evasion is broadly defined as a taxpayer deliberately trying (not necessarily successfully) not to pay the right amount of tax. This is not a high bar, there is no need for sophisticated mechanisms such as false or doctored documents, merely an attempt at paying the wrong amount of tax, for example by submitting incorrect tax, VAT or employee tax returns.
There is real potential for all organisations to fall foul of the CCO if the risk of employees facilitating evasion is not properly analysed; the activities of ‘associated’ persons may carry additional risk as this could include contractors over whom the organisation has relatively little control.
Organisations need to consider all the scenarios where a breach could occur. Some practical examples of this, all of which we have seen in practice, are mentioned below.
| An employee deliberately raises an invoice to a client's company overseas rather than a UK company so that UK VAT does not need to be charged. | An employee issues an invoice in the name of the company rather than its shareholder/director knowing that there is an intention to recover VAT and not to declare the benefit in kind. | Large amounts of cash are transported overseas by an employee who is aware that the overseas workers being paid will not be declaring the income. |
| A member of the HR team deliberatively completes the paperwork for a person as a self-employed contractor rather than an employee subject to PAYE and NIC. | A UK supplier issues an invoice form an overseas entity with a very similar name, with no or reduced VAT charged, or asks for payment to be made into an overseas bank account to shield the funds from HMRC’s view. | An employee pays, or authorises payment, to a contractor in cash knowing that it will not be declared for tax purposes by the contractor. |
