Failure to Prevent – the new rules explained

(December 2018) In April 2017, the Criminal Finances Act was given Royal Assent. It was primarily introduced to bring online the two new corporate criminal offences of failure to prevent criminal facilitation of tax evasion and has been designed to tighten up several existing loopholes in the current legislation. Here is a quick guide to the law and how it applies to both companies and individuals.

It doesn’t supersede the crime of tax evasion

Tax evasion still exists as a crime, but what the new legislation does is extend the scope of the law to prosecute individuals who may have allowed tax evasion to take place. It’s the facilitation of the crime that has now become a crime in itself.

The legislation means that companies now have to ensure that there are reasonable prevention measures in place to stop an employee or other party acting on their behalf with the intention of facilitating tax evasion, both here and abroad. So squirrelling away your profits in an offshore account could still get your business into trouble, even if it was done on your behalf by a third party and without your knowledge or consent.

Failure to take adequate steps to prevent this from happening could result in a very hefty fine for the company. There’s no limit to the level of fine, either, so the bigger the crime, the bigger the resulting fine could be.

What are the new offences?

There are two new offences covered by the Act – one for tax evasion in the UK and another separate offence for tax evasion overseas. Both are designed to tie up a loophole where it’s perceived that it was previously too difficult to prosecute a company for allowing employees to facilitate tax evasion by customers or suppliers. So rather than attributing a crime to a business, it focuses on the failure to prevent clause, meaning a business can be held to account for allowing the crime to happen in the first place.

The offences make ‘relevant bodies’ (which includes corporates and partnerships) criminally liable for preventing anyone regarded as an ‘associated person’ from facilitating tax evasion. This could include an employee or a sub-contractor and applies even if senior managers or CEOs had absolutely no idea what was going on. This legislation really is ‘ignorance is no excuse in the eyes of the law’ made manifest.

Is there any way to defend yourself against this?

The only defence is that you had put ‘reasonable’ procedures in place designed to prevent this from happening. The trouble is, ‘reasonable’ procedures is a bit of a vague term, which will probably need a lot more clarification if the already complex taxation laws are to be made any simpler.

Does this new legislation apply to sole traders?

No, only corporates (including limited companies) and partnerships can be prosecuted under the new laws.

What if my business is based abroad?

There are two new offences, so businesses based overseas but with connections to the UK (either through trade or having UK-based premises as part of the business) can still be caught up in the legislation.

What is an ‘associated person’?

This lies at the very heart of the law, and for an offence to have been committed an associated person has to have facilitated the tax evasion. This term includes not just employees and sub-contractors, but anyone who has a direct or indirect link to the company.

What happens if a business is held liable?

A successful prosecution could mean an unlimited fine, as well as some serious damage to your business’ reputation. As long as a business fully co-operates with any investigation then they may be permitted to apply for a Deferred Prosecution Agreement. This is when a prosecutor grants a company or individual an amnesty from prosecution as long as the defendant agrees to certain requirements, such as full disclosure and co-operation with the investigation, an agreement to pay fines, or implement corporate changes to procedures and operations.

How do we avoid this from happening to our business?

There are steps you can take to make sure that your business doesn’t end up in the dock. A full risk assessment can be carried out to identify any potential problem areas, associated persons and possible loopholes in your financial and tax management systems. Revisions to your policy and prevention procedures should be made clear (bear in mind that this may be your only form of defence if you are involved in an investigation). Practise due diligence when bringing onboard any external service providers, and make sure you monitor and review your prevention policies and their implementation carefully.

If you do encounter issues, then contact a legal expert specialising in taxation law immediately to minimise the potential damage to your reputation and your business.

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