Failure to prevent the facilitation of tax evasion

In September 2017, the government introduced the Corporate Criminal Offence (CCO) under the Criminal Finances Act 2017, making it a crime for organisations to fail to implement procedures that prevent the facilitation of tax evasion, and to strengthen tax integrity across all organisations.

Could your organisation be affected?

The legislation surrounding the CCO is 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 a 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.

HMRC starts to get tough

As of October 2020, HMRC has 31 potential CCO cases under review, with charging decisions still to be made. These span 10 different sectors, from small businesses through to some of the UK’s largest organisations.

It was a relatively slow start for HMRC with an initial lack of awareness amongst corporate entities - a survey carried out by HMRC over a year after the new rules came in found only 24% of respondents had assessed their risk and most did not have the risks formally documented. HMRC sought to address this in the following months as noted below. HMRC’s guidance also stresses the need for organisations to assess the risk of being exposed to the facilitation of tax evasion by those providing services on their behalf.

Regulated businesses such as law firms also face additional scrutiny and possible further sanctions from their regulatory body, as well as consequent reputational damage.

Developments in 2019


	The Law Society issues guidance emphasising the need for law firms to comply with the legislation and risks of not doing so.		HMRC introduces an online self-reporting facility for organisations to tell HMRC where they have failed to prevent the facilitation of tax evasion. This will give details about the criminal facilitation that the organisation failed to prevent and any tax evasion that may have taken place as a result.		HMRC confirms that it has commenced a number of criminal investigations in respect of this offence.

What are the key elements under the offence?

1.	Criminal tax evasion by an individual or legal entity - such cases are usually settled by HMRC accepting a monetary penalty by way of punishment (as well as the tax and interest due) so a successful prosecution is not needed.
2.	Facilitation of the offence by an employee or other person 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, unless it 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 measures, procedures and safeguards to prevent such facilitation of tax evasion. Prevention procedures must be reasonable and it may be, for example, that for a particular 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.

Step 1	An initial assessment of the risk that the first two elements above 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.
Step 2	Have an executive commitment to foster an environment where tax evasion is not acceptable under any circumstances.
Step 3	Implement a training and education programme for employees (and possibly agents).
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 of any employees or associated persons engaging in activity, which could help facilitate tax evasion, plays an 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?

There is real potential for organisations to incur criminal liability in relation to the activities of ‘associated’ persons, which may include contractors over whom they have relatively little control.

Organisations need to consider all the scenarios where a breach could occur. Some practical examples of this 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.	Advice is provided to a client by an employee on an overseas structure that can be used wrongly to shield income from HMRC, perhaps also using local overseas experts to create the structure.	An employee pays, or authorises payment, to a contractor in cash knowing that it will not be declared for tax purposes by the contractor.