Tax

Corporate criminal offences explained

Jun 01, 2018
With the UK’s Corporate Criminal Offence legislation now in full force, businesses need to assess their risks before it’s too late.

These days, a company’s tax affairs are considered a hot topic – particularly if said company is not seen to be paying its fair share of tax. With the introduction of Corporate Criminal Offence (CCO) legislation, public scrutiny could extend to the actions of those a company employs or contracts within the ordinary course of business. The implications of failing to act could be significant, and the reputational damage alone of a successful conviction could be devastating for a company.
CCO is part of the global focus on the prevention of tax evasion and other financial crimes. It is one of a number of measures that were introduced in the Criminal Finances Act 2017 and took effect from September 2017.

Aim of the legislation

The aim of the legislation is to overcome difficulties in attributing criminal liability to a corporate when its ‘associated persons’ facilitate the evasion of tax. The term ‘associated person’ is widely drawn and includes any person (individual or corporate) who provides services for, and on behalf of, the corporate. This includes – but is not limited to – employees, contractors and agents. The legislation applies to all taxes and all relevant bodies (namely, body corporate or partnership – collectively referred to as ‘corporate’) regardless of their size. There is no de-minimus limit.

Penalties

Under CCO legislation, it is the corporate that is subject to prosecution. The authorities do not need to attribute the prosecution to a specific individual, and this offence does not alter what is criminal; rather, who is held accountable for the criminal activity. A successful prosecution could lead to:

  • An unlimited fine;
  • Ancillary orders, such as confiscation orders or serious crime prevention orders;
  • Public record of the conviction; and
  • Significant reputational damage.

The offences

The legislation has created two offences: the UK tax evasion offence (the ‘domestic offence’) and the foreign tax evasion offence (the ‘overseas offence’). These offences are very similar and include three stages:

  1. Criminal tax evasion by a taxpayer;
  2. The criminal facilitation of the evasion by an ‘associated person’ of the corporate. This would include aiding, abetting, counselling or procuring the fraudulent evasion of tax; and
  3. Failure to put in place reasonable procedures to prevent the associated person facilitating the tax evasion.
The overseas offence requires a UK nexus; it can only be committed if the corporate is incorporated in the UK, carrying on a business via a permanent establishment in the UK, or the associated person is located in the UK when the evasion of the overseas tax is facilitated.

Example

A very simplistic example of the type of arrangements the legislation is aiming to catch is as follows: in order to retain the services of a valued contractor, the finance department of a UK corporate agree a change to the payment arrangements whereby 90% of the contactor’s invoiced fees are to be paid to the normal trading account of the contractor, with the remaining 10% paid to a British Virgin Island (BVI) bank account. The contractor carries out the work on behalf of the corporate and payments are made as requested by the contractor. The contractor recognises 90% of invoiced fees, resulting in lower reported profits. The associated person, in this example the employee, must deliberately and dishonestly take action to facilitate the evasion of tax by the taxpayer. If the employee has only accidentally – or even negligently – facilitated the tax evasion, then the offence is not committed.

Defence

The only defence against this offence is the implementation of reasonable prevention procedures. What is accepted as ‘reasonable’ is likely to develop over time, however HMRC recommend that the following six principles should drive the corporate’s approach:
  1. Risk assessment: the risk assessment plays a fundamental role in evidencing that there are reasonable procedures in place. It should be used to highlight areas of potential exposure and identify and prioritise risks;
  2. Proportionality of risk-based prevention procedures: the procedures adopted must be proportionate to the risk faced by the corporate. HMRC suggests the ‘opportunity, motive and means’ test;
  3. Top-level commitment: this is intended to encourage the involvement of senior management in the creation and implementation of preventative procedures. Communication from the top level of the organisation is key;
  4. Due diligence: certain industries already undertake specific due diligence exercises – for example, financial services, legal and accountancy firms. However, this may not be sufficient for the purposes of CCO and may need to be tailored accordingly;
  5. Communication (including training): it is necessary to ensure that the procedures are clearly communicated to staff and understood at all levels. Communication and training should be proportionate to the level of risk involved; and
  6. Monitoring and review: the nature of risks faced by a corporate will change over time. It is therefore necessary for procedures to be reviewed and modified as appropriate.
As can be seen, the legislation is wide-ranging (in particular, innocence of the directors is no defence) and a successful conviction could have significant implications. It is therefore advisable for all corporates to carry out a risk assessment to identify those areas of risk facing their business. The findings can then be used to implement relevant procedures and train staff accordingly. Doing nothing is not an advisable option!

Claire McGuigan is Tax Director at BDO Northern Ireland.