HM Revenue & Customs (HMRC) has started cracking down on businesses that are failing to report tax evasion.
The Criminal Finances Act 2017 makes it a criminal offence for companies to facilitate tax evasion.
According to the taxman, which is applying the criminal corporate offences rules for the first time, it has nine live investigations and a “further 21 opportunities under review”.
Financial services is among the sectors being targeted.
Andrew Sackey, partner at law firm Pinsent Masons, said: “HMRC worked hard to get these new criminal powers and is determined to use them.
“Asset managers and private banks are obvious targets for HMRC’s activities.
“However, boards in other sectors also need to be asking themselves serious questions about whether they are at risk.”
Harsh consequences
If companies are found guilty of breaching the Criminal Finances Act, HMRC has the power to impose unlimited fines.
Additionally, businesses could end up having a criminal record, get restricted assess to regulated markets and not be able to bid for government contracts in the UK or abroad, the law firm warned.
“The corporate criminal offence is often described as HMRC’s Bribery Act; however, the level and breadth of this activity is on a far greater scale than we have seen before,” Sackey added.
“In terms of detection and intervention rates, the corporate criminal offence is already a far bigger risk to businesses than the Bribery Act.
“HMRC teams are increasingly conducting tax evasion investigations as normal, using either civil or criminal powers; and then exploring whether there has been a facilitation by someone associated with a company and, if so, testing if the company has the right controls in place.
“This makes it simpler to identify, investigate and subsequently prosecute non-compliant businesses.
“The fact that HMRC has confirmed that it is applying this offence across 10 business sectors, with very different operating models, reveals that they are using the power to send the message that corporates everywhere need to revisit their understanding of the risk of facilitation,” he added.
Wake-up call
The taxman’s announcement that it is looking into companies for tax evasion-related offences should prompt firms to review their procedures, especially if they have not done so since the act came into force, said Pinsent Masons legal director, Penny Simmons.
“This news should act as a wake-up call to businesses which have so far put dealing with the corporate criminal offences to the bottom of their compliance to-do list,” she said.
“Businesses need to quickly commit some time and resource to undertaking a risk assessment to determine their exposure to the offences, if they haven’t already, and reviewing their controls to prevent facilitation of tax evasion across their supply chain.
“And if they did a risk assessment two years ago, it’s time for a review to check that procedures are as robust as they need to be – so that, if HMRC does knock on its door, a business can quickly demonstrate that it took reasonable, proportionate steps to prevent the tax evasion that’s happened,” she added.
But, according to law firm Osborne Clarke, “most businesses have taken the hint and brought in the ‘reasonable procedures’ that constitute a defence to the new offences”.
“However, the risk is that, having put in place the new procedures, a degree of complacency can set in and businesses might not have reviewed their processes or checked that are working.”
Don’t sit on it
When the act came into force, the government published guidelines on what measures should be put in place.
It warned that:
- Procedures need only be reasonable and not necessarily burdensome;
- A risk assessment will inform the decision as to which procedures will be most appropriate for a particular organisation;
- The size of a company will be an important factor;
- Top-level management will be required to show a commitment to fostering a culture in which the facilitation of tax evasion is never acceptable;
- Due diligence procedures will be needed and may require the help of external consultants; and,
- Companies must communicate, and train on, their prevention policies and procedures.
“The immediate point for most businesses is that the reasonable procedures that were put in place in 2017 cannot be allowed to sit in a drawer,” added Osborne Clarke.
“HMRC expects businesses to review their effectiveness. That means running checks periodically, for example on agencies and other associated persons whose actions are deemed to be those of the business.
“Further, businesses may well have been encountered relevant incidents of potential tax evasion that occurred in the last two years. How they responded to those incidents and, if necessary, updated their processes will be important to demonstrate there are ‘reasonable procedures’ in place,” the law firm added.
