Tax Evasion and the Criminal Finances Act 2017

Tax Evasion and the Criminal Finances Act 2017


On the 27th April 2017, the Criminal Finances Act (“the Act”) received royal assent.  Apart from containing some of the most far-reaching changes to anti-money laundering since the passing of the Proceeds of Crime Act 2002, the act also introduced new powers designed to address the seizure of suspected criminal property – even in those cases where no conviction has occurred.  Of particular interest to all law firms, however, is the fact that the Act has also created new offences in relation to the facilitation of tax evasion which will affect all companies, LLPs and partnerships – and thus professional advisers such as lawyers and accountants. Although these new provisions did not take immediate effect they have been phased in by a series of ministerial announcements, and most of them took effect on the 30th September.

Corporate facilitation of tax evasion

The result of the introduction of the new offence is that companies, LLPs and partnerships can now be held to account for the actions of their employees in relation to failure to prevent facilitation of tax evasion – not only in relation to UK tax but also in relation to foreign tax evasion offences.  However, under the Act, liability only arises on a corporate basis for the organisations in relation to the acts of “associated persons” of the organisation.  This will include partners, directors, employees and others that the firm might instruct.  The individuals themselves will not therefore commit this offence – even though they may commit other offences under other legislation.  The rationale behind this is that in the past, where a professional adviser assists a taxpayer to evade tax, the adviser and the taxpayer could commit a criminal offence but the adviser’s employer would not have done so – even in cases where the adviser was encouraged to assist in the evasion.

Under the Act, however, the company, LLP or partnership will be criminally liable if it has failed to prevent tax evasion – whether by a member of staff or its agent and whether or not the company, LLP or partnership was involved or even aware of the evasion in question.

The legislation has been hailed by some as doing for tax evasion what the Bribery Act did for bribery and corruption.  Indeed, rather like the Bribery Act 2010, there is a defence of having adopted reasonable prevention procedures whereby liability will not arise if the organisation can “demonstrate that it has put in place a system of reasonable prevention procedures that identifies and mitigates its tax evasion facilitation risks” (ss.45(2) and 46(3)).

What does this mean in practice?

It is inevitable that the majority of firms strive, in any event, to avoid providing advice which is of its nature illegal – if only because Principle 1 of the SRA Handbook imposes an underlying duty upon all firms to uphold the rule of law and the proper administration of justice.   However, it is not the obvious instances that are the problem.  Many private client lawyers will be concerned about whether tax avoidance schemes fall under the ambit of tax evasion, which may later be investigated by HMRC and be declared, possibly retrospectively, to be illegal.

Those lawyers can possibly take some comfort from an HMRC guidance note which stresses the need for the associated person to facilitate the tax evasion “deliberately and dishonestly”, which suggests that bona fide advice should not present a risk – even in those circumstances where that advice pushes the boundaries of what might be regarded as legitimate tax avoidance.

However, it is not simply “authorised” advice about which firms need to be concerned.  Consideration must also be given to the possibility that directors, partners, employees and agents are giving illegal or unpermitted advice, usually in circumstances that the firm would not be aware of.  An example of just such a case was recently reported in the Law Society Gazette where a conveyancer in a firm had, without the knowledge of the partners in the firm, under-declared property values on 43 stamp duty land tax forms which he then submitted to HM Revenue & Customs, transferring about £333,000 to a personal bank account and to third parties. This resulted in a regulatory settlement being agreed between the partners of the firm and the SRA based on a failure to establish and maintain proper accounting systems. Similar circumstances now might result in a prosecution under this offence if the “reasonable procedures” required by the act were found not to be in place.

The important thing for firms to bear in mind is that, although the scope of the Act is quite wide, there are limitations to the extent to which it will impact.

The first of those limitations is that it is not intended that the provisions under the Act will change what is regarded as criminal tax evasion.  The intention is simply to increase the scope of those who can be held to account for criminal acts of tax evasion.

Secondly, it is worth noting that liability will not arise simply because a client is known to be committing tax evasion.  For the offence to be committed the adviser, who must be a partner, director, employee, agent or other associated person of the company, LLP or partnership charged with the offence, must be seen to be taking “deliberate and dishonest action” to facilitate the evasion.

Thirdly, the focus of the provisions is not so much on the tax evasion itself but instead on the requirement that organisations out in place procedures to prevent its tax evasion being facilitated.

A further point to be borne in mind is that the intention is not to restrict the ability of a client to seek advice as to how legally to minimise tax liabilities.  It is to prevent the unlawful evasion of tax.  Thus, there is nothing to prevent a solicitor from defending criminal charges of tax evasion or providing advice to the client on how they may regularise their tax position through legal means. Similarly, a firm cannot be held to be liable if their advice to a client to cease tax evasion goes unheeded.

Indeed, it is worth stressing that, since legal professional privilege applies to this offence no liability will arise for the firm under the Act if it fails to report tax evasion by the client where it knows that evasion is taking place.

Finally, it should be stressed it is not expected that firms will have in place all procedures to prevent the offence.  HMRC are taking a reasonable approach in appreciating that for some businesses this may be a major commitment. However, firms should have in place as of the end of September:

  • a clear commitment to achieving compliance and a visible demonstration of this fact. Thus, simply stating that they are attempting to comply will not be enough – they must be able to show what steps they have taken,
  • a commitment to comply with the provisions of the Act which starts at the top,
  • a plan for how they will communicate their intentions to those likely to be affected, and
  • going forward, a plan for how they will implement procedures in a proportionate and timely manner.

Thus, the expectation from HMRC is that there will be “rapid implementation, focusing on the major risks and priorities, with a clear timeframe and implementation plan on entry into force’.

How Does the Offence Arise?

For the offence to arise there must be a “relevant body” which is defined at s.44(2) of the Act as being “a body corporate or partnership (wherever incorporated or formed)”.  The implication, therefore, is that it would not apply to an unincorporated sole practitioner – but then if there were an act of unlawful tax evasion an individual would be liable in any event. The duty which is placed upon the relevant body is to put in place “such prevention procedures as it was reasonable in all the circumstances” to prevent the criminal acts of its employees and other persons who are associated with it, even if the members of senior management are not involved in or aware of what was going on.

Those criminal acts that will trigger possible liability for this offence are stated to be (s.45(5)):

“an offence under the law of any part of the United Kingdom consisting of—

(a)  being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax by another person,

(b)  aiding, abetting, counselling or procuring the commission of a UK tax evasion offence, or

(c)  being involved art and part in the commission of an offence consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.

In other words,  any specific statutory tax evasion offence or the common law offence of cheating the public revenue. There must also be an element of fraud or deliberate dishonest conduct, so liability would not arise, for example, through failure or even a refusal to complete a tax return or breach of other similar notice requirement offences. There need not be a conviction for a tax evasion offence, as where a taxpayer approaches HMRC to make a voluntary disclosure of their circumstances and no prosecution follows. Also, since a number of the relevant offences can be committed where dishonesty arises “with a view to” or where the person is “knowingly concerned in” the evasion of tax it might even be the case that the tax might not actually need to have been underpaid for liability to arise.

Similar definitions are given in relation to foreign tax evasion offences in s.46 (5) and (6) which states that “foreign tax evasion offence” means:

“conduct which—

(a)  amounts to an offence under the law of a foreign country,

(b)  relates to a breach of a duty relating to a tax imposed under the law of that country, and

(c)  would be regarded by the courts of any part of the United Kingdom as amounting to being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of that tax.”

and where “foreign tax evasion facilitation offence” means:

“conduct which—

(a)  amounts to an offence under the law of a foreign country,

(b)  relates to the commission by another person of a foreign tax evasion offence under that law, and

(c)  would, if the foreign tax evasion offence were a UK tax evasion offence, amount to a UK tax evasion facilitation offence (see section 45(5) and (6)).

Thus, the stages of the offence are:

  • the criminal evasion of tax, regardless of whether there has been a conviction;
  • the criminal facilitation of this offence by an associated person;
  • which the firm failed to prevent through the adoption of suitable procedures.

Note, in particular, that there are some additional elements to the foreign offence at which effectively creates a “dual” criminality test.  Thus:

  • the evasion must be criminal in the territory where it occurred and within the UK; and
  • there must be an equivalent offence covering an associated person committing a criminal act of deliberate and dishonest facilitation of tax evasion in that jurisdiction (so an offence of doing so merely through negligence or oversight would not suffice).

A further feature of the foreign offence is that the consent of the DPP or the Director of the SFO is required for there to be a prosecution, and there must also be a “UK Nexus” for an organisation to be potentially liable.  That means that the relevant body must:

  • be incorporated in the UK; or
  • carry on business in the UK, or
  • part of the facilitation must have been performed in the UK.

Thus criminality could potentially arise where there is just a slight involvement in the UK on the part of international firms.

What is an Associated Person?

S.44 of the Act provides that a person is associated with a relevant body if they are:

  • an employee acting in the capacity of an employee of the relevant body,
  • an agent, other than an employee, acting in the capacity of an agent of the relevant body, or
  • any other person who performs services for or on behalf of the relevant body who is acting in the capacity of a person performing such services.

and whether or not that person is the person who provides the services on behalf of the relevant body will be determined by reference to all of the relevant circumstances and not merely by reference to their relationship with the relevant body.

Thus, an associated person will include not only directors, partners, employees and agents, but also external adviser such as counsel if they are performing services on behalf of the relevant body (for example being charged as a disbursement). However, if the services in which the act took place are not “for or on behalf of the firm” –  for example where the firm merely introduces the client to a foreign firm for advice in that jurisdiction – then the advice will not be given “for and on behalf of the firm” and thus the offence will not be committed.

How Should Firms Begin the Process of Compliance?

The starting point for all firms to take in relation to achieving compliance with the Act is to develop a policy as to how they will comply and to introduce procedures to facilitate this as soon as possible. Bear in mind that, despite total compliance not being needed from the end of September, nevertheless HMRC do want to see “rapid implementation, focusing on the major risks and priorities, with a clear time frame and implementation plan”.

In order to achieve this, firms should, therefore:

  • devise a clear statement of partner/director commitment to comply with the law – which implies that all partners and directors are not only aware of the provisions but support the steps taken by the firm;
  • create and implement an initial communication plan – in other words, ensure that everyone within the firm is aware of the provisions and what they must do and not do; and
  • devise an implementation plan – that is to say, set out what will actually be done to ensure compliance.

HMRC have suggested that the required procedures should be based on six guiding principles:

  1. undertaking a risk assessment to identify how facilitation might arise;
  2. implementing procedures which are proportionate to the risks thereby identified;
  3. maintaining due diligence with partners, staff, third parties and clients in relation to the risks that arise;
  4. ensuring partner or director commitment to preventing facilitation;
  5. communication and training; and
  6. ongoing monitoring and review.

The implication of this, therefore, is having developed a policy statement, the next practical step for the firm is, as with so many aspects of practice, to carry out a risk assessment as to which aspects of the firm might potentially be involved and how evasion advice might be given.   Firms wishing to get some guidance on risks to be assessed may wish to look at Section 5 of the Law Society Criminal Finances Act 2017 Practice Note.

The way in which the offence is set out means that a firm will have a defence provided it can point to reasonable prevention procedures being in place. The position of the individual who actually provides the advice that might trigger liability under the offence is different.  The HMRC guidance note makes the point that:

“It is already a crime for a person to be knowingly concerned in, or take steps with a view to, another person fraudulently evading tax. It is also a crime to aid and abet another person in committing a revenue fraud.”

and that “the fact that the crime is committed during the course of their work is no defence” and it would be desirable for the policy now required to stress this point also.

The procedures to be adopted are likely to be accepted as being reasonable as long as they can be shown to have emerged from the documented risk assessment process.  It is essential, therefore, that the risk assessment is documented and that the procedures implemented can be seen to flow from it.

Further Reading

Anyone who wishes to know more about the offence and how the appropriate procedures should be implemented should read:

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