The Criminal Finances Act: restricting tax avoidance
For adviser use only
New legislation to restrict tax avoidance
Over recent years, the government has increasingly focused its attention on tackling tax avoidance, tax evasion and the non-payment of tax. HMRC has published various legislation and introduced new measures to tackle this growing problem, with the General Anti-Abuse Rule and the Disclosure of Tax Avoidance Schemes being two good examples. In this article, we’ll consider The Criminal Finances Act 2017, which came into force on 30 September 2017. Under this legislation, companies and partnerships will be liable if they don’t prevent their employees, agents or others providing services on their behalf from criminally facilitating tax evasion. Have you considered the implications for you and your business?
So, what’s the difference between tax avoidance and tax evasion?
Tax avoidance is where a taxpayer is acting within the law, but making use of loopholes in the tax legislation to gain a tax advantage. This often involves using a contrived scheme or arrangement.
Tax evasion, on the other hand, is where the taxpayer is acting illegally, with a view to either underpaying tax or not paying tax at all.
What are the main implications of the Criminal Finances Act?
The legislation introduces two new criminal offences, one in relation to the evasion of UK taxes and the other the evasion of foreign taxes. All UK taxes are in scope including National Insurance contributions, but there is an exception for Scottish devolved taxes.
It’s worth noting, HMRC stated in its guidance to this legislation that companies and partnerships won’t be liable for crimes that their customers commit and they’re not responsible for making sure that their customers aren’t evading tax. Additionally, if an adviser legitimately recommends a product to a client and the client then, unknown to the adviser, uses that product to evade tax, the company or partnership won’t be liable. It’s already a criminal offence if a professional adviser helps a client to evade tax, but this legislation now takes this one step further, in that the aim of the legislation is for a company or partnership to stop their employees or agents from criminally facilitating tax evasion.
There are three stages to the UK offence, as follows:
Stage 1 – the taxpayer has to have committed tax evasion under UK law, but they don’t need to have been convicted of the crime.
Stage 2 – an employee, agent or other person who offers services to the company or partnership has to have criminally facilitated tax evasion. This would require deliberate and dishonest behaviour on their part.
Stage 3 – the organisation has to have been unsuccessful in preventing this criminal facilitation of tax evasion.
The stages involved in the evasion of foreign taxes offence are similar.
If the company or partnership can prove it has adequate prevention procedures in place, this could be used as a defence.
HMRC is keen to get organisations to report any criminal facilitation of tax evasion by their employees, agents or people carrying out services on their behalf. If an organisation does come forward and disclose such an incident, HMRC will take the view that this is evidence that the organisation’s prevention procedures are working.
So what actions should you or your business consider taking?
There are six guiding principles to consider when taking mitigating action, and these are as follows:
- Risk assessment - carry out a detailed risk assessment to consider the nature and level of exposure your organisation has to this type of risk and document the findings.
- Proportionality of your risk-based prevention procedures – review the adequacy of your prevention procedures, as these should be reasonable when considered alongside the level and nature of exposure to risk that your organisation faces.
- Top level commitment – senior management has to show that they’re taking preventative measures seriously and that criminal facilitation of tax evasion won’t be tolerated.
- Due diligence – undertake due diligence and assess the adequacy of current prevention procedures, especially In the light of high risk transactions, clients or jurisdictions.
- Communication - make sure that staff are adequately trained and that you publish effective internal communications to inform staff about this Act. Staff should also be made aware or reminded of whistleblowing processes.
- Monitoring and review – regularly monitor and review your risk assessment and procedures to make sure you have adequate prevention measures in force.
These tasks and measures could take considerable time and effort to implement but should be carried out as soon as practically possible given that the legislation is already in force. Your preventative measures and risk assessment will then need to be reviewed regularly to make sure they are up to date and adequate.