Failure to Stop Offshore Tax Evasion: A New Criminal Offence

Tuesday 11 October 2016

On 11 April 2016, following the ‘Panama Papers’ disclosures, the UK Government announced that it was bringing forward its plans to introduce legislation designed ‘to hold companies who fail to stop their employees facilitating tax evasion criminally liable’, thereby accelerating the consultation and legislative process that had already been started. The move was described as ‘part of the government’s efforts to clamp down on corruption in all walks of life’.

Less than a week later, on 17 April 2016, Her Majesty’s Revenue & Customs (HMRC) announced the launch of a further public consultation exercise on draft legislation for the creation of a new corporate offence of failure to prevent the criminal facilitation of tax evasion.

The consultation exercise was entitled ‘Tackling tax evasion: legislation and guidance for a corporate offence of failure to prevent the criminal facilitation of tax evasion’, and the closing date for public comments was 10 July 2016.

The proposed new corporate offence aims to overcome the legal and evidential difficulties associated with attributing criminal liability to corporations (including companies, partnerships, LLPs and other relevant trading entities) for the criminal acts of their agents and employees (as opposed to the acts of their senior directors and executives).

The proposed new offence will have 3 stages:

1. Stage One will address criminal tax evasion by a UK taxpayer under existing criminal law (i.e. cheating the public revenue or fraudulently evading VAT liability).

2. Stage Two will address criminal facilitation of a Stage One offence by a person acting on behalf of a corporation, whether by taking steps with a view to; being knowingly concerned in; or aiding, abetting, counselling or procuring, tax evasion by a UK taxpayer.

3. Stage Three will address a corporation’s failure to take reasonable steps to prevent those who acted on its behalf from committing the criminal act outlined at Stage Two.

HMRC’s proposed guidance stresses the importance of all corporations reviewing and improving their compliance and training procedures, and their business cultures generally, with respect to tax advice and associated financial and professional services. HMRC has provided a number of examples of facilitation, including:

  • Acting as broker or intermediary.
  • Providing tax planning and tax advice.
  • Delivering and maintaining infrastructure (e.g. company or trust establishment, bank account opening, legal services, corporate secretarial or fiduciary services, registered office services).
  • Providing financial services and assistance (e.g. use of client accounts or escrow services).

The draft legislation is expected to be enacted and implemented by late 2016 or early 2017, as part of the Criminal Finances Act.

Various industry groups have submitted responses to the consultation, particularly with respect to the more controversial and onerous elements of the Stage Three offence. For example, the UK’s Chartered Institute of Taxation has expressed concerns that the new offence must be subject to the availability of appropriate defences; that clear and unambiguous guidance must be provided by the government; and that the legislation must not be deployed in a draconian manner.

Extraterritoriality

In a similar manner to the UK’s Bribery Act 2010, the proposed draft legislation has a number of extraterritorial elements, in that the new offences apply equally to foreign corporations liable to pay UK tax, as well as UK-based corporations liable to pay foreign tax. The facilitation offence can also be committed not only by UK corporations, but also by foreign corporations carrying on business from an establishment in the UK, or whose acts or omissions take place in the UK.

In addition to the new criminal offences and sanctions, the UK Government has also proposed a new civil penalty regime for ‘enabling offshore tax evasion’, as part of the Finance Act 2016.

The UK Government’s proposals, when enacted, are likely to be very significant to ‘offshore’ financial service, fiduciary service and professional service providers (including banks, corporate service providers, accountants, auditors, investment managers and advisors, and lawyers), and their directors and officers.

Given the large number of such offshore firms that do business in or have other material  connections with the UK, and HMRC’s commitment to offshore tax enforcement activity, it would be prudent for such offshore firms to review and update their compliance procedures with this new legislation in mind.

Given other initiatives associated with international tax reporting and tax transparency such as FATCA and CRS, the review and enhancement of tax-related compliance procedures is likely to be a necessary corporate exercise for offshore service providers in any event.

Offshore professional insureds and their insurance brokers and insurers would also be well advised to consider the extent to which PI and D&O insurance policies might respond to the costs and liabilities associated with tax evasion investigations and prosecutions, and associated civil or criminal sanctions.

 

Original article part of Sedgwick’s Offshore Professional Risks Newsletter of October 2016 and included here with permission from Sedgwick LLP.

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