Turning up the heat on corporate standards
By Paul Scully, North West head of tax at Grant Thornton
The idea of guilt by association has always been with us. You only need to look across the Atlantic to the drama unfolding in the White House to understand that people can be judged by the company they keep.
That concept of contamination through association with suppliers, employers and related entities has been given some real teeth in the world of tax through the enactment of the Criminal Finances Act 2017, which took effect from September last year.
The Criminal Finances Act is a radical piece of legislation that represents a major departure from previous orthodoxy in the world of tax that held you could only be prosecuted for tax evasion if you knowingly committed a breach of the regulations.
Under the new rules not only can a company be prosecuted for tax evasion that it is oblivious to but it can be prosecuted for evasion committed by third parties.
Two new offences have been introduced by the Act: The first is the failure to prevent facilitation of UK tax evasion, which introduces a strict liability offence for companies (and partnerships) if a person commits a UK tax evasion facilitation offence when acting in the capacity of a person associated with the company and the company fails to prevent this.
The second is the failure to prevent facilitation of foreign tax evasion when a firm is incorporated in the UK, carries out business in the UK or if any aspect of the facilitation of foreign tax evasion took place in the UK.
One of the issues for UK businesses is just how widely the term ‘associated person’ is applied under the Act. It not only includes employees of the company but other individuals and businesses who perform services for, or on behalf of the company such as sub-contractors and associated persons such as agents, distributors, subsidiaries and business partners.
The terms of the Act are also broad, including criminal tax evasion by a third-party taxpayer (whether an individual or a company) and the ‘associated person’ facilitating this evasion deliberately and dishonestly.
This creates risk far and wide in the business world, with some sectors more vulnerable than others. For example, the oil and gas industry operates across many different territories, using many different service providers and sub-contractors, meaning there are many – and varied – opportunities for tax evasion across a project.
Similarly in many industries, it is common for workers to claim that they are self-employed in order to minimise tax contributions when – by all reasonable measures – they ought to be considered to be employees. Under the terms of the new Act, employers can no longer turn a blind eye.
Of course, no business can reasonably be expected to know what every employee or ‘associated person’ is doing at any given time. But they can be expected to instigate reasonable procedures to prevent the facilitation of tax evasion. Key steps that businesses should take include:
• Ensuring buy-in from the top: If things go wrong, it is board-level managers who are at risk. HMRC therefore has an expectation that they personally put reasonable steps in place to build a company culture in which all staff members, service providers and contractors know that tax evasion is never acceptable, and what the penalties are.
• Adequate risk assessment: This should include assessment of both domestic and international business to pinpoint areas of risk (e.g. who is likely to be considered an ‘associated person’ or which countries in which they work are likely to lack adequate anti-corruption legislation). The risk assessment should be proportional to the complexity of the business in question.
• Put reasonable preventative measures in place: This will, of course, depend on the size, nature and scope of the business, but could include: training for both internal staff and external ‘associated persons’ , clear reporting structures, robust whistleblowing procedures and due diligence (e.g. in the selection of ‘associated persons’ and inclusion of anti-tax evasion clauses in company contracts)
• Careful monitoring: Implementing a culture of ‘active management’ on the issue, with regular reviews and auditing of all processes and contracts.
Given the penalties involved – which include imprisonment and unlimited fines – it’s no surprise that the new Act has created a large volume of enquiries for us from businesses that are sensibly taking steps to mitigate their risks.