“Failure to prevent tax evasion” – the Government has recently released draft legislation introducing this new corporate offence after conducting extensive research throughout 2015. Initially, a generic corporate offence of “failure to prevent economic crime” was envisaged, but this ambitious plan has since been abandoned. It seems that the government now plans to tackle corporate crime one offence at a time.
The new legislation is set to follow a structure similar to the Bribery Act 2010 in that it will place a responsibility on corporate bodies to prevent their agents from facilitating tax evasion. It will eventually require all corporates to undertake an assessment of the risk they may face of being prosecuted, and then implement adequate business practices to prevent such a prosecution. It is likely that non-compliance will result in crippling financial penalties against the corporate bodies.
Currently, it is proposed that all three elements of the new offence will have to be satisfied in order for the action to be deemed a ‘criminal offence’:
1. There must be criminal tax evasion by a taxpayer
2. There must be criminal facilitation of the offence by a person acting on behalf of the corporation; and
3. There must be a failure by the corporation to take reasonable steps to prevent that facilitation.
In recent months, the media has been shining a spotlight on the murky area of offshore tax havens. Whilst offshore structures in themselves are a perfectly legitimate commercial tool, they are open to abuse and – in the wrong hands – could enable individuals and corporate bodies to conceal their assets overseas in order to evade tax.
To overcome this, the draft legislation is intended to have extra-territorial reach and will apply to non-UK corporates whose agents criminally facilitate the evasion of UK taxes, and UK corporates whose agents facilitate tax evasion in other countries.
The overseas element of the draft legislation is however likely to raise the biggest challenges before being implemented. Broadly speaking, as currently drafted the offence may apply even in circumstances where there would be no tax evasion in the UK, because tax would not be chargeable in the same circumstances in the UK as it would in other jurisdictions. Additionally, corporates would incur significant costs when seeking to comply with such legislation and HMRC would face a similar outlay when prosecuting the offence. As it stands currently, HMRC will require the permission of the Director of Public Prosecutions before prosecuting overseas tax evasion on the basis that it must be in the public interest to pursue.
The draft legislation is open to comments until 10 July 2016, but limited to statements regarding the detail of the legislation, rather than any policy behind it. With that in mind, companies may want to stay ahead of the game and begin to think of their current internal practices, and what changes they may have to make going forward. For guidance on this, please contact Maya Paunrana.