If you haven’t heard of the UK Criminal Finances Act 2017 yet, you aren’t alone, but you won’t want to be the last person to get in the know.
This is an important piece of new legislation that businesses need to prepare for – and quickly. It comes into force on 30 September 2017.
The Act is of global significance. Among other things, it introduces a new criminal offence if a company fails to prevent its “associated persons” from facilitating tax evasion by a third party.
The law relates to the evasion of taxes or duties anywhere in the world, and applies to any company that is incorporated in the UK, or any overseas company that conducts business in the UK.
It also applies to companies that have no connection to the UK, if their associated persons facilitate the evasion of UK tax or duty or facilitate evasion while in Britain.
This dual aspect makes the scale of accountability for companies unprecedented in UK criminal law.
But that isn’t the only sting in the tail. An “associated person” is very broadly defined as any person or entity that provides services for or on behalf of the company, such as employees, agents, subsidiaries, sub-contractors, joint venture partners, or professional advisers.
Because the offence is one of failing to prevent, it is irrelevant whether or not the company was involved in the evasion, or if it was completely unaware of what its associated persons were doing. The only defence is for the company to show that it had in place “reasonable procedures” designed to prevent the facilitation of tax evasion.
This means that a company needs to tailor a compliance programme according to the risks it faces based on where, how and with whom it is doing business.
Formal guidance to be issued by HMRC will also refer to the need for board level commitment, effective training, due diligence in relation to third parties, and regular monitoring to ensure effective implementation of policies and procedures.
The scale of this new legislation cannot be understated. It will affect financial services firms, accountants, lawyers, tax consultancies and wealth managers – but also manufacturers, importers, exporters, resellers and agents. In fact, any company of any type anywhere in the world will be impacted, especially if they are involved in aggressive behaviours to mitigate tax, or don’t have full sight of their sales and supply chains.
It would be a mistake to think that this is just another tax law. It is a wholesale extension to corporate criminal law, and companies should seek expert legal advice long before dwelling on the intricacies of their tax affairs.
HMRC will lead investigations in relation to the UK, while the Serious Fraud Office (SFO) will take the lead overseas. The new offences will attract substantial fines, confiscation of the proceeds of crime, and significant reputational damage. There is also the prospect of separate action by the regulator of any regulated entity, especially where the failures are considered to be systemic.
You can bet on HMRC and the SFO taking their responsibilities seriously, not least because of the intense global pressure to act against tax evasion following the publication of the Panama Papers.
Huge amounts of tax data have already started to flow into the hands of HMRC from dozens of revenue authorities all around the world, as a result of the global Common Reporting Standard. More will follow suit next year. And the SFO has gathered significant data from historic investigations, so it knows where to go looking next.
Both agencies rely heavily on information provided by whistleblowers. They know that the new law will give them latitude to investigate companies in a way that didn’t exist before.
Companies need to act now as, technically, “reasonable procedures” ought to be in place by the end of the month, although there is likely to be some flexibility. Your board will not want to be the last to learn about this new law – or the first to receive a summons.