For much of the past decade, perceived tax wrongdoings have taken a centre stage in the debate over corporate accountability. When the Panama Papers were released in 2016, the resulting investigative report led to public protests in countries around the globe. Prominent politicians lost their jobs in the fallout.
Despite the outrage and the ensuing investigations, it was widely acknowledged there was no easy way to hold UK companies responsible for failing to prevent the facilitation of arrangements that enabled instances of tax evasion to go unchecked.
While tax evasion, and facilitating tax evasion, have been criminal offences for a long time, HMRC believes that the system has been toothless in attributing criminal liability – in particular, where facilitation of tax evasion occurred without proving the “mind and management” of the company were knowledgeable of the activity.
Consequently, HMRC concluded that senior management of companies were not working hard enough to ensure that their own organisations were faultless in this respect.
While this is highly questionable, new criminal offences that came into force earlier this month suggest that HMRC has found an effective way to “fight back” after years when they believed that certain corporates held the whip hand.
At the heart of the new approach is the Criminal Finances Act 2017.
For the first time, facilitation of both domestic and foreign tax evasion will be strict liability criminal offences at the corporate level.
The new regime effectively makes firms liable for the criminal acts of their employees and “associates” that facilitate tax evasion.
For the domestic offence, the prosecution will simply need to show that there has been a criminal evasion at the taxpayer’s level, and a person associated with the corporation was criminally involved in facilitating that wrongdoing.
The only defence for a business is that it had reasonable prevention procedures in place – or it was reasonable to expect the business not to have these procedures in the first place.
Instead of pursuing questionable tax practices through courts of law, the new rules are designed to push senior management into taking a proactive approach in complying with the law, by policing the activities of their staffand associates.
The early signs indicate that the approach is working. Companies are already conducting risk assessments of the potential exposure to the facilitation of criminal tax evasion, with the intention of implementing new procedures to deal with this, and monitoring these periodically.
This can be pragmatic depending on the size of the company, but it is vital, not only because it is expected by HMRC, but because it would also represent the first step towards developing a robust defence.
HMRC is also asking for messaging to be strong and clear from the top. So corporate leaders are increasingly looking to make everyone associated with their business aware of the risks of non-compliance. We’re seeing increased due diligence carried out on suppliers and customers by many companies.
But it would be a mistake to brush off the consequences as purely financial. HMRC has learnt that the high-profile media scrutiny faced by large retailers and technology companies has been a far more effective deterrent than a comprehensive rulebook could ever be.
The damaged reputation in the shape of a criminal conviction makes it even easier for consumers and other stakeholders to hold companies to account in the court of public opinion.
More than ever, companies need to adjust to a new world where the buying public is set to assume an ever more important role in scrutinising corporate social responsibility.