Complying with the Criminal Finances Act: 5 key things you can’t forget

The Criminal Finances Act (the Act) introduced two new corporate criminal offences which came into force in September 2017. One is failing to prevent the facilitation of UK tax evasion by associated persons and the other is failing to prevent the facilitation of foreign tax evasion by associated persons. Since then, organisations can be held criminally liable for failing to prevent anyone acting for or on their behalf from facilitating the evasion of UK or foreign tax. Conviction comes with serious consequences, including a potentially unlimited fine.

We have outlined 5 key things that organisations can’t forget to ensure compliance with the new offences under the Criminal Finances Act.

All companies must act, starting with a risk assessment

No organisation is exempt from the new corporate offences. They extend to companies and partnerships across all industries and risk levels and also have an extraterritorial reach, applying to all UK firms and all foreign firms with a UK nexus. A clear and documented risk assessment is thus a necessary first step for all organisations, to understand their risks and determine the procedures that are reasonable. Indeed, HMRC has made it very clear that “it will rarely be reasonable to have not even conducted a risk assessment”.

All types of tax evasion need to be considered

The new offences apply to facilitating the evasion of any type of UK or foreign tax, including the misuse of personnel allowances and naming employees as contractors to avoid national insurance. This means risk assessments need to consider how organisations treat any type of tax, anywhere in the world, and ensure associated persons cannot facilitate their evasion. A compliance programme that covers only UK taxes or focuses on a single type of tax – such as corporate tax or VAT – is too narrow.

Associated persons are not just employees

Under the Act, an organisation can be held criminally liable for failing to prevent an associated person from facilitating tax evasion. The ‘associated person’ of an organisation is defined in the Act as anyone acting for or on its behalf, and therefore includes not only employees but also other third parties such as agents, suppliers, representatives and contractors. Organisations must thus ensure that their preventative procedures reach all their associated persons and are not solely focused on employees.

Cross-functional support is key

Although input from an organisation’s tax experts is required, particularly to provide guidance on tax queries and what might constitute tax evasion, compliance demands a focus that extends beyond the tax team. HMRC has clearly stated that organisations must put in place preventative procedures informed by a risk assessment, proportionality of risk-based prevention measures, top level commitment, due diligence, communication and training, and monitoring and review. Preventative procedures informed by these principles will necessarily extend across multiple levels and departments of an organisation, including HR, sales, procurement and finance. Cross-functional support is therefore necessary for a robust and effective compliance programme.

A long-term focus is necessary

The risks to which an organisation is exposed change and evolve over time. To make sure the procedures in place remain effective and reasonable, it is important to carry out periodic reviews.

The GoodCorporation Framework on Preventing Tax Evasion and the Facilitation of Tax Evasion can be used as the base for a risk assessment and to assess whether an organisation has the reasonable procedures to prevent the facilitation of tax evasion. It covers different types of tax and demands a cross-functional approach to compliance.

Contact us for more information.

Posted August 2018