GUEST ARTICLE: UK Widens Criminal Law Net Over Corporates In Fight Vs Tax Evasion

Andrew Smith and Danielle Reece-Greenhalgh Corker Binning 18 April 2016

GUEST ARTICLE: UK Widens Criminal Law Net Over Corporates In Fight Vs Tax Evasion

The UK wants to hold corporate entities criminally liable for not stopping the "facilitation" of tax evasion, a move which creates all manner of traps for the unwary or even those better informed.

The UK government proposes to hold corporate bodies criminally liable for not stopping the facilitation of tax evasion, adding to moves to make tax evasion - already a crime - a strict liability offence, so that intent does not need to be proven, as has been historically the case under English Common Law. With governments the world over adopting ever tougher measures to stem revenue losses to shore up their own balance sheets, significant alterations to the flightpath of such policy is unlikely any time soon. It remains the view of this publication that the best path for policy is for governments to simplify and reduce tax to reduce the opportunity and incentive for evasion in the first place, while also reducing appetite for aggressive tax avoidance which isn’t, strictly speaking, illegal. 

In its consultation paper, HM Revenue & Customs said: "The new corporate offence aims to overcome the difficulties in attributing criminal liability to corporations for the criminal acts of those who act on their behalf. Whilst this consultation refers to the application of the new offence to “corporations”, the draft legislation refers to a “relevant body” to encompass the broad range of legal persons to which the new offence will apply." Clearly, definitions will be crucial in deciding how the law operates in practice.

A law firm specialising in areas such as fraud, regulatory litigation and various crime cases is Corker Binning. Two lawyers, Andrew Smith and Danielle Reece-Greenhalgh, set out the latest developments and some of the associated issues. This publication is pleased to share these insights and invites readers to respond. 

In a new consultation published yesterday, the government has outlined the latest incarnation of its plans to hold corporate bodies criminally liable for failing to prevent the facilitation of tax evasion. This new consultation has been anticipated ever since the original consultation in July 2015, which led to the publication in December 2015 of the first draft of the legislation. A revised draft of the legislation is annexed to yesterday’s consultation.   

On 11 April, the Prime Minister’s office issued a press release announcing that the draft legislation was being brought forward in light of the London Anti-Corruption Summit on 12 May. The press release also referred to plans for a cross-agency taskforce, led by HMRC and the NCA, to investigate illegality arising from the Panama Papers. (For more on the Panama Papers subject, see here.)

To be clear, the draft law is not a means by which the government could seek the prosecution of those implicated in the Panama Papers. The law would, for example, have no application whatsoever to the type of offshore investment scheme which David Cameron’s father managed. The law does not expand the definition of tax evasion under UK law, nor does it criminalise what some regard as immoral tax avoidance. However, the timing of the consultation is no doubt calculated to deflect the current waves of criticism concerning the Government’s broader approach to combating tax fraud.

What is the offence?
The substance of the offence remains the same as originally proposed, namely to criminalise corporate bodies which fail to prevent an associated person from facilitating the fraudulent evasion of tax, either in the UK or overseas. The offence utilises the “failure to prevent” model of strict liability found in section 7 of the Bribery Act 2010, and replicates the definitions of “associated person” and “relevant body” almost exactly. The associated person who facilitates a tax evasion offence can therefore be legal or natural, and can perform services for or on behalf of the corporate as an employee, agent or subsidiary.

There are three important differences between the draft law published yesterday and the draft published in December 2015. These are as follows:

1.    An expanded definition of the circumstances in which a prosecution can take place of a foreign company for failing to prevent the facilitation of foreign tax evasion;
2.    A restricted definition of the circumstances in which facilitation of UK tax evasion can occur;
3.    A new defence whereby the corporate commits no offence if it was reasonable not to have any prevention procedures in place.

The first difference
The offence relating to UK tax evasion facilitation applies to all companies and partnerships, regardless of whether they are incorporated or formed in the UK. In contrast, the offence relating to foreign tax evasion facilitation requires one of the following:

1.    That the relevant body is incorporated/formed in the UK;
2.    That the relevant body is carrying on a business or undertaking (or part thereof) from an establishment in the UK; or
3.    That any act or omission forming part of the foreign tax evasion facilitation offence takes place within the UK.

This third permutation did not appear in the draft law published in December 2015. Its inclusion in today’s draft law means, for example, that a Brazilian company, with a business located solely in Brazil, would be criminally liable in the UK if it fails to prevent one of its agents performing an act in the UK that constitutes an offence of facilitating the evasion of Brazilian tax (e.g. a telephone call in London which facilitates the evasion of Brazilian tax). On one view, expanding the draft law in this way simply reflects ordinary principles of jurisdiction under UK criminal law. However, prosecuting foreign companies for their failure to prevent foreign tax evasion, especially when they are not even carrying out any business in the UK, is almost inconceivable in practice.

Indeed, when one looks at the draft provisions relating to the facilitation of foreign tax evasion, it is difficult not to feel a sense of unreality. The draft law states that the tax evasion must be both an offence under the law of the country relating to evasion of tax payable in that country and a tax evasion offence under UK law. In addition, the facilitation of the tax evasion must be both an offence under the law of the country where the evasion takes place and an offence in the UK. These provisions sensibly contain a “dual criminality” protection, which means a company cannot be prosecuted in the UK in relation to facilitating a tax offence which would not be criminalised under UK law. Even so, one has to question the practicality and public interest in prosecuting companies in relation to foreign tax. A prosecutor would need to call expert evidence about foreign tax law, to prove both the evasion offence and the facilitation offence. Except in the most egregious cases, this is likely to be an insurmountable hurdle, given the varying (and difficult to interpret) thresholds of evasion and avoidance created in tax regimes across the world. Those defending the company would seek to sow confusion in a jury by turning any trial into an abstruse debate about foreign law.

The facilitation of foreign tax evasion bears the hallmarks of a similar provision - section 71 Criminal Justice Act 1993, which has sat on the statute books for many years but which has never, to our knowledge, been successfully prosecuted. This section created an offence of aiding or inducing conduct in relation to the evasion of certain defined taxes within the EU. To commit this offence, the evasion itself occurs in the EU (outside the UK) but the assistance or inducement of that evasion occurs within the UK. If prosecuting the evasion of EU taxes under section 71 CJA 1993 has proved impossible over the past two decades, what prospect is there of this foreign tax facilitation offence being successfully enforced? It is simply not in the public interest to create criminal offences which stand no realistic prospect of being prosecuted in practice. In the vast majority of cases, where the authorities of a foreign country have suffered a tax loss, the most pragmatic – and arguably the more just – solution is to place the culpable suspects on trial in that foreign country (and if they are in the UK, to extradite them to the foreign country).

The second difference
The draft law sets out what constitutes the relevant tax evasion offences alleged to have been facilitated. Unsurprisingly in the UK, this includes an offence of cheating the public revenue, but also covers any offence“ consisting of being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax.” The facilitation of this offence is committed where a person with the necessary knowledge and intent, aids, abets, counsels or procures the commission of the offence. The facilitation is also committed where a person is knowingly concerned in the commission of the tax evasion offence. However, a company cannot be criminally liable where the associated person was involved in “encouraging or assisting the commission of the offence” - the wording found in the December 2015 draft. This somewhat woolly language has now been removed, with the result that the concept of facilitation is now firmly based on well-established criminal law concepts of accessorial liability.

The third difference
The draft law provides the corporate with the same defence to both the UK and overseas offences. To rely on this defence, the corporate must prove that, at the time of the facilitation, one of the following applied:

1.    That the corporate had in place such prevention procedures as it was reasonable to have in place; or
2.    That in all the circumstances, it was not reasonable to expect the corporate to have any prevention procedures in place.

This second defence was not found in December 2015 draft. It has no precedent in the Bribery Act 2010. Its introduction marks a policy shift which gives greater protection to a corporate suspect. It seems to recognise, quite rightly, that small to medium entities should not be unduly burdened with creating compliance procedures if they reasonably perceive the risks of tax facilitation in their business to be non-existent.

Whilst the guidance elaborates helpfully on how reasonable prevention procedures might be developed, it has nothing useful to say about the circumstances in which an absence of procedures might be reasonable. The devil will be in the detail, of course, because the reasonableness of the procedures will be determined by the risk profile of the particular corporate. The consultation invites respondents to suggest case studies on this point.

There are many statutory and common law offences which criminalise tax evasion. There are the so-called “professional enablers” provisions under the Serious Crime Act 2015 criminalising those who facilitate offences including tax evasion. There are far more serious criminal offences of money laundering under the Proceeds of Crime Act 2002, which criminalise all dealings with the proceeds of tax evasion.

What distinguishes the proposed offence from all of these existing laws is the stringent obligations it places on corporates to monitor persons associated with them. The clear objective of the draft law is to impose on the corporate the compliance burden of policing its employees, agents and subsidiaries, with the aim of creating more responsible corporate citizens, thereby helping to stamp out tax evasion at its source, or helping HMRC to identify tax evasion it might not otherwise detect.  

Over the past few years, the government has repeatedly said that it is serious about investigating and prosecuting aggressive tax fraud. But it also knows how difficult it is to gather evidence and secure convictions, particularly where the evasion involves opaque offshore structures. Only last week the House of Commons Public Accounts Committee lambasted HMRC’s “woefully inadequate” prosecutorial record.

Given HMRC’s stretched budget, and to improve HMRC’s prosecutorial record, it is no doubt politically expedient to criminalise the easier targets - the corporates which fail, even inadvertently, to prevent the facilitation of tax evasion, and which may have little appetite for contested criminal litigation. A cynic would say that business is being asked to bear the burden of HMRC’s inability to prosecute the true tax evaders. However, that perspective ignores the raft of other measures, both domestic and international, that are being planned so as to bolster the fight against tax evasion, not least the introduction of the Common Reporting Standard in 2017.

Businesses can take limited comfort from the fact that the consultation emphasises that they need only act proportionately to the risks arising in their sectors, so as to develop compliance procedures which are reasonable rather than all-encompassing. 

However, it is not easy to square that position with the government’s insistence on criminalising the failure to prevent the facilitation of foreign tax evasion - a prospect which any significant multinational business would rightly regard as a compliance nightmare. For this reason, as well as the significant legal difficulties of proving the commission of foreign tax crimes, the authors believe that the offence should be limited to the failure to prevent the facilitation of UK tax evasion.



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