Ever since the Panama Papers exposed the underground nexus of global tax evasion, regulators have been trying to figure out how to get ahead of it. In the UK, the Criminal Finances Act was passed in late April 2017.
The legislation will be fully implemented in September, so firms have very little time to get themselves prepared by putting in place reasonable procedures.
What does the Criminal Finances Act do?
If an employee or a contractor helps someone evade their taxes, that business can be prosecuted for failing to prevent it happening. The Criminal Finances Act applies to any business either based in the UK, or with a UK nexus, meaning they have staff or an office in Britain.
The Criminal Finances Act or CFA also covers tax wherever in the world it may be owed.
Criminal facilitation can occur even without knowledge of the business. If an employee or contractor is helping facilitate tax evasion, then the business can be prosecuted if they fail to have reasonable procedures in place to prevent it.
Implementing reasonable procedures is a key defense against prosecution. But creating those procedures requires a thorough risk assessment, a top-down commitment, and a roll out of staff training.
Guidance (pdf) from HM Revenue and Customs says procedures that successfully detect and disclose wrongdoing would likely be reasonable. Timely self-reporting is also an indicator that reasonable procedures are in place.
The CFA doesn’t penalize a business for the actions of its clients, however, and it would not be reasonable to expect it to prevent every instance of tax evasion where the business had no way to know it was taking place.
The Criminal Finances Act is not only aimed at the regulated sector. All companies could be caught up in it. While for some businesses the risk of facilitating tax evasion will be negligible and they will decide not to implement further procedures, at minimum a risk assessment would need to be completed to defend the decision of taking no additional action.
What does the Criminal Finances Act not do?
The CFA doesn’t go as far as some would have liked. The UK didn’t take forward the recommendations of the UN Convention against Corruption and introduce an offense of illicit enrichment. This would have forced public officials to explain large increases in wealth relative to their salary whilst holding a position of authority.
Significant action against offshore tax jurisdictions under British authority also didn’t get included in the Criminal Finances Act. This is despite some strong overtures from the opposition Labor party, who bemoaned the fact that the British Virgin Islands for instance boasts over 15 registered companies per person.
Should the current minority government of Theresa May collapse, expect Labor to revisit corporate tax evasion and avoidance pretty quickly.
What should companies do now?
The first step to take is to thoroughly assess business risk. This should include understanding tax liabilities of the company itself and those companies it deals with, plus the potential for staff or contractors to be involved in criminal facilitation of tax evasion. Some risk factors to consider include how many employees or contractors are a potential liability for tax evasion and what current measures are in place, and how are they working.
Training for everyone in an organization on the Criminal Finances Act, including how to spot the signs of facilitation and what to do about it, are essential. That training can contribute significantly to a set of proportional, reasonable procedures that will help tackle tax evasion and protect the organization and its people from prosecution.
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Nick Henderson is the Director of Course Development at VinciWorks. VinciWorks provides compliance training to over 80,000 users worldwide and has released an interactive online course on Tax Evasion and the Criminal Finances Act.
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