Criminal Finance Act comes with lots of teeth

There is a new sheriff in town when it comes to UK tax evasion, finds James Mcmillan

THE Criminal Finances Act 2017, which came into force on 27 April, introduced a new corporate offence of failure to prevent facilitation of tax evasion. It provides investigators with a powerful tax evasion device including unlimited fines, but will it come at a cost to Scotland’s key exporting industries?

Part of a raft of measures intended to deter tax evasion following controversies surrounding the UK tax structures of well-known global companies, the new rules within the Act provide for two offences, one domestic (failure to prevent facilitation of UK tax evasion) and the other relating to foreign tax evasion (failure to prevent facilitation of foreign tax evasion).

The new laws have teeth and may well be effective at reducing the use of certain arrangements allowing multinationals to bypass their tax liabilities, and help bring to justice more of the financial facilitators where illegal schemes are exposed.

Until now, it had been difficult to prosecute organisations that knowingly turn a blind eye or are involved in tax evasion, unless it can be proved senior management were involved. The new offences circumvent this requirement by making businesses guilty of an offence where a person acting for them is involved. No criminal intent, knowledge or condemnation by senior management is required, and if organisations are found guilty, they face an unlimited fine.

The primary intent of this legislation is to target banks and advisory firms that help big companies and wealthy individuals tevade tax.

For example, a construction company operating internationally may be required by contract to make payments into a specific account, which may be an offshore trust. Potentially, in doing this the construction firm might be facilitating tax evasion.

In the case of the oil and gas sector, which operates across multiple jurisdictions, payment requirements in contracts can be complex and specific. There will be a legiti- mate intention to minimise the tax burden of activities by some parties, but again companies must tread carefully to avoiding straying into the grey area between legitimate avoidance and illegal tax evasion. In these cases, robust due diligence will be required, including scrutiny of potential partners’ tax arrangements, before agreeing payment clauses. In some cases, businesses seeking to build their international portfolio may face tough choices if potential clients use tax schemes that fall within a grey area of the law.

Businesses will have a defence if they can prove they had put in place reasonable compliance risk mitigation procedures, but the bureaucratic burden of these measures is considerable.

In considering suitable due diligence procedures in light of the new law, firms of any size should carry out risk assessments of different areas of UK and international operations. Such reviews should identify where associated persons operate and the type of taxpayers they are dealing with. Particular tax evasion risks arise where small groups of people operate autonomously in tax avoidance hotspots, while unusual payment arrangements are another red flag. Training may be needed across the business, not simply the tax team, to ensure such signs are spotted. Senior management must also have enough information to be able to assess the progress of the compliance program.

Unlike the Bribery Act 2010, which relies on self-reporting, these new offences will be investigated by HMRC, particularly where UK tax evasion is suspected. Given the taxman’s enthusiasm to tackle avoidance and its enhanced investigatory powers, it is likely many cases will emerge and prosecutions will follow. The Criminal Finances Act 2017 may become a powerful tool. James Mcmillan is an associate in the fraud, investigations & business crime practice, Maclay Murray & Spens LLP.