But many firms have already shrugged their shoulders, given a resigned sigh, and started to put in the extra work to make sure they stay on the right side of the new law.In many cases, firms will build on the anti-money-laundering arrangements they already have in place, points out Frank Haskew, head of tax in the Tax Faculty at ICAEW. But Amit Puri, director of tax investigations at Grant Thornton, thinks the penny has yet to drop. “Those that consider themselves low risk may need to think again and the days of turning a blind eye or not asking probing questions of business counterparts may be over.”
Those who think they can argue over the meaning of the word “facilitation” could be in for a shock. HMRC takes it to include anyone who has encouraged, assisted, aided, abetted, counselled, procured or done anything that helps to commit a UK tax evasion offence.
PUT PROCEDURES IN PLACE
In any event, it’s simpler and more honourable to do the things that provide a sound defence under the new law. There are two steps to safety. First, the company or partnership needs to show it has procedures in place designed to prevent “associated persons” from facilitating tax offences. Second, it must show that the procedures were reasonable.
To be guilty, the facilitator must have the same intent as the tax evader, says Jessica Parker, partner at law firm Corker Binning. “Usually this is dishonesty, but it can also be the intention to deceive.”
“The legislation is a further shift towards self-policing,” notes Tim Humphries, associate tax director at accountancy firm Menzies. “Before, it was possible for the bosses to wash their hands of their employee’s actions and escape punishment. Now it is their responsibility to proactively prevent staff from aiding and abetting tax evasion.”
So if the buck stops in the boardroom, what should directors be doing now? Much depends on the nature of the company’s business and its exposure to tax evasion among its staff and those associated persons in other organisations it works with. “The corporate governance and policies in place need to be understood and endorsed by the board directors,” says Toby Ryland, corporate tax partner at chartered accountants HW Fisher. “There should be regular documented discussions at board meetings reviewing the policies and considering how they are being implemented.”
Miles Dean, managing partner at Milestone International Tax Partners, sees a number of actions boards should consider as priorities. These include training staff with regular updates and introducing an adequate whistleblowing procedure. Dean also believes the board should ensure staff contracts are updated to make reference to the new rules, and consider relating an element of any bonus or promotion to them.
If a firm runs into potential trouble under the new offence, HMRC is likely to look at how far board members have made an effort to understand how their business works. They need to show they’ve got close enough to their own staff and other associated persons to understand whether they had the motive, opportunity and means to facilitate tax evasion.
“It is not enough for the board to say that it doesn’t tolerate tax evasion,” says Puri. “They also need to support their staff in making the right choices.”In exercising this new responsibility, many boards will feel they’ve been here before – when they took on board their duties under the Bribery Act. “The facilitation crime is a strict liability offence,” notes Humphries. “That means that if there is tax evasion involving an employee, then the senior management of the company is effectively deemed guilty until proven innocent. That should encourage the top-level commitment HMRC is looking for.”
A STUDY IN RISKThe first step for any firm looking to provide itself with the statutory defence of a charge of facilitating tax evasion is a comprehensive risk assessment. The procedures should be designed to mitigate risks, says Haskew. But some of them may already be familiar from existing tax evasion and money laundering mitigation arrangements.
Areas to look at in the risk assessment may include client risk, client history, area of business, nature of transactions, the structuring and use of trusts (especially when they have no clear purpose), and use of tax havens. Haskew would also have his eye on “opaque arrangements that lack clarity and transparency, commissions and payments that are not justified commercially or lack proper evidence as to their bona fides, unusual or non-commercial arrangements – and lack of clarity about sources of funds”.
Nicholas Aleksander, partner in the London office of law firm Gibson Dunn, says: “One of the key elements of any risk analysis is to work out the different categories or people carrying out services for you or on your behalf and identify which individuals engage with which particular risks you’ve identified – and vice versa.”
HMRC says there are six principles a firm should take into account when deciding whether it has adopted reasonable prevention procedures: risk assessment; the proportionality of risk-based prevention procedures; that top-level commitment; due diligence; communication – which includes training; and, finally, monitoring and review.
While all firms should make sure they have all these bases covered, Humphries thinks that firms with the lowest risk levels should only have to undertake a risk assessment and document the fact. Many of the anti-evasion procedures – such as monitoring payments made by staff on behalf of the company – should already be best practice.
But it is those firms that judge themselves to be at higher risk of unwittingly facilitating tax evasion that may need to go further. One of the issues to pay special attention to is that of “associated persons” – an individual who represents the firm. The term includes employees but also agents and outside consultants.
Haskew says this area will need special care, but the principles behind it are not new. “Know who your associates are and what they’re doing on your behalf,” he advises. “Ensure that there are clear limits to their authority, monitor what they do and report back any unusual or suspicious activity.”
The new law may challenge some working practices. For example, companies in the IT industry that sometimes hire workers through “personal service” companies may need to carry out due diligence on their consultants’ companies. “They need to seek assurance that they are not facilitating tax evasion by paying a company rather than taking the individual on as an employee,” says Humphries.
IS IT WORTH IT?So will the new law make much impact on tax evasion? “The measure is likely to prove most effective if other countries adopt similar rules to the UK’s – but time will tell whether they will,” says Haskew.
Even so, the ramifications are potentially wide, points out Aleksander. The offence covers a big basket of taxes including VAT, excise duties and environmental taxes.
It looks as though many firms have just been landed with more work, which critics of the measure will claim is “red tape”. But a thoughtful risk assessment that identifies potential problem areas could be the key to minimising the workload.
“Think of using it positively,” suggests Ryland. “Would your clients, customers and stakeholders not be pleased to see your business championing a culture of responsibility? Explain your policies, what you are doing to cascade the culture among your employees, and why you consider it important to conduct business in a responsible and transparent way. That can only improve the perceptions of your business.”
To listen to ICAEW’s webinar on the Failure to Prevent Tax Evasion offence here