Opinion
Ed Smyth 15 Apr 2019 02:48pm

HMRC needs companies to act against tax fraud

HMRC needs companies to engage if it wants to make progress on tax fraud, following the introduction of new provisions in September 2017 (under the Criminal Finances Act 2017 (ss 45-46))

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Caption: The Revenue needs companies to engage if it wants to make progress on tax fraud

The provisions allow the prosecution of a company or partnership for failing to prevent its employees and other associated persons from facilitating tax evasion in the UK and abroad, were heralded as a game-changer in terms of reducing tax fraud and closing the tax gap.

However, it seems few prosecutions have been brought despite claims of HMRC’s compliance success made by the Financial Secretary to the Treasury, Mel Stride, in the 2019 Spring Statement.

A recent FOI request reported by City AM produced the admission that, “HMRC currently has less than five criminal investigations into behaviours occurring since 30 September 2017 for an offence under Article 45. These investigations have been commenced since November 2018 and are the first in a pipeline of cases HMRC has under development that may have Article 45 implications.”

Emphasis on self-reporting

Guidance issued alongside the 2017 provisions shows that HMRC is now looking to companies themselves to help with the drive to increase scrutiny in this area, by the use of self-reporting: a tool that is already familiar to its fellow law enforcement agency, the Serious Fraud Office.

The adoption of reasonable prevention procedures can provide an organisation with a defence, though the guidance expressly states that there is no “one-size-fits-all approach”. The guidance further emphasises that timely self-reporting will be viewed as “an indicator that a relevant body has reasonable procedures in place”.

HMRC ran a dedicated self-reporting process to allow companies and partnerships to register their failure to prevent the criminal facilitation of tax evasion. However given that HMRC felt it necessary to announce in February that it has “redesigned the self-reporting route”, we can only presume that there were few, if any, self-reports.

The same announcement described the benefits of self-reporting:
A) Used as part of the company or partnership’s reasonable procedures defence in the event of an offence being charged.
B) Taken into account by prosecutors when making decision about prosecutions (for example, Deferred Prosecution Agreements in England and Wales)
C) Reflected in any penalties that are imposed.

The form further confirms that self-reporting provides no guarantee that a company or partnership will not be prosecuted but it may be taken into account by HMRC, prosecutors and the courts.

Potential implications of self-reporting

Whether or not to self-report is a critical decision for a company with significant implications for the organisation (and individuals) involved. Decisions need to be made about the scope of any internal investigation that may precede a self-report, the management of such an investigation, the impact on personnel and the maintenance of a clear line between the investigation and on-going business activities.

The Serious Fraud Office (SFO) guidance on self-reporting states that prosecutors will assess whether a self-reporting corporate has been genuinely proactive. Critical to such an assessment is whether the corporate has provided sufficient information about its operations, including making witnesses available and disclosing the details of any internal investigation. The SFO has long trumpeted the mantra of “co-operation is king” and perhaps HMRC is due to follow suit.

Whilst HMRC is keen to show that it can take on the corporates, the reality is that it relies on companies to engage proactively with the new regime if it is going to reduce tax fraud effectively. That there is considerable work to be done is well illustrated by a recent poll of senior individuals in 1,000 UK companies and partnerships conducted for HMRC by Ipsos which found that only a third of respondents were aware that businesses could now be held criminally liable for failing to prevent the facilitation of tax evasion.

It will need to improve education and start claiming some scalps, if it is to achieve what parliament and the public clamour for: holding corporates ¬ in particular big multinationals - to account.

Ed Smyth is a senior associate in the criminal litigation team at Kingsley Napley LLP


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