The corporate criminal offence of failing to prevent the facilitation of tax evasion (the CCO) came into effect almost six years ago. Although no prosecutions have yet been made, HMRC are continuing to conduct CCO investigations in a wide variety of sectors, a key element of which will be testing the existence and robustness of anti-facilitation of tax evasion procedures. Noting that, and the fact the UK government has recently confirmed the introduction of a new corporate offence of failing to prevent fraud, which will incorporate a similar ‘reasonable procedures’ concept, corporate groups should prudently take the opportunity to assess how they would fare should their processes come under scrutiny.
The background to the CCO
There are various criminal offences for which taxpayers have long been potentially subject to prosecution in the UK, including:
- the common law offences of:
- conspiracy to defraud, and
- cheating the public revenue, and
- the statutory offences of:
- fraud (under the Fraud Act 2006),
- false accounting (under the Theft Act 1968), and
- fraudulent evasion of VAT (under the Value Added Tax Act 1994).
Historically, companies could only be liable for these offences if it could be established that an individual who represented the ‘directing mind and will’ of that company (e.g. a director) had the necessary criminal intention. In practice, that imposed an incredibly high hurdle – something that perhaps contributed to the critical assessment of HMRC’s success in tackling tax fraud handed down by the Public Accounts Committee in March 2016.
That barrier to corporate prosecution was dramatically reduced by the introduction of the CCO via the Criminal Finances Act 2017. In very high-level terms, if a person commits a tax evasion offence and is criminally facilitated in doing so by an ‘associated person’ of an entity, that entity will itself be guilty of a criminal offence – unless it can establish that it had reasonable procedures in place to prevent the facilitation. The key point to note is that the CCO is therefore a strict liability offence: there is no requirement for senior management to even be aware of the tax evasion or its facilitation.
Is the CCO a real risk for companies?
In short, yes.
The primary purpose of the CCO may be to act as a deterrent, and it is true that no prosecutions have yet been made, but this does not in our view mean that the CCO should be dismissed as a damp squib. Statistics published earlier this year show that HMRC are reviewing or have reviewed over 100 ‘opportunities’, with a further nine investigations currently live. Critically, HMRC are not just looking at companies in high-risk industries: companies spanning 11 different business sectors are included in these figures. We have recently seen corporate groups in various sectors identify red flags indicating that another person is potentially committing tax evasion, which has prompted the need to investigate whether facilitation has taken place and whether their existing prevention procedures are sufficiently robust to provide a defence to the CCO should that be necessary. The latter is particularly important because in practice it is usually very difficult to be able to rule out with certainty that either underlying tax evasion, or facilitation, has taken place.
A call to arms
One key thing corporate groups can do to minimise the risk of any facilitation activity that could prompt an investigation, and to avoid successful prosecution should one nonetheless be brought, is ensure they are able to prove that they have in place such prevention procedures as it is reasonable in all the circumstances to expect them to have.
That is not as straightforward as it might at first blush sound. The key here is the word ‘reasonable’ – and because what is reasonable for one company may not be reasonable for another, there is no ‘one size fits all’ solution.
Accordingly, companies would be well-advised to:
- complete a detailed assessment process to identify the specific activities, processes and individuals within their business which pose particular risks in this regard;
- use that information to formulate a range of bespoke measures aimed at minimising those risks;
- implement those measures properly (ideally with senior stakeholder support), evaluate them for effectiveness and then keep them subject to ongoing review; and
- keep accurate and contemporaneous records of all steps taken, so that they can be demonstrated when required.
And what if HMRC bring a CCO investigation regardless? As in any situation where there is potential criminal liability, companies in this position should consider obtaining specialist legal advice promptly.
Beyond the CCO
The CCO is focused on preventing the facilitation of tax evasion by third parties, rather than tax evasion by the entity that is potentially liable. However, as the recently announced new corporate criminal offence of failing to prevent fraud covers certain fraud offences with a tax angle (for example, cheating the public revenue), going forward large organisations will similarly be exposed to the risk of prosecution for failure to prevent tax evasion which benefits them.
There is likely to be some overlap in terms of the steps that could form part of a ‘reasonable procedures’ defence as between this offence and the CCO, and the detailed guidance regarding what could constitute ‘reasonable procedures’ in the CCO context will no doubt be useful in this context too (at least until more specific guidance is published).
If you would like to discuss any of the points raised in this blog post in further detail, please contact our tax investigations and dispute team or your usual Freshfields contact.
More detail about the CCO is included in our Contentious Tax Tool. This tool helps navigate risks arising on tax-related disputes and investigations by operating as a checklist to consult both when a tax dispute is on the horizon or a new issue arises on an ongoing dispute. For further details and to request access to our Contentious Tax Tool, please contact TaxDisputes@freshfields.com.