As of 30 September 2017, all businesses and partnerships will fall within the remit of the Criminal Finances Act – and yet recent Smith & Williamson research showed that many companies are not yet ready to comply with new regulations.
Historically, the domestic offence of tax evasion has been committed by taxpayers (either an individual or an entity) and ‘associated persons’ who facilitate the offence. From September if, as a corporation, you fail to prevent a representative from facilitating tax evasion, then you will be held criminally responsible.
Entities, including partnerships, will be criminally liable when:
- there is a UK or foreign tax evasion offence;
- that offence is facilitated by a person associated with the entity (eg employees, agents, payroll companies); and
- they failed to put adequate procedures in place to prevent the associated person from committing the facilitation offence (unless in their case it’s reasonable not to have procedures).
Companies that have a particularly high risk profile include those that have:
- an international client base;
- a high proportion of non face-to-face relationships;
- operate in financial or professional services;
- make payments to suppliers in cash; or
- refer clients to third-party service providers.
Criminal Finances Act – tight compliance deadline
The deadline for compliance is fast approaching and many companies have yet to make meaningful steps towards showing they have put procedures in place to prevent evasion from taking place.
According to a survey recently carried out by Smith & Williamson, almost 45% of businesses polled are yet to start preparing for compliance, with nearly 40% claiming that the timeframe for complying with the rules is their biggest challenge.
Businesses convicted of an offence face a potentially unlimited fine, while regulated entities could lose licences, or have restrictions placed on them, making it harder to do business.
Corporate offence: what are reasonable procedures?
Feedback we have had also suggests that many are unsure what HMRC requires from them, with 50% of our survey population saying they were unsure how to approach the new rules.
This is particularly pertinent as the deadline for compliance is short. There is also a presumption of guilt, unless a firm can demonstrate the existence of ‘reasonable procedures’ to prevent facilitation, or that it was not reasonable under the circumstances to expect a firm to have any prevention procedures in place.
What constitutes ‘reasonable’ depends on each business’ risk profile, industry and size. HMRC recommends a principle-based approach to defining the procedures, using six guiding principles:
Conduct a risk assessment
Ensure your reasonable procedures are proportionate
Implement due diligence procedures
Gain buy-in from management
Communicate to and train all stakeholders
Periodically monitor and review your reasonable procedures
Prioritise risk areas
The timeline for implementing these changes is extremely tight. With that in mind, it is important that businesses carefully map the risks specific to them and focus work on those areas that are high risk.
At a recent event we held, a spokesperson for HMRC underlined that businesses are not necessarily expected to have addressed every principle by September.
They must however show that assessments have been undertaken and reasonable procedures have been considered and are beginning to be implemented, particularly in the higher risk areas of their operations.
In the next few months, an assessment of the nature and extent of a company’s exposure to the risk of associates engaging in activity to criminally facilitate tax evasion should be prioritised.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.