United Kingdom: Tax agency opens nine new investigations for failure to prevent tax evasion and announces a further 26 opportunities for investigation under review

In brief

On 26 January 2023 HM Revenue & Customs (HMRC) announced that, as of 1 January 2023, it has nine live Corporate Criminal Offences (CCO) investigations for the failure to prevent the facilitation of tax evasion, with a further 26 investigation opportunities under review. These live and potential investigations cover 11 different business sectors including software providers, labour provision, transport, accountancy and legal services.

In more detail: the offence

The corporation offence of failure to prevent the facilitation of tax evasion was introduced by Part Three of the Criminal Finances Act 2017 (CFA), which came into effect on 30 September 2017. Similar to section Seven of the UK Bribery Act 2010 (UKBA) which came into effect in 2011, and which rendered corporate bodies potentially liable for a failure to prevent bribery, Part Three of the CFA provides that a relevant body is guilty of a CCO if a person acting in the capacity of a person associated with the relevant body (such as an employee or agent) commits a UK or foreign tax evasion facilitation offence. The legislation is very widely drawn and can apply to the evasion of any tax, including indirect and employment taxes, anywhere in the world. The introduction of these offences highlights the Government's continued focus on increasing corporate bodies' accountability for the actions of their employees, agents or other associated persons, as a means of encouraging proactive steps to counter bribery and facilitation of tax fraud. Currently, liability for a "failure to prevent" under existing legislation is limited to corporate entities. However, there is a possibility that amendments to the Economic Crime and Corporate Transparency Bill, currently making its way through Parliament, may extend criminal liability for a failure to prevent broader economic crimes (such as money laundering, fraud and false accounting) to individuals. This is by no means certain, but if introduced it is envisaged that it would seek to target corporates and individuals (such as directors, lawyers or accountants).

In practice: the impact of the failure to prevent offences

Since the CCO came into force in 2017, no prosecutions have been brought by HMRC. This accords with the low number of prosecutions under section Seven of the UKBA. In the 11.5 years since section seven came into force, only three prosecutions have resulted in a conviction. In part this is due to the advent of Deferred Prosecution Agreements, whereby companies avoid prosecution but agree to pay significant financial penalties. Of these three convictions, two have been prosecuted in the past two years and have been very high profile with record- breaking fines imposed. The pandemic may also have had a part to play in the lack of any prosecutions for the CCO, and organisations should take note that since 2021 the number of opportunities under review has significantly increased. Time will tell as to whether HMRC's increased interest in opening investigations, coupled with a wider crack down by Government regulatory bodies more broadly on economic and white collar crime, will trigger an increase in the number of prosecutions.

Steps corporate organisations should take

HMRC have made it clear that the purpose of the CCO is not solely about corporate prosecutions but also changing industry practice and encouraging organisations to prevent tax crime occurring in the first place. This aim is reflected in the legislation: reasonable measures for prevention will serve as a defence for corporate organisations found guilty of failure to prevent tax evasion. Organisations that have not already done so should focus on developing robust risk assessment and prevention procedures together with systems for monitoring compliance. Given HMRC's increased interest, organisations that have already put procedures in place should consider undertaking a review to ensure that they remain appropriate and effective.

Our Investigations, Compliance and Ethics Team have extensive experience of advising on such measures and responding to any HMRC investigations and/or prosecutions.

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