INSIGHT: The U.K. Corporate Criminal Offense—Where Are We and What’s Next?

The U.K.’s Corporate Criminal Offenses (CCO) legislation (Part 3, Criminal Finances Act 2017) has been with us for over two and a half years.

The legislation is based upon the principles of corporate criminal liability related to the failure to prevent facilitation of tax evasion from taking place. If someone (an individual or corporate) commits tax fraud (either in the U.K. or overseas) and if someone representing the business enables the tax fraud, the business could face criminal prosecution if it did not have reasonable procedures in place to try and prevent that fraud.

A successful prosecution would lead to an unlimited financial penalty, significant reputational damage and potential director disqualification.

Crucially, however, the legislation does not create a “zero fail” regime. Even if a representative of a business does facilitate tax evasion, the business is protected from prosecution if it has taken steps to implement “reasonable prevention procedures.”

Known Activity by U.K. Tax Authority

There have been no prosecutions to date, but it would be wrong to think that HM Revenue & Customs (HMRC) is not actively pursuing a number of potential cases. It took around five years for the first prosecution to be brought under the Bribery Act (very closely aligned to the Criminal Finances Act) but since then, there has been a continuous flow of successful prosecutions.

In the past year, HMRC has carried out a number of visits to business properties under the CCO legislation. According to a press release issued by HMRC on February 10, 2020, HMRC has 30 CCO cases underway.

The press release stated that, as at December 31, 2019:

• HMRC had nine live CCO investigations, with a further 21 “opportunities” under review across 10 different business sectors, including financial services, oils, construction, labor provision and software development;
• investigations and opportunities sit across all HMRC customer groups, from small businesses through to some of the U.K.’s largest organizations.

There is also a “public interest” test in taking a prosecution and so, where there is a point of principle or examples of serious failings, we can expect that HMRC or the Serious Fraud Office (SFO) will seek to prosecute, regardless of the size of the business.

And, with this public interest test in mind, it may be useful to consider the relevance of the legislation in the current rapidly evolving environment.

Impact of Covid-19 and Related Tax Measures

The overall financial cost of the government’s Covid-19 measures, both the current, direct cost of supporting individuals and businesses, as well as the knock-on economic effect of the lockdown, means that when we reach the other side of the pandemic there will be a concerted effort by government to ensure tax take is maximized. The language is likely to reflect that immediately following the 2008 financial crash—of us all “being in this together” and everyone having to play their part.

Putting aside the question of increased levels of taxation, the focus will undoubtedly include an emphasis on businesses paying the “right” amount of tax, and a continued and increased crackdown on tax fraud and tax avoidance. Indeed, where previously HMRC has been concerned with punishing “aggressive avoidance,” it may well be the case that any form of perceived avoidance becomes unacceptable.

The CCO legislation is likely to form a key part of HMRC’s armory for this. The legislation was already seeking to bring about a “cultural change” in how prevention procedures over tax evasion are embedded in an organization, from top level commitment downwards. The impact of Covid-19 is likely to put more pressure on businesses to demonstrate they are doing the right thing.

What will this look like in practice?

CCO Risks as Part of Furlough Measures

There are potential areas where HMRC could identify fraud arising specifically from misuse of Covid-19 measures: for example, any fraud or “turning a blind eye” to individuals continuing to do productive work while receiving furlough pay. Under the Coronavirus Job Retention Scheme, the amount that can be claimed includes an element in respect of employers’ National Insurance contributions. Any fraudulent claims will consequently therefore include an element of tax evasion. There are circumstances where such claims could lead to a prosecution under the CCO legislation.

Off-Payroll Workers

A further aspect of the government’s response to the Covid-19 crisis has been a delay in the introduction of revised off-payroll worker (IR35) rules. This does give a slight respite for many organizations, but there is still a risk from a CCO perspective where individuals who are paid off-payroll, either individually or as part of a personal service company/agency, have been determined as potentially deemed employees. With the delay announced, deliberately ignoring this, or waiting until April 2021 where those individuals are not being taxed appropriately under pay as you earn/National Insurance contributions, could be an offense under the CCO rules.

Risk of a Loosening of Controls

Pre-Covid-19, HMRC’s Fraud Investigation Service sent a number of targeted letters to businesses concerning the potential for supply chain fraud related to their business. These letters specifically mentioned the construction, labor supply chain and payroll sectors.

Two aspects of these letters are worth noting. Firstly, there is the reminder of the potential culpability under the CCO legislation if there is tax fraud in the supply chain. Secondly, in all of the letters we have seen, there is the direct request by HMRC to visit those businesses to determine the extent of prevention procedures in place and review and discuss certain business documentation from whistleblowing measures to the extent of supplier due diligence carried out by those businesses.

Clearly, office visits are not now taking place until lockdown measures are reduced, but in the meantime there is an unfortunate downside risk at this time where some businesses may potentially seek to cut corners and costs, and the impact of this is that controls are not as tight as they would be normally. Businesses will need to remain vigilant in this regard to ensure that the risk of someone within their organization or supply chain “turning a blind eye"to any potential facilitation of tax risk is minimized.

Planning Points

To have some level of protection, a business needs to be able show evidence of having reasonable prevention procedures in place and these should be based on HMRC’s six guiding principles of the defense:

• carrying out and documenting a CCO specific risk assessment for the business;
• showing clear tone from the top (“Top Level Commitment”);
• ensuring the control processes are reasonable and proportionate when considering the size and complexity of the business (which will be difficult to prove if it has not carried out a risk assessment);
• having a robust process in place for carrying out an appropriate level of due diligence on “Associated Persons”;
• communicating zero tolerance for facilitation of tax evasion internally and externally—through direct communication/codes of conduct/contractual term. In addition, it is vital that training is also rolled out within the business;
• monitoring and reviewing risks—both through escalation and whistleblowing procedures.

The vast majority of businesses will have a risk management framework and economic crime controls in place. However, these controls will not of themselves necessarily provide a defense from prosecution under the CCO legislation if no consideration is given to the impact of the CCO legislation on the business.

Existing controls should be built upon but, in the words of HMRC’s guidance, businesses must ensure that they do more than pay “lip-service” to preventing the criminal facilitation of tax evasion.

James Egert is the lead BDO Tax Risk Partner in London specializing in SAO, tax strategy, risk and governance. Martin Callaghan is a Director in BDO’s Tax Performance and Risk Management Team, specializing in all risk and governance matters.

The authors can be contacted at: james.egert@bdo.co.uk; martin.x.callaghan@bdo.co.uk

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.