The new offence is part of a package of measures designed to clamp down on those who evade, or help others to evade, UK tax by hiding assets offshore; but it is not limited to offshore evasion.
Over the next couple of years, HM Revenue & Customs will receive more information than ever before about UK residents with assets held offshore.
More than 90 jurisdictions have committed to the adoption of the common reporting standard, which will require financial institutions in one signatory country to report on financial accounts maintained for residents of the other signatory countries, with the first exchanges by ‘early adopters’ taking place next year.
Despite this, the government still feels it needs more weapons in its armoury. This time, possibly prompted by the revelations in the BBC Panorama programme in February about the activities of some banks operating in Switzerland, HMRC has in its sights the organisations whose staff or other ‘agents’ it thinks are facilitating evasion by others by helping to hide assets.
It is intended that the legislation will be based on the Bribery Act 2010, under which a commercial organisation is guilty of an offence if one of its ‘associated persons’ pays a bribe, and the company cannot show it had adequate procedures to try to prevent such a payment from being made. This has led to organisations having to put in place detailed anti-bribery policies and procedures.
The tax offence will criminalise organisations who fail to take reasonable steps to prevent their ‘agents’ from criminally facilitating the evasion of tax. Under current law, the organisation would only commit an offence if the ‘agent’ is senior management and therefore represents the ‘directing mind’ of the organisation. Agents are likely to include employees but also contractors and other authorised intermediaries (whether in the UK or not).
The government still feels it needs more weapons in its armouryThe offence will be committed by the company or partnership alone - not its board of directors or partners personally. It is likely to have severe reputational consequences for any organisation which is convicted, but HMRC’s main focus is to engineer a change in behaviour and to ensure that organisations take the issue seriously and cannot simply ‘turn a blind eye’ to what their agents are doing.
The offence will apply wherever the company is geographically located if the tax evaded is UK tax. The offence will also apply to any UK corporation whose agents facilitate foreign tax evasion so particular care needs to be taken around foreign operations.
We do not yet have the draft legislation so it is not clear what the precise scope of the new offence will be. However, from what we can glean from the consultation document, the main areas where financial advisers could be exposed are likely to be in relation to the activities of ‘rogue’ employees or where clients are referred to other businesses who provide services to facilitate tax evasion.
Despite the focus on offshore tax evasion, the proposals look wide enough to cover onshore UK tax evasion. However, activities of financial advisers with an offshore element are likely to be at higher risk.
If the agent of an organisation can be shown to have facilitated tax evasion, the organisation will automatically also be guilty of an offence unless it can show, as with the current Bribery Act regime, that it had procedures in place to train and prevent its agents from facilitating tax evasion.
The new offence is therefore likely to add to the compliance burden for financial advisers. In addition to the current anti-money laundering requirements, further policies and procedures, systems and training are likely to be required to ensure that a financial adviser has a watertight defence to the offence should any damaging activities of a ‘rogue’ employee come to light.
One of the other main risk areas under the new offence for financial advisers will be where clients are referred to a third party, perhaps a tax specialist or a trustee or company services provider, especially if based in another jurisdiction.
If that third party facilitates tax evasion by the referred party, the financial adviser will be guilty of an offence, even if he did not know that the third party would facilitate evasion, unless it can show it took reasonable steps to prevent the third party from so facilitating. The key to minimising risk in this area will be to have procedures in place for conducting appropriate due diligence on any entities to whom referrals are made, and for imposing certain ‘standards’ if business is to be so referred.
One particular point to note is that the consultation document suggests that the financial adviser might be liable even if it is a rogue employee within the third party, as opposed to the management of the third party, who facilitates the evasion.
This seems a step too far as there is a limit to what the financial adviser can reasonably expect the third party to do. It may be sufficiently reasonable for the financial adviser just to seek confirmation that the third party organisation has systems in place to ensure that its employees are not facilitating tax evasion.
Any offshore element is likely to increase the risks of falling foul of the new offence, as offshore evasion is a major focus of the measure. In theory the offence is intended to apply to the evasion of overseas tax enabled by UK corporations – although it is not clear how this will be picked up. It will also apply to non-UK entities whose agents enable the evasion of UK tax. Financial advisers should therefore take particular care around policies and procedures relating to non-UK staff and around cross-border referrals.
Financial advisers should monitor the consultation closely, which closes on 8 October. If the proposed legislation is enacted, they will need to develop a comprehensive set of procedures for their UK and non-UK facing operations if they do not want to fall foul of this offence.
Jason Collins is head of tax at law firm Pinsent Masons
Key facts
The government has issued a consultation on a planned new criminal offence for companies and partnerships whose ‘agents’ facilitate tax evasion
The tax offence will criminalise organisations who fail to take reasonable steps to prevent their ‘agents’ from criminally facilitating the evasion of tax
The consultation document suggests that a financial adviser might be liable even if a rogue employee within the third party has facilitated evasion
