Background

As mentioned in our July 2017 edition of UK Tax Round Up, the UK has enacted a new corporate criminal offence of failing to prevent the facilitation of tax evasion. The law comes into effect on 30th September 2017, and businesses should ensure that they have considered its impact before then. A risk assessment could be required to be carried out before 30th September, and applicable policies and prevention measures may need to be considered.The legislation in fact introduced two separate offences: failure to prevent the facilitation of UK tax evasion (the “UK Offence”) and failure to prevent the facilitation of non-UK tax evasion (the “Foreign Offence”).

Importantly, there are no territorial limits to the UK Offence – it has unlimited extra-territorial effect. The Foreign Offence requires a UK connection.

Any business successfully prosecuted for the new offences faces unlimited fines and the inevitable regulatory and reputational damage that would flow from a conviction.

Scope

All incorporated bodies (companies) and partnerships, including LLPs, are within scope as “relevant bodies”.

The UK Offence can be committed by any relevant body worldwide. The Foreign Offence requires the relevant body to be a UK company or partnership, or a non-UK company or partnership carrying on business in the UK, or for any of the facilitation of tax evasion to take place in the UK.

The scope of the offence is limited to cases where there has been evasion of tax. Much recent commentary on international tax has blurred the distinction between avoidance and evasion of tax. Here, the law is concerned with evasion – cheating the public revenue or fraudulently evading tax. The UK Offence applies to tax fraud offences under UK law. The Foreign Offence requires an element of “dual criminality” to be in place – it will be committed where the relevant acts that have been facilitated would constitute a UK tax evasion offence and the relevant overseas jurisdiction has similar laws to the UK in place as regards the evasion itself and the facilitation.

For the offence to apply, one or more of the relevant body’s “associated persons” must have committed a “tax evasion facilitation offence”, and the statutory defence (referred to below) not be available. Associated persons include all the relevant body’s employees and partners acting on its behalf, and also its agents and even its sub-contractors, in some circumstances.

Facilitation requires a level of knowledge by the relevant associated person of the underlying tax evasion. The law defines a tax evasion facilitation offence as (a) being knowingly concerned in or taking steps with a view to the fraudulent evasion of tax by another person or (b) aiding, abetting, counselling or procuring the commission of a tax evasion offence. Legitimate advice and services given in good faith that are misused by clients and third parties should not be in scope.

To summarise, there are three stages to the offences:

  1. The criminal evasion of tax (with the “dual criminality” overlay for the Foreign Offence referred to above)
  2. The criminal facilitation of this offence by an associated person of the relevant body (again with the “dual criminality” overlay for the Foreign Offence)
  3. The failure by the relevant body to prevent its associated person from committing that facilitation – in other words, the statutory defence described below not being available. If there has been facilitation of tax evasion by an associated person of the relevant body, the offence is strict liability. This means that no actual intent or subjective awareness on the part of the relevant body needs to be proved – there will be criminal liability if the statutory defence is not available.

Defence

The only statutory defence available is that the relevant body had in place reasonable prevention measures or that there were reasonable grounds for not having such procedures in place. Guidance issued in draft by HM Revenue & Customs states that those measures should be guided by six core principles:

  1. Risk assessment
  2. Proportionality of risk-based prevention procedures
  3. Top level commitment
  4. Due diligence
  5. Communication (including training)
  6. Monitoring and review

Action

All corporate organisations and partnerships, particularly those based in the UK or carrying on business here, should carry out as a priority an assessment of how this new legislation might apply to them and, in particular, the risk of facilitation of UK or, if relevant, non-UK tax evasion occurring in their business. Those overseas businesses with no interaction with the UK may conclude that it is reasonable not to have preventive measures in place, but that will depend on the facts in each case.

The results of this risk assessment may well, however, lead to changes to policies and procedures. Affected businesses should consider training on the new offence for all relevant staff, the policies around work intake and rules around reporting suspected incidents of tax evasion by third parties. It will also be critical that these steps be clearly documented, as will the top level commitment by senior management to prevent facilitation of tax evasion.

If you require any assistance or guidance on the implementation of this new law, please do not hesitate to contact your usual Proskauer lawyer, or any of the authors of this post.

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Photo of Catherine Sear Catherine Sear

Catherine Sear is a partner in the Tax Department and a member of the Private Funds Group. She specializes in the tax aspects of structuring and investing in private investment funds including private equity, venture capital, infrastructure, debt and real estate funds, funds…

Catherine Sear is a partner in the Tax Department and a member of the Private Funds Group. She specializes in the tax aspects of structuring and investing in private investment funds including private equity, venture capital, infrastructure, debt and real estate funds, funds of funds, secondary funds and other investment partnerships.

She advises sponsors and investors on a wide variety of UK and international tax issues related to private investment funds and their operations, including tax aspects of:

  • structuring and raising private investment funds
  • structuring carried interest and executive coinvestment arrangements
  • restructuring existing private investment funds
  • establishment and operation of fund management businesses
  • investments by institutional investors in private funds
  • separate accounts for institutional investors, acting for both fund managers and investors
  • secondary transactions, both buy-side and sell-side
  • coinvestment structures

Catherine advises on a broad range of UK tax issues including VAT, employment tax, capital gains tax in relation to partnerships, withholding taxes and tax rules relating to carried interest. She also has considerable knowledge of international tax issues arising for investment structures with a cross-border dimension and experience with multijurisdictional fund management teams.

Photo of Robert E. Gaut Robert E. Gaut

Robert Gaut is a tax partner and head of our UK tax practice in London.

Robert provides advice on a full range of UK and international tax issues relating to fund formation, private equity deals, finance transactions and private equity real estate matters…

Robert Gaut is a tax partner and head of our UK tax practice in London.

Robert provides advice on a full range of UK and international tax issues relating to fund formation, private equity deals, finance transactions and private equity real estate matters, including experience with non-traditional equity transactions, such as debt-like preferred equity and co-investments for private credit investors.

Robert is highly-regarded for his ability to provide sophisticated tax advice to many of the world’s preeminent multinational companies, sovereign wealth funds, investment banks and private equity and credit funds. Clients have commented to legal directories that Robert is “really technical and knows his stuff,” and “has a very strong knowledge of the various tax laws, but also presents more innovative techniques and strategies.”

He is consistently recognized by Chambers UK and The Legal 500 United Kingdom, and has been recognized by Chambers Global as a leading individual in tax. The Legal 500 comments that Robert has “vast experience in a range of matters, including corporate tax structuring, real estate tax and fund formation.”

Photo of Stephen Pevsner Stephen Pevsner

Stephen Pevsner is a tax partner and a member of the Private Funds and Private Equity M&A Groups. Stephen’s practice covers the broad range of corporate and individual tax advice, with particular emphasis on private fund formation across a wide range of buyout…

Stephen Pevsner is a tax partner and a member of the Private Funds and Private Equity M&A Groups. Stephen’s practice covers the broad range of corporate and individual tax advice, with particular emphasis on private fund formation across a wide range of buyout, debt and infrastructure asset classes, as well as UK and international M&A transactions (often private equity backed). He has wide experience in corporate reorganisations, structured finance, investment funds and new business set-ups, and also advises regularly on a wide range of employee and fund manager incentive arrangements arising from these transactions.

Stephen is a member of the BVCA tax Committee and, according to Chambers UK, he is a notable practitioner in the corporate tax field, praised for “his ability to master the intricacies of tax law and understand the commercial aspects of the deal”.