Are You Prepared for the UK’s New Tax Evasion Law?
9/27/2017

Previously, companies could be held accountable if prosecutors showed that senior directors, usually members of the board, were involved in and aware of illegal activity, such as advising clients of illegal tax avoidance schemes. But such cases were hard to pursue, particularly in the case of multinational corporations, where decisions are often made at a lower level, and even if leaders knew about malfeasance, they had little incentive to report it.
Under the new law, the Criminal Finances Act 2017, companies will be criminally liable if they fail to prevent tax evasion by either a member of their staff (even lower-level staff) or an external agent.
The law does not broaden the definition of tax evasion; rather, it widens the net for catching companies that abet it. For a corporate offense, someone must have deliberately and dishonestly facilitated tax evasion at a company. Individuals avoiding tax will be charged with tax evasion. Companies will be charged only with failing to prevent it, not with tax evasion itself.
The law is vague about the consequences of being held criminally culpable. There is no limit on financial penalties, for example. In addition, the confiscation of illegal gains and ineligibility for receiving public contracts may apply.

“Reasonable Prevention Measures” Defense
Companies that can show they have implemented “reasonable prevention measures” will not be charged. The government has issued detailed guidance suggesting what to do. It also says that smaller companies with less risk are not expected to develop policies as elaborate as those of multinationals.
Here are certain basic requirements that large companies should be mindful to follow in order to establish (and demonstrate) a robust prevention framework:
- Develop a strategy and timeframe for prevention procedures.
- Do a risk assessment and contract review that includes third parties you deal with. Although violations by contractors and consulting companies generally do not appear likely to lead to charges, the law relies heavily on context. Examine all contracts with employees and third parties and add language requiring them not to engage in facilitating tax evasion and to report concerns immediately.
- Review your employee policies and procedures and add a section about prevention of tax evasion.
- Urge your board of directors to issue a strong statement against tax evasion.
- Provide regular staff training on detecting and preventing financial crime.
- Provide a reporting procedure for whistleblowers to follow, and protect them from retribution.
- Make sure your compensation structure encourages compliance and discourages facilitating tax evasion.
- Create a process to monitor your prevention program and periodically review it for effectiveness.
Examples of Innocence and Guilt
Though the law may sound intimidating at first glance, the government places great emphasis on prevention and makes it clear that good-faith efforts will go a long way towards avoiding trouble. Context is also important.
As an example, the guidance cites a car parts maker that contracts with a UK distributor that creates fake invoices to help customers avoid UK taxes. If the car parts maker had a clear policy against tax evasion and had prevention policies and procedures in place, it is unlikely to have committed an offense.
Another example of innocence is a UK bank with a client who requests services in South Africa, where the bank has no branches or subsidiaries, but instead refers people to an outside firm for help. This firm sets up an illegal tax evasion scheme for the client. Since the firm was working for the client, but not the bank, the bank would not be charged.
The picture is different, however, if a company “controls” the relationship with the service provider. For example, if a company instructs a foreign tax advisor to help a client with taxes and pays the advisor’s fees, the company could be held liable if recommendations result in illegal tax evasion.
If a company’s own employees in any branch commit an offence, the company will likely be held liable.
The guidance offers additional, more complex examples that shed light on the government’s reasoning in applying the law.
Context
The tax evasion provision is just one part of the new law, which strengthens previous anti-terrorist and anti-money laundering legislation and improves the collection of ill-gotten gains. It also increases the government’s ability to seize illegal assets stored in the UK and requires those suspected of corruption to explain the source of their funding.
The tone of the guidance on failure to prevent tax evasion, along with its heavy emphasis on prevention, is part of the government’s strategy to build a more risk-averse corporate culture. Basically, they’re reasoning that encouraging prevention is better than administering a cure.
Though the law creates a new offense, its detailed examples and careful consideration of circumstances come across as business-friendly. It seems to be aimed at preventing egregious conduct. That said, and as with all laws, the devil is in the detail and its applications. Those corporations that comply with the requirements and have appropriate, documented protocols and procedures in place will be well-placed to quickly and cost effectively manage any related inquiry from regulatory authorities.