Criminal Finances Act 2017: what you need to know

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From a likely date of September 2017, the Criminal Finances Act 2017 will make companies and partnerships criminally liable if they fail to prevent tax evasion by either a member of their staff or an external agent, even where the business was not involved in the act or was unaware of it.

A prosecution could lead to both a conviction and unlimited penalties.

Tax evasion is already an offence, but up to now it has not been possible to ascribe criminal liability to the firm where it occurred.

The Act became law in April 2017, and it will be down to the new post-election government to decide when the regime should actually take effect, though the autumn seems the most likely time. The new rules cover both UK and overseas taxes (where there is a UK element).

Key facts

For a firm to be liable under the Act, there must have been:

  • Stage one: criminal tax evasion by a taxpayer (either an individual or a firm) under existing law.
  • Stage two: criminal facilitation of the offence by a representative of the firm, as defined by the Accessories and Abettors Act 1861.
  • Stage three: the firm failed to prevent its representative from committing the criminal act outlined at stage two.

The new rules target deliberate and dishonest behaviour. They do not create any new offences at the individual level – if activity would be considered to be tax evasion under existing law, then it will continue to be so. Likewise, if the activity would not currently be considered tax evasion, then the new law does not make it so.

Defence

A business may avoid criminal liability where it can show that it had implemented reasonable prevention procedures, or where it can show that in the circumstances it would have been unreasonable or unrealistic to have expected it to have had procedures in place.

What firms should do

Firms will have to ensure that they have reviewed their current practices and procedures to minimise any risks, and to put in place appropriate monitoring and training of staff at all levels. The Act effectively makes owners and managers responsible for preventing their staff and external agents and consultants from committing tax evasion. And the larger and more complex the business, the greater the risk that an activity may occur that could be caught.

Risk assessments

HMRC’s 45 pages of draft guidance suggests firms undertake risk assessments of their products, services, client data and internal systems that could be used to facilitate tax evasion.

Areas that firms may wish to review could include, for example, where staff have not taken holidays, or are evasive over their client relationships, or where there is insufficient oversight of processes and information.

Procedures

After reviewing any risks, a firm may wish to design or upgrade its procedures to cope with any concerns. This may include:

  • Making clear to employees that the firm is committed to preventing the facilitation of tax evasion.
  • Including clauses in contracts with employees and external contractors requiring them not to engage in facilitating tax evasion, and to report their concerns straightaway.
  • Providing staff training on recognising and preventing financial crime.
  • Providing a safe whistle-blowing procedure.
  • Monitoring and enforcing prevention procedures.
  • Regular reviews of prevention procedures and changing them where required.

Unexplained Wealth Orders

A further measure in the Act allows for Unexplained Wealth Orders to be served on individuals suspected of a serious crime to explain the sources of their wealth; any proceeds of crime can be seized by the authorities.

Other provisions

The Act also covers a raft of other provisions, including further powers to investigate suspected money laundering or terrorist financing, and new orders to require someone to disclose information they may have on money laundering.

Further Guidance

HMRC has issued draft guidance and factsheets on how the new rules will work in practice:

Contact us

If you would like to discuss these issues, please contact a member of our business tax team, or your usual Bishop Fleming adviser.

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