HMRC ramps up investigations against companies facilitating tax evasion; time to check those "reasonable procedures"

HMRC has for some time been trying to stamp out the criminal activity of tax evasion. The perception is that large corporates, or at least individuals in those businesses, are complicit in evasion by turning a blind eye to it.

Corporate criminal offences introduced in September 2017 make it a crime for businesses to fail to prevent "associated persons" facilitating tax evasion by third parties. Associated persons would include employees but also any person that performs services for or on behalf of the organisation, for example vetting agencies. There are two separate offences relating to domestic and foreign tax evasion.

These crimes carry potentially unlimited fines but also represent a significant wider risk to the business. Tax compliance is now played out as a brand issue for businesses where stakeholders – from shareholders to employees, customers and regulators – require a business to play a positive role in society. Any prosecution under these new offences would seriously damage a business's reputation.

HMRC has been vocal in its intention to bring about change in industry practice and attitudes towards risk. Our experience over the last two years has been that most businesses have taken the hint and brought in the "reasonable procedures" that constitute a defence to the new offences. However, the risk is that, having put in place the new procedures, a degree of complacency can set in and businesses might not have reviewed their processes or checked that are working.

What is HMRC doing?

If there was any doubt that HMRC would follow through with its new powers, figures recently released demonstrate its seriousness in enforcing the new offences.

As at the end of last year, HMRC had nine live investigations and a further 21 opportunities under review across 10 business sectors. These include financial services, construction and software development. The businesses range in size from small companies to some of the UK's largest organisations.

The range of sectors is interesting and perhaps has been chosen by HMRC to send a signal that there are no safe havens.

What can companies do to protect themselves?

Government guidance was published back in September 2017 (and our own Insight prior to that) to assist companies ensure that they have reasonable procedures in place. This guidance is illustrative though, and professional advice will be needed to ensure that relevant measures are taken to address the risks faced by individual businesses.

Some key highlights from the guidance include:

• Procedures need only be reasonable and not necessarily burdensome.
• A risk assessment will inform the decision as to which procedures will be most appropriate for a particular organisation.
• The size of a company will be an important factor.
• Top-level management will be required to show a commitment to fostering a culture in which the facilitation of tax evasion is never acceptable.
• Due diligence procedures will be needed and may require the help of external consultants.
• Companies must communicate (and train on) their prevention policies and procedures.

However, the immediate point for most businesses is that the reasonable procedures that were put in place in 2017 cannot be allowed to sit in a drawer. HMRC expects businesses to review their effectiveness. That means running checks periodically, for example on agencies and other associated persons whose actions are deemed to be those of the business. Further, businesses may well have been encountered relevant incidents of potential tax evasion that occurred in the last two years. How they responded to those incidents and if necessary updated their processes will be important to demonstrate there are "reasonable procedures" in place.