Prevention better than a cure?

On 27 April 2017 the latest UK government measure designed to combat offshore tax evasion received Royal Assent.  It will shortly be a criminal offence for an institution to fail to prevent the facilitation of tax evasion.  This affects institutions globally, not just in the UK.

The Criminal Finances Act contains two new criminal offences which can only be committed by corporates and other bodies, not by individuals.  Once the Act is in force it will be a criminal offence for an institution to fail to prevent its employees or other persons associated with it facilitating the evasion not only of UK tax, but also of foreign tax.   On one view this goes against a long established legal principle that the UK will not enforce, directly or indirectly the tax regime of another country.

A company will commit the UK tax offence if a person associated with it criminally facilitates evasion of UK tax by another.  The classic situation may be where an employee sets up a structure for a client in order to evade UK tax knowing that this is what the client intends.   If this happens and it can be shown that the employer company failed to prevent it, the employer will be criminally liable.  This may cause relatively little concern to the Jersey finance industry which is well used to due diligence and AML measures designed to detect tax evasion.   However, the company will be liable not only for the actions of its employees, but also of any persons “associated” with it.   This includes those who provide services on its behalf anywhere in the world.  It would cover a tax adviser in another jurisdiction who is used to provide tax advice to clients.  It is also likely to cover sub-contractors and potentially some business introducers.

A significant aspect of the new law is that none of the tax evasion need take place in the UK. It is the fact that UK tax has been evaded that provides the justification for the UK prosecution authorities to become involved.   Wholly non-UK conduct by non-UK companies and individuals can be prosecuted in the UK courts.   From the perspective of the criminal law that’s a relatively surprising proposition.

Even more significant is the offence of failing to prevent the evasion of foreign tax.   This mirrors the UK tax offence but has the additional requirement that there must be a connection between the evasion and the UK in order for it to be prosecuted.  A Cayman trust company whose employees facilitate the evasion of South African tax could not be brought before Southwark Crown Court and prosecuted.   On the other hand, what amounts to a connection with the UK is broadly phrased in the new legislation.   If the Cayman trust company had a branch office in London so that it carried on part of its business in the UK, it could be prosecuted in respect of foreign tax.   It will be clear from this how wide the potential reach of these new offences is.

It will be a defence to show that “reasonable procedures” were in place to prevent facilitation of tax evasion.   It is clear that bespoke procedures will be expected, which will have to be evidenced, rather than a generic “tick box”

Some may argue that the new offences are intended not to be regularly prosecuted but to set a moral tone on tax evasion and to encourage institutions to withdraw from business areas where tax evasion is a high risk.   On the other hand, with the UK Courts imposing fines on the likes of Rolls Royce which run into hundreds of millions of pounds, no-one in the Jersey finance industry can afford to ignore this new legislation.   Procedures will need to be reviewed and in place for when it comes into place in the autumn.


Simon Thomas

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