04 August 2017

Impact of Criminal Finances Act (‘CFA’) 2017

The Criminal Finances Act (“CFA”) 2017 comes into effect on 30 September 2017. The CFA introduces two new offences which could affect any company with links to the UK.

What are the offences?

Failure to prevent” the facilitation of UK tax evasion, in the UK; and “failure to prevent” facilitation of foreign tax evasion overseas.

When will such offences occur?

These offences can only be committed in circumstances where a person acting for or on behalf of a company, acting in that capacity, facilitates tax evasion by another person.

Who can commit the offences?

The offences cannot be committed by individuals. That is already covered by existing UK legislation. The offences can only be committed by a “relevant body”. A relevant body is either a body corporate or a partnership, such as a bank or a law firm. For simplicity in this article, we will use the word “company” to mean any relevant body.

Offences involved?

Each offence is made up of three elements. To commit the offences, all three elements must have occurred.

Element one: A taxpayer must commit criminal tax evasion.

Element two: The company must have facilitated tax evasion by an associated person.

Element three: The company must have failed to prevent the facilitation of tax evasion.

What is an associated person?

An associated person is someone who is an employee of the company and who is acting in the capacity of an employee.

So what is new?

Evading tax and facilitating tax evasion are already criminal offences under English law. What is new is the introduction of a criminal offence by companies which are responsible for the actions of their employees and other people seen as working for them.

I don’t conduct business in the UK – why will this affect me?

The new offences introduced by the CFA apply both within the UK and overseas. If any company, wherever incorporated, fails to prevent facilitation of UK tax evasion, it will commit the first offence above. However, in order to commit the offence of failure to prevent facilitation of foreign tax evasion overseas, there are additional requirements.

What are the additional requirements?

There are two additional requirements – dual criminality and a UK nexus.

Dual criminality: Dual criminality means that both tax evasion and facilitation of tax evasion must be offences in the country in which the offence is committed. For example, for a bank in Singapore to be guilty of the new offence, the offences of tax evasion and facilitation of tax evasion must exist under Singapore law. Additionally, if the offences committed in Singapore had occurred within the UK, then those offences must constitute criminal offences under the Act under English law in the UK.

UK nexus: There must be a connection between the failure to prevent foreign tax evasion facilitation overseas and the UK. This connection can occur in one of three ways.

  1. The company was incorporated in the UK and has an international branch (as opposed to a subsidiary) that fails to prevent foreign tax evasion facilitation overseas. For example, if a bank was incorporated in the UK and a branch in Australia fails to prevent facilitation of tax evasion in Australia, there will be a UK nexus.
  2. The company was incorporated outside of the UK, fails to prevent foreign tax evasion facilitation overseas and has a branch (as opposed to a subsidiary) in the UK. For example, if a bank was incorporated in Switzerland and the branch in Switzerland fails to prevent facilitation, there must also be a UK branch for there to be a UK nexus.
  3. Any part of the conduct constituting part of the foreign tax evasion facilitation offence takes place in the UK. For example, if there is no branch in the UK but a USA company pays its employees in cash while on a trip to the UK to evade US tax, there will be a UK nexus.

How can I ensure that my company doesn’t commit these offences?

If you have in place prevention procedures that are reasonable given the size, nature and complexity of your company, these prevention procedures should serve as a defence.

How will what is ‘reasonable’ be decided?

Guidelines state that the UK tax authorities will take a risk-based and proportionate approach when determining whether procedures are reasonable.

HMRC guidance is that “reasonable procedures” need to cover six key principles.

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

What types of prevention procedures could I use?

You should take steps such as conducting risk assessments to understand the risks of facilitation by associated parties, preparing a training programme for your employees and/or having procedures in place to notify the relevant authorities or regulators if an associated person were to commit the offence of facilitation of tax evasion.

Who should I contact for more information?

Please contact a member of your usual KWM team with any queries. They will work with Vanessa Docherty, Head of Finance in our London office, or with Darren Roiser, a partner in our Dispute Resolution team in our London office, to provide any assistance needed in updating internal policies.

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