Blog: Tax evasion: a subtle shift of emphasis with big consequences

John Macintosh, Tax Partner at Deloitte in Scotland surveys the bigger picture as new laws loom.

Tax evasion offences have tended to focus on individuals, rather than businesses. But that’s about to change. The introduction of new legislation, coming into effect on September 30, will place more of an onus on the “facilitation” and “enablers” of tax evasion, i.e. a corporate entity.

These new regulations will affect all corporates and partnerships operating in the UK. Under current law, the UK’s tax authorities can only criminally prosecute a business when they can establish, beyond reasonable doubt, that senior figures within it are knowingly involved in tax evasion.

However, the new rules will turn this on its head. Instead, Her Majesty’s Revenue and Customs (HMRC) will not have to prove this – compelling companies to demonstrate senior-level involvement in the active prevention of tax evasion. It’s a significant change of emphasis.

That said, there are several criteria that must be met for an offence to have been committed. Firstly, criminal evasion by a taxpayer under existing law, whether it’s an individual or legal entity, has to have occurred.

Second, a person acting in their role as an “associated person” of a company or partnership facilitated that act. An “associated person” is deliberately very broad. It includes all employees of the business, but may also extend to contractors, agents, suppliers or subsidiaries.

Finally, it has to be established that the organisation failed to prevent this “associated person” from committing the tax evasion. It is, however, important to note that there must be an intention or knowledge of wrongdoing on the part of the associated person – anything unintentional or negligent won’t be included within the scope of the legislation.

If an offence is found to have been committed, there is only one defence: a business had “reasonable prevention procedures” in place. These must be proportionate to the risk level faced and based around the six core principles of: risk assessment, proportionality, top-level commitment, due diligence, communication and training, as well as monitoring and review.

HMRC has made it clear that businesses can’t rely on their existing procedures – tax evasion facilitation risk must be evidently considered separately and documented. The UK Government has also said that it accepts some procedures will take time to roll out; but they do expect implementation to be quick and a plan set out, focussed on the major risks and backed by a clear timeframe.

The last decade or so has shown that breaching these codes comes with the risk of reputational damage. Businesses also need to be aware that unlimited financial penalties and criminal sanctions could also be levied against anyone caught on the wrong side of these changes.

The upshot is that all types of organisations need to undertake a risk assessment ahead of September 30 – not just large multinationals, but smaller businesses too. On the face of it, the shift of emphasis in the legislation may seem slight, but it could have significant consequences for entire businesses – not just a few individuals within them.