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5 Steps You Should Take To Avoid Facilitating Tax Evasion

Posted by

Lynne Callister

on 08 Oct 2019

5 Steps You Should Take To Avoid Facilitating Tax Evasion

Tax evasion? That's for all those off-shore guys, no? Your company has nothing to do with taxes other than payroll, so why would you need to worry about tax evasion?

Well, because the law in the UK makes your company liable for 'failure to prevent' if any employee or associated person is found facilitating tax evasion... even if your company had no knowledge of it! So, it's prudent to take a few preventative steps now, rather than repent later.

Businesses are now liable for failure to prevent tax evasion

The Criminal Finances Bill 2016-17, introduced a range of new offences in a bid to crack down on financial crime. Included were two specific offences related to tax evasion.

Now companies can find themselves liable for failing to prevent the facilitation of tax evasion. In other words, professional advisors who help their clients to evade tax could face fines of up to £3,000. What's more, HM Revenue & Customs (HMRC) will not be shy in naming and shaming those companies involved.

The bill should come as no surprise. During her leadership campaign to pursue companies over tax avoidance, the UK Prime Minister at the time, Theresa May, stated:

“It doesn’t matter to me whether you’re Amazon, Google or Starbucks, you have a duty to put something back, you have a debt to fellow citizens and you have a responsibility to pay your taxes.”

The UK was one of the first countries in the world to introduce this power. The Bill brought with it new criminal offences applying to all organisations, whether or not they are based in the UK.

The two new tax evasion offences are:

  • Failure to prevent facilitation of UK tax evasion; and
  • Failure to prevent facilitation of overseas tax evasion.

This means that a company will be held liable if one of its employees or contractors is proven to have aided and abetted a person in evading tax, even if the company didn't have any knowledge of the associated persons facilitating tax evasion.

These offences bear resemblance to the corporate offence under the Bribery Act in that they are extraterritorial - they cover conduct that takes place anywhere in the world.

According to GOV.UK, HMRC has secured over £130 billion in additional compliance revenues as a result of actions to tackle tax evasion, avoidance and non-compliance, since 2010.

The clampdown was originally aimed at accountants, bankers and lawyers - who actively promote tax avoidance or evasion schemes - and their wealthy clients. However, in reality, the Act impacts a whole host of companies. The video games industry is the latest to come under the spotlight.

The only defence is to show that you took reasonable steps

Since the Paradise Papers and Panama Papers data leaks, governments around the world have recouped over $1.2 billion so far - with hundreds of cases still underway.

The evidence shows that the risk for businesses is greater than ever. So, with this in mind, can you be sure you are doing everything in your power to prevent any form of tax evasion associated with your company?

After all, the penalties for companies if found guilty can be severe. They include, unlimited fines, confiscation orders and serious crime prevention orders.

The only defence that a company has is to show that they have taken reasonable steps to prevent the facilitation of tax evasion.

So, if you are a business owner, it is vital that you and your employees understand what tax evasion is, and be aware of how you could inadvertently aid tax evasion. To help we have 5 steps to follow so that you can ensure that your company is not seen to have facilitated tax evasion.

MLRO Responsibilities Checklist

Step 1: Provide information and regular training to all staff

Your staff need to be clear on the rules of tax evasion and know what they must do to comply, including watching out for red flags, conducting due diligence checks, and raising any concerns promptly. And you must be able to demonstrate when the training was delivered, what was the content, whether the employees concerned understood the violations of the law and whether they made an attestation. For all these reasons, companies often do this training as e-learning - often choosing a provider like Skillcast!

Step 2: Know who poses a high risk of tax evasion in your company

Entities with complex tax planning structures, difficulties establishing beneficial owners, customers with unsubstantiated sources of funds or wealth, and also companies based offshore in jurisdictions with high levels of secrecy all pose a higher risk. Tax advisory, legal and financial service firms are also considered high risk, as well as companies offering private wealth management.

But every company runs the risk of aiding tax evasion, eg in the way you pay your suppliers, your consultants, and your facilities management company, and in the way you help your clients. Recently, a former banker was fined € 500k and given a 12-month suspended prison sentence for helping wealthy clients hide € 1.6bn from tax authorities.

So, whether your company is in one of these high risk businesses or not, it's a good idea to conduct a risk assessment to identify the individuals who might pose a risk of tax evasion through their actions.

Step 3: Conduct third-party due diligence

This is especially important for third parties and customers, to ensure you are not conducting business with anyone who may be involved in tax evasion. This should be proportionate to the level of risk faced. In short, the higher the level of risk, the more information or due diligence is required.

  • Develop criteria, monitoring and screening processes to check customer tax compliance status.
  • Remember that tax evasion doesn't just apply to companies or customers with links to offshore tax havens - e.g. non-US financial institutions are also obliged to check the tax status of US citizens under FATCA.
  • There are new international standards (the OECD's Common Reporting Standard) designed to ensure tax transparency and help combat tax evasion.

Step 4: Make sure you and your employees can distinguish between tax evasion and tax avoidance

Tax evasion. Tax avoidance. One is legal. One isn't. It's crucial that your company knows the difference.

ax avoidance is when a person or company legally exploits the tax system to reduce tax liabilities, such as ISA investments or establishing an offshore company in a tax haven. Tax evasion is when a person or company escapes paying taxes illegally. This is typically done by concealing the true state of their affairs to tax authorities.

Step 5: Report it

Encourage your employees to report any knowledge or suspicion of tax evasion or other financial crimes via your company's whistle-blowing hotline or any other reporting channels you may have. You must have procedures to ensure that such reports are attended to promptly and passed on to the law enforcement authorities, if appropriate.

Whistleblowing Training Presentation

Want to learn more about Financial Crime?

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