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Tackling boardroom excess: the new criminal offence for corporates failing to prevent tax evasion

By Richard Highley and Maria Richardson (DAC Beachcroft).
4 October 2016 

Theresa May is expected to push ahead with David Cameron's plans to hold companies criminally liable where they fail to stop their employees facilitating tax evasion . This proposed new offence was put forward in response to intense political pressure on the UK government to deal with corporate tax evasion, in particular following the leak of the "Panama Papers" on 3 April 2016 (see our article on the Panama Papers).

The proposed new legislation will make corporates criminally liable if they fail to prevent the facilitation of tax evasion committed by one of their employees. The first consultation was conducted by HMRC just over a year ago and the first draft legislation was set out in the response documentation in December 2015. The HMRC's second consultation paper which invited views on the draft legislation and guidance has now closed. A copy of this paper can be found here: Tackling tax evasion: legislation and guidance for a corporate offence of failure to prevent the criminal facilitation of tax evasion. The draft legislation is expected to be implemented in early 2017.

The proposed offence

At the moment, attributing criminal liability to a corporation normally requires proof that the most senior members of the corporation (typically those at director level) were involved and aware of the criminal activity (the "directing will and mind test"). HMRC are particularly critical of the fact that the current legislation allows those at a senior level to protect themselves from prosecution by turning a blind eye to wrongdoing, in order to preserve their ignorance of the criminality going on within their organisation.

The proposed new offence is intended to overcome these difficulties. It follows the effective model of the Bribery Act 2010 and liability is strict, in that no intention, knowledge or participation on the part of the relevant body in respect of the facilitation of tax evasion needs to be proven. It will apply to "relevant bodies" who are defined as a body corporate or partnership, and thus would encompass all businesses, including banks, fiduciaries and professional advisers.

The main principles of the proposed draft offence are as follows:

Stage One: Criminal tax evasion by a taxpayer under the existing criminal law.

The draft legislation separates the domestic and foreign elements of the corporate offences into the following: 

• failure to prevent facilitation of UK tax evasion offences, which applies to any corporate, regardless of whether the relevant acts or omissions take place in the UK or elsewhere; and
• failure to prevent facilitation of foreign tax evasion offences. This applies where the offence is a foreign tax evasion offence which would be recognised as the same in the UK also (i.e. it satisfies the dual-criminality test). The territorial reach of this offence is also broad, applying to any corporates incorporated in or conducting business in the UK.

Stage Two: Criminal facilitation of this offence by a person acting on behalf of the corporation.

The draft legislation makes clear that a corporation will not be liable for actions undertaken by an employee acting on a "frolic of their own", but otherwise applies to any "associated person", performing services on behalf of the corporate, whether for reward or not. An associated person may facilitate such an offence by, for example, aiding, abetting, counselling or procuring the commission of an offence by another person.

Stage three: The corporation has a defence if it took reasonable steps to prevent those who acted on its behalf from committing the criminal act outlined at stage two (i.e. having "reasonable prevention procedures"); or, it was not reasonable to expect the corporation to have any such prevention procedures in place. Both defences will be considered in the context of "all the circumstances".

The revised guidance to the draft legislation states that what amounts to "reasonable prevention procedures", for the purpose of this defence, will be "proportionate to the risk of criminal facilitation faced by the corporation [and] will depend on the nature, scale and complexity of the corporation's activities". The guidance confirms that "procedures" refers to both formal policies adopted by the corporation as well as practical steps taken, including regular training sessions, for example.

Comment

In view of the uncertainty following Brexit, some commentators suggest the government should delay implementation of this new offence. However, early indications given by Theresa May are that she will push ahead as part of her domestic legislative agenda to address "boardroom excess".

In view of this, we expect D&O insurers will already be considering the consequences of the likely increased exposure to corporates. Areas we would expect them to focus on are: 

• conducting greater due diligence on the "reasonable prevention procedures" which the Insured has in place to protect it from liability under the proposed offence and to have the benefit of the defence.
• adding blanket exclusions to their policies for all claims arising from the proposed new offence, while offering to provide limited optional coverage for an additional premium.
• their current exclusions for fines and penalties.
• their exposure for employees working outside the UK, given the scope of the proposed offence applies whether the relevant acts or omissions take place in the UK or elsewhere.