Time to take action on tax evasion

The Criminal Finances Act 2017 focuses on accountability for tax evasion. What does this mean for real estate?

We all watched with somewhat morbid curiosity when, in 2016 and 2017, the Panama and Paradise Papers scandals saw the leaked tax affairs of multinational corporations, heads of state, the super-rich and even royalty splashed over the front pages. The gory details of Lewis Hamilton’s private jet and the elaborate arrangements of David Cameron’s multi-millionaire father were set out in technicolour: tax had never been so interesting. But while the schadenfreude faded, it remained clear that there is a serious problem with systemic tax evasion by high-net-worth individuals and companies with links to the UK making the most of secretive offshore tax regimes.

Looking for an easy win with a disillusioned general public and hoping to combat the perceived culture in UK corporate governance of "turning a blind eye", the government swiftly passed the Criminal Finances Act 2017 (the Act).

The Act does not radically change what is criminal, but it does do one rather interesting thing. Apportioning blame for tax evasion is a messy business and so the Act focused on who can most easily be held accountable.

It is now an offence for an incorporated body or partnership (a “relevant body”) to fail to prevent the facilitation of tax evasion (there are separate provisions dealing with domestic and foreign tax although the difference is not relevant for the purpose of this article) and it is now far easier to hold corporate entitles liable where they fail to prevent crimes being committed by those acting for or on their behalf.

Evasion or avoidance?

Let us be very clear – we are talking about tax evasion here, not tax avoidance. The distinction is an important one. Entirely legal tax avoidance involves taking steps, within the existing tax regime, to minimise your bill. Tax evasion, by contrast, is entirely illegal, and involves deliberately deceiving the taxman with a view to dishonestly evading tax which is properly due.

How does the new offence work?

The offence of failure to prevent the facilitation of tax evasion can be broken down into three stages:

• There must be criminal tax evasion by a taxpayer (who does not have to be the same as, or even connected to, the relevant body);
• It has to have been criminally facilitated by a person associated with or representing the relevant body (an "associated person"); and
• The relevant body did not have procedures in place to prevent its associated person from facilitating tax evasion, when reasonably it should have done.

Importantly, it does not matter whether the relevant body is UK-based or not, or whether the associated person is in the UK or overseas; what matters is the evasion of tax liability.

Stage one

At its most extreme, this underlying tax evasion will involve cheating the public revenue, but there are a number of statutory offences of "fraudulently evading" specific taxes (for example VAT). Here it is a crime to "take steps to" or "be knowingly concerned in" tax evasion, regardless of whether any tax is actually successfully evaded.

Stage two

Stage two requires deliberate and dishonest conduct. To show criminal facilitation, it is not enough that an associated person only accidentally, ignorantly or even negligently facilitated the tax evasion.

Secondly, and more concerning, the definition of "associated person" within the Act itself is deliberately wide, determined with reference to all the circumstances of the relationship (not just the label put on it). Associated persons include any employees, agents, consultants, but also any individuals or entities performing services for and on behalf of a relevant body.

Stage three

This offence is one of strict liability – if stages one and two have been established, and the relevant body has failed to do anything preventative, the offence has been committed. Ignorance is no defence. The onus is very much on corporate entities to know what is going on within their business operations and act as policemen on HMRC’s behalf with respect to their associated people.

What does this mean for real estate?

In the real estate sector, perhaps more than most industries, relevant bodies are reliant on others performing services on their behalf. Managing agents may be employed to provide estate services on behalf of a management company. Contractors or sub-contractors, meanwhile, provide construction services on behalf of developers. The Act even catches professional advisers such as lawyers and accountants.

Is there any defence?

It is not all bad news. Stage three requires a relevant body to fail to prevent the criminal facilitation, thereby offering a defence where it had, at the time of the facilitation offence, reasonable prevention procedures in place. It might not even be reasonable in all the circumstances to expect the relevant body to have any such prevention procedures in place.

What exactly is reasonable will depend on the nature of the relevant body and its level of risk; however, the government has given some guidance to inform relevant bodies’ approaches moving forward. Well-advised relevant bodies should consider:

• risk assessment – looking at the nature and extent of their exposure through the relationships they use to conduct their affairs;
• articulating top-level commitment – demonstrating awareness and commitment to compliance and transparency from board level down fosters a culture where facilitating tax evasion is never acceptable;
• communication – working with both internal and external teams to make sure policies and procedures are communicated and embedded within an organisation; and
• ongoing monitoring and reviews – updating risk assessments and prevention policies will help ensure risk continues to be adequately mitigated.

We are still waiting for the first glimpse of this new offence in action, but the consequences of falling foul of its reach cannot be understated: unlimited financial penalties, a serious crime prevention order, not to mention untold reputational damage. Understanding this new offence and implementing adequate prevention procedures to limit exposure should be at the forefront of every company’s agenda.

View the Criminal Finances Act 2017.

This article was first published in Estates Gazette on 15 February 2018.