Corporate criminal tax offence: contractual provisions not sufficient on their own

It is a criminal offence in the UK under the Criminal Finances Act 2017 if a business fails to prevent its employees or any other person associated with it from facilitating tax evasion. There are two new offences. The first offence applies to all businesses, wherever located, in respect of the facilitation of UK tax evasion. The second offence applies to businesses with a UK connection in respect of the facilitation of non-UK tax evasion.

A business will have a defence if it can prove that it had put in place reasonable procedures to prevent the facilitation of tax evasion taking place, or that it was not reasonable in the circumstances to expect there to be procedures in place. Find out more detail about the the offence in our guide.

The new offences are strict liability offences so that a prosecutor does not need to show any intention on the part of the business to commit the offence. Falling foul of them could cause serious reputational damage. The risk for entities operating, or bidding for, government or public authority procurement contracts is even more pronounced as corporate criminal convictions may need to be disclosed.

Associated persons

Business will potentially be caught by the new offence if their 'associated persons' facilitate tax evasion and they have failed to prevent this from happening. 'Associated persons' are employees, agents and other persons who perform services for or on behalf of the business, such as contractors, suppliers, agents and intermediaries.

Training programs and company policies and procedures can and should be put in place to manage the risk of employees facilitating tax evasion. It can however be more difficult to manage the risk in relation to associated persons who are not employees.

One of the ways in which companies may seek to protect themselves and increase their control is by putting obligations on their associated persons to comply with the new law. This can be done by placing obligations in contracts on third parties not to commit or facilitate a tax evasion offence. Given the wide drafting of the definition of associated person within the legislation, this form of wording should be considered for inclusion in contracts with agents, intermediaries, sub-contractors and suppliers.

Typical contractual obligations on an associated person may require them to comply with the legislation, have adequate procedures in place or even match the policies and procedures of the engaging party. Clauses may also afford the engaging party certain rights in relation to compliance against tax evasion, such as the right to terminate in the case of a breach, review another entity's procedures or to receive requested information and/or assistance.

In addition, businesses should request that their contracting partners include similar wording in their own contracts with their third party contractors. This is something which is not only expressly mentioned in HMRC's guidance but also ensures compliance along the chain - thereby making the risk more remote.

Possible liability under the new offence also needs to be considered where businesses and companies are acquired. Buyers will need to investigate in their due diligence the steps the business has taken to ensure it does not fall foul of the offence and consider warranty and indemnity protection in share purchase agreements.

Clauses are not enough

However, it is not enough to simply put a clause in an agreement and point to that alone as amounting to the reasonable prevention procedures envisaged under the legislation.

A business will need to ensure that a wider and robust set of policies and procedures are in place to be able to have a defence against the new regime. Typically, businesses will need to conduct a risk assessment, which is regularly reviewed, to test their exposure to the offence and ensure their procedures meet the standards required, or improve them if not. Businesses should consider their customer and supplier due diligence/on-boarding procedures, staff training and whistle-blowing culture in the round.

Prevention procedures not only reduce the risk of businesses being embroiled in the new facilitation of tax evasion offences in the first place, but if properly drawn up, they can also amount to a defence should HMRC seek a conviction.

Clauses in contracts may impose a hypothetical gold standard to which contractors should be held; but without active exercise of the rights in the clauses, they may provide a false sense of security and are unlikely on their own to constitute reasonable prevention procedures. The extent to which the engager should exercise rights under the clause to review the procedures of the associated person will depend on the perceived risk posed by that person - for example an associated person that is a quoted company will tend to be lower risk than an individual or private company.

Given the importance HMRC place on 'buy-in' from the top, boards and risk managers should be ensuring that in addition to including appropriate drafting in contracts, they have carried out a full  risk assessment to review their procedures and assess their risk under the new offence and exercise their rights under the protective clauses introduced to mitigate those risks.

Jason Collins and Ian Hyde are tax experts at Pinsent Masons, the law firm behind Out-law.com.