As noted in our May post "How not to fall victim to a push payment fraud" there are increased risks of businesses becoming the victim of fraud due to circumstances, such as increased home working, facilitated by the pandemic.Businesses do not want to find themselves inadvertently falling foul of the corporate criminal offence of failure to prevent tax evasion under the Criminal Finances Act 2017 (CFA).
The CFA, which came into force on 30 September 2017, makes corporate entities with a UK connection (referred to as "relevant bodies") criminally liable where they fail to prevent persons associated with them from criminally facilitating tax evasion, whether the tax evaded is owed in the UK or overseas.
A person is “associated” with a relevant body if they are an employee, agent, intermediary or other person who performs services for or on behalf of the relevant body. The definition is intended to be wide.
The corporate offence is a strict liability offence, and the relevant body will therefore be liable unless it can demonstrate that it had "reasonable prevention procedures" in place to prevent the facilitation (or in rare cases that it was not reasonable to expect it to have such procedures). T
he fines for those found guilty of the offence are potentially unlimited and accordingly HMRC makes it clear that "organisations must take their responsibilities seriously and put in place reasonable procedures to stop the facilitation of tax evasion" or face the consequences (potentially unlimited fines and criminal prosecution).
Earlier this year, prior to the COVID-19 pandemic, a freedom of information request confirmed that HMRC had 30 live investigations and 9 open criminal enquiries. That number is likely to sky-rocket following the pandemic.
As at 12 May 2020 HMRC confirmed it had received 795 reports of potential fraud related to the furlough scheme (Coronavirus Job Retention Scheme) to its whistle-blowing hotline, and there are reports that as of 29 May 2020 it had received 1,868 such reports.
Misuse of the scheme will likely involve tax fraud as the scheme gives rise to an exemption for National Insurance Contributions (and accordingly tax will have been evaded). It is important that businesses ensure their staff are properly trained on the requirements of the scheme and the eligibility criteria so they are not involved in fraudulent claims (which could lead to the criminal failure to prevent offence being committed by their employer).
However, misuse of the furlough scheme is not the only area where there is currently an increased risk of falling foul of the failure to prevent offence in the CFA.
With increased working from home, there is far less direct oversight and control of employees and ability to ensure the robust implementation of processes and controls.
There is far more scope for cutting corners or lax application of procedures, for example not undertaking full checks before making payments. With the economic hardship being caused by the lockdown the likelihood of requests to relax rules and "just this once" make a payment in a different way or without the proper paperwork may well also increase.
The combination of external pressures and reduced oversight significantly increase the risks for business.
Given the significant financial outlay by the UK government during the pandemic it is not surprising that it will be looking to recoup any sums it can in due course and make an example of those who were involved in wrongdoing during this period.
Tax evasion is an uncontroversial area in which to seek to do so and we should expect an increase in investigations and prosecutions.
The corporate criminal offence of failure to prevent tax evasion is a strict liability offence. The only, and complete defence, is to have in place reasonable prevention procedures to address the risk.
HMRC have confirmed that the risks must be identified following a risk assessment and updated when the risk profile of the business changes. Therefore all businesses should be putting in place or reviewing their policies and procedures given the changes in working practices have (in most cases) changed the risks facing businesses.
Businesses have a tendency to consider the risk of tax evasion to be an external one, i.e. something that may happen in their supply chain or customer base, and because they have no (or little) control over the actions of those entities not to treat this as a priority.
But business can and should address the risks they face by putting in place reasonable prevention procedures and ensuring that their employees know what is required of them and what red flags, which could indicate tax evasion or other fraud, to be aware of and report.
Please contact Fieldfisher's Fraud, Financial Crime and Investigations team if you have any questions or concerns regarding a tax evasion issue, self-reporting, or reasonable prevention procedures.
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