Tax corporate criminal offences

Legislation introduced over the past few years has significantly expanded the situations in which companies can be criminally liable for tax offences. We expect there to be increased focus in this area as a result of the changes made by the Economic Crime and Corporate Transparency Act 2023.

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Failure to prevent facilitation of tax evasion

Two corporate criminal offences for failure to prevent the facilitation of tax evasion (FTP offences) were introduced in the Criminal Finances Act 2017.

The FTP offences make companies or partnerships criminally liable if they fail to prevent the criminal facilitation of tax evasion by their associates (those performing services for or on behalf of them, including employees and agents).

Before an entity can be found guilty of a FTP offence two underlying offences must be committed:

an underlying tax evasion offence committed by a taxpayer; and
a person associated with the company must criminally facilitate that tax evasion.

The FTP offences are strict liability offences and the only defence is to demonstrate that either (a) the company/partnership had in place "reasonable prevention procedures" to prevent the facilitation of tax evasion or (b) it was reasonable to have no such prevention procedures in place. What is "reasonable" will depend upon the particular circumstances of the business in question.

These offences require all UK companies and partnerships to review their business and supply chains for potential tax evasion risk – of UK and foreign taxes. Foreign entities are also potentially caught by the scope of both offences – for example, if UK tax is evaded or there is a UK nexus to foreign tax evasion - and so should undertake the same review.

Why is it important to review FTP offence procedures?

Guidance issued by HMRC stresses the importance of continued review, and the need for procedures to evolve over time as an entity puts in place different processes to manage identified risks. Businesses will need to revisit their risk assessments and ensure that staff training and risk management processes are up to date. For example, procedures put in place in 2017 may no longer be regarded as "reasonable", particularly if the business has subsequently expanded into higher risk jurisdictions, has diversified into a high risk sector, or is more reliant on service providers.

Enlarged scope of corporate criminal tax liability following ECCTA

The Economic Crime and Corporate Transparency Act 2023 (ECCTA) has two principal impacts on corporate criminal liability for tax offences.

1. Attribution of offences committed by senior managers

If a senior manager of a company or partnership (acting within the actual or apparent scope of their authority) commits an economic crime, the entity is also guilty of an offence. The specified economic crimes include the tax offences of cheating the public revenue and fraudulent evasion of VAT, meaning that the commission of these tax offences by a senior manager could result in criminal liability for the company or partnership. A "senior manager” is an individual who plays a significant role in the making of decisions about how the activities of the entity are to be managed or organised, or the actual managing or organising of those activities. Previously, attributing criminal liability to a company typically required prosecutors to show that more senior members of a company (such as board directors) were involved in and aware of the illegal activity. Following ECCTA, the activities of a relatively lower level manager could result in corporate criminal liability.

2. New corporate criminal offence of failure to prevent fraud

A large organisation may be guilty of an offence if it fails to prevent an associate (those performing services for or on behalf of them) from committing a fraud offence. The associate (which could include a subsidiary, or an employee, depending on the circumstances) must intend that the fraud offence benefits either the entity or a person to whom the associate provides services on behalf of the entity. A "large organisation" is a company or partnership that satisfies two out of three of the following conditions in a financial year: (a) its turnover exceeds £36 million; (b) its balance sheet exceeds £18 million; and (c) it has more than 250 employees.

The fraud offences include cheating the public revenue which is also within the scope of the UK FTP offence. However, the two offences will bite in slightly different scenarios. This is because the FTP offence requires that the activities of the associate facilitate the cheating the public revenue by a separate taxpayer, whereas the failure to prevent fraud offence would apply where the associate itself cheats the public revenue for the benefit of the principal.

Like the FTP offences, failure to prevent fraud is strict liability, but a defence will be available if the entity can demonstrate that either (a) they had in place "reasonable prevention procedures" or (b) it was reasonable to have no such prevention procedures in place.

How can Travers Smith help?

We can assist with:

Any risk assessment required to determine the key areas of risk of tax evasion in your business and supply chains

Putting in place reasonable prevention procedures. We can provide standardised compliance implementation packs (including policy documents, due diligence questionnaires and risk assessment checklists), or a tailored service for your business
Providing training for employees and directors in relation to the offences

We can also provide a "one stop shop" of risk assessment, training and compliance procedures covering the FTP offences, the Bribery Act offence of failure to prevent bribery and the new ECCTA offence of failure to prevent fraud (world leading UK financial crime regimes with a common structure but distinct risks), alongside wider financial crime matters.