Can manufacturers be criminally liable if they fail to prevent others from facilitating tax evasion?
The new Corporate Criminal Offence of Failure to Prevent the Facilitation of Tax Evasion (CCO) legislation came into force on 30 September 2017 as part of the Criminal Finances Act 2017 and applies to all companies. This means that manufacturer’s need to be able to demonstrate that they are taking reasonable steps to respond to the legislation as soon as possible.
The new offences were introduced as the law previously required senior officers of a company to commit parts of the offence before criminal liability could be attributed to the company. In large organizations, where decision making is often decentralized, this was then difficult to prove or identify.
The aim of the legislation is to make it easier to prosecute companies if their associated persons (employees, agents or other third parties acting for and on behalf of the business):
- Knowingly aid, abet, counsel or procure tax evasion (say by a customer or supplier or their staff); and
- The company has not put reasonable prevention procedures in place to stop the facilitation of the evasion offence.
A successful prosecution could lead to an unlimited fine, public record of the conviction, reputational damage and adverse publicity. The legislation broadly applies to:
- UK tax evasion regardless of whether the company is UK based or not and regardless of where the offence takes place, and
- Overseas tax evasion to the extent the company is a UK tax resident, has a UK permanent establishment, or associated persons are located in the UK when they knowingly facilitate tax evasion.
Risks in the manufacturing industry
Given the many facets of a manufacturing business both in the UK and Internationally, this new offence and legislation cannot be ignored. Typical examples that manufacturers should be aware of would include the payment to contractors where it is both known or unknown as to whether they are registered for VAT, Income or Corporation Tax or not. In other words, it is wide-ranging and can take place when you least expect it.
However, a more specific example would be where a UK manufacturer contracts with a distributor to sell its products. The distributor facilitates a VAT invoicing fraud enabling the distributor’s customer to evade VAT in the UK, unknown to the manufacturer.
As UK tax has been evaded and the distributor facilitated it whilst providing services to the manufacturer, the manufacturer is liable for failing to prevent this offence, unless it can demonstrate it had reasonable procedures in place to prevent this from occurring in the first place.
In order to have a reasonable procedures defence, the manufacturer should carry out a risk assessment, apply policies and procedures to mitigate the risks identified in any review as well as carrying out further due diligence on its distributor.
It is clear that HMRC have a minimum expectation of all entities as well as manufacturers that they carry out a risk assessment as part of any review of this legislation. HMRC has been clear in stating that companies should prioritize this given the legislation came into force on 30 September. When undertaking any risk assessment, it is expected that this covers all aspects of a manufacturer’s business, for example: procurement, HR and sales and not just finance or legal.
If you would like to discuss how to undertake a risk assessment or would like to know more about the new CCO legislation, then please contact Chris Bond at [email protected] or on 07792 018593.