Corporate Criminal Offence – implications for charities
Charities should be aware of a new corporate governance requirement to manage the risk of facilitating tax evasion
Background
The Corporate Criminal Offences took effect on 30 September 2017.
The rules apply to all partnerships and bodies corporate (including companies limited by guarantee and community benefit societies) regardless of size. For the rest of the article we will refer to “the Charity” and consider how the rules apply to “the Charity” on the assumption it falls within the definition (which many will).
They apply where a person acting on behalf of the Charity knowingly facilitates someone else’s tax evasion. A common area of confusion is charities thinking that these offences relate to their own tax affairs. They don’t. The new legislation is entirely concerned with the tax affairs of third parties. As such it is more akin to an additional corporate governance requirement that happens to require tax knowledge.
This is best explained by considering the background for the legislation:
- It is already illegal to evade tax (note the distinction between tax avoidance which is legal and tax evasion which is illegal).
- It is already illegal to deliberately and knowingly facilitate tax evasion by another party.
Therefore the individual committing the offence and any individual who assists them are already capable of prosecution within the existing legislation.
- However it has historically been very difficult to prosecute a corporate entity for facilitating tax evasion due to the challenges in demonstrating that the corporate entity itself (i.e. the Board) knew what was happening in the lower tiers of the organisation.
Therefore the new rules don’t change what is criminal tax evasion, but add an additional offence which makes it significantly easier to hold corporates accountable for the activities of persons acting on their behalf where they facilitate tax evasion.
Headlines
In order for an offence to occur, there are three stages:
- Criminal tax evasion takes place by a taxpayer (this could be UK or foreign taxes – discussed in more detail later)
- An associated person (e.g. an employee or subcontractor) of the Charity, whilst acting in that capacity, criminally facilitates this evasion
- The Charity failed to prevent the associated person from committing the facilitation
If an offence occurs, the Charity is liable for a corporate prosecution and potentially unlimited penalty unless it can demonstrate that it had reasonable procedures in place at the time of the offence to prevent the associated person committing the offence or it was unreasonable to have such procedures.
Which taxes are caught?
There are two offences, capturing both UK taxes and foreign taxes. Whilst the specifics of the foreign tax offence are complex, broadly if there is a UK operation which can be linked to the facilitation of evasion of overseas taxes, then this can be caught.
Who are associated persons?
This has a deliberately wide definition which includes any person or entity that provides services for or on behalf of the Charity. It potentially includes:
- Staff
- Sub-contractors
- Group companies
- Agents
- JV partners
Example
The precise risks will depend upon the individual circumstances of the Charity. An example for the charity sector could be where a company wishes to claim corporation tax relief on a “donation” to a charity which has associated benefits and conditions attached to it that would typically prevent relief. The corporate donor asks that the Charity provides a receipt showing the payment as a donation but making no reference to the wider conditions associated with the payment, which are recorded in a separate document.
In this scenario, the “donor” is potentially evading tax (by deliberately claiming an incorrect tax deduction), and the Charity representative would be facilitating the evasion by knowingly providing documentation that facilitates the evasion. That the facilitation may have been well meaning by the Charity representative doesn’t detract from them knowingly facilitating evasion.
What is “reasonable”?
Whilst the charity sector may not necessarily be the target of the legislation, these rules will apply nonetheless.
What constitutes reasonable procedures will vary from charity to charity depending on the size, complexity and specific fact pattern of each charity. As such, HMRC has issued guidance explaining six guiding principles which should be used to inform the controls and processes necessary to meet the “reasonable procedures” requirement. These are:
| Risk assessment | To capture the extent to which the Charity is exposed to risk in this area. HMRC guidance is explicit that it will rarely be reasonable to not even conduct a risk assessment, even for a low risk business. |
| Proportionality | The controls should be proportionate to the level of risk. This step can only be determined once the risk areas facing the Charity are understood. |
| Top level commitment | Management should create a culture where facilitating tax evasion is not acceptable and also be involved in the risk assessment decision process. |
| Due diligence | Conduct due diligence procedures as appropriate on persons who will act on behalf of the Charity. |
| Communication and training | The policies and procedures should be communicated, understood and embedded throughout the organisation as required by the level of type of risks that the different parts of the Charity face. |
| Monitoring and review | Ongoing review of the nature of the risks faced by the Charity, and consideration as to whether the controls are still appropriate and effective. |
In particular, HMRC has indicated that what is considered reasonable will evolve as time passes, and even for low risk businesses it is unlikely to be reasonable to not even undertake a risk assessment under the new legislation.
Policing of the legislation
HMRC will be responsible for investigating the UK tax offence and has also has introduced a self-reporting facility for companies and partnerships to notify that they have facilitated tax evasion. The notification facility indicates that whilst self-reporting doesn’t guarantee that there will not be a prosecution, it could be taken into account when making decisions about prosecution.
Existing procedures
Whilst charities will have had to consider the requirements of the Bribery Act previously (on which the Corporate Criminal Offence legislation is modelled), it is unlikely that the existing procedures will fully capture all of the relevant risks that the Charity faces, simply due to the legislation being brand new. It may be that the gaps are small, but they will still need to be addressed.
Takeaway points
Whilst the new rules are potentially far reaching in terms of scope, the immediate actions will be to understand:
- the legislation and
- who needs to be involved in the Charity’s project to manage their Corporate Criminal Offences requirements
This will give you the starting position to undertake a high level risk assessment of the Charity’s activities to determine what additional detailed steps are needed.
Ian Short is a Corporation Tax Senior Manager and Tania Dimitrovich-Archer, is a Senior Tax Manager. Both work for KPMG
See also: