PAYROLL INSIGHT
Caught in the Act
Jonathan P Preshaw, PwC tax director, outlines a significant recent change in the law which introduces new challenges and a criminal offence
T he Criminal Finances Act 2017 (‘the Act’) introduces new criminal offences which are likely to present challenges for payroll and other service providers. The rules create a new strict liability criminal offence where organisations fail to prevent the facilitation of tax evasion. Although the rules are specifically intended to address defects in the existing law which made it difficult for prosecutors to pursue large multi-national organisations, they go much wider than the intended target and place new obligations on businesses of all shapes and sizes. An organisation which is found guilty of the offence is likely to be subject to very significant fines, regulatory sanctions and severe reputational damage. The rules impose criminal liability on a company or partnership (defined as a ‘relevant body’) where: ● a person criminally evades tax, and ● an employee, agent or anyone else acting on behalf of the relevant body (defined as ‘associated persons’) criminally facilitates that evasion. Where these two conditions are met, the relevant body is guilty of a strict liability offence unless it can demonstrate that it had reasonable procedures in place to prevent the facilitation. The existence of reasonable procedures is the only defence available under the legislation; there is no other basis on which the organisation can avoid criminal liability. The law applies to both the evasion of UK tax and the evasion of foreign taxes (as long as there is some connection to the UK, either because the relevant body conducts business here or because the facilitation
their clients. This is because the provider will be acting on their client’s behalf when processing payroll payments and deductions. The provider will only be an associated person of their client at the time they are providing services for them, but this means that if the provider facilitates tax evasion by deliberately processing incorrect payments or deductions, the provider’s client may be criminally liable. As a result, we expect many clients of payroll service providers will require their provider to demonstrate that they have reasonable procedures in place and to require changes to contractual arrangements to formalise this. This is because such a confirmation is likely to form an important part of the client’s reasonable procedures. The Act came into force on 30 September 2017 and can apply to acts of facilitation at any point after that. The existence of reasonable procedures will be considered at the time the facilitation takes place. HMRC’s guidance recognises that reasonable procedures are likely to change over time, and what is reasonable on 1 October 2017 may not be reasonable a year later. Therefore, it is not necessarily the case that organisations will be expected to have a full set of reasonable procedures in place on 1 October. To ensure an organisation is best-placed to address the risks the offence presents, and also to respond to any client requests, a risk assessment should be undertaken as soon as possible. Once this has been completed, it should be possible to map existing processes against the risks which have been identified and to draw up a plan to address any gaps. It is important that this process is documented properly in order that it can be shared with clients and, perhaps more importantly, with the tax authorities should this ever become necessary. n
takes place here). The rules are extremely widely drawn and place very significant importance on the reasonable procedures in place. All businesses are expected to carry out some form of risk assessment to understand the risks that their associated persons might facilitate tax evasion and, where appropriate, to put in place reasonable procedures to prevent such facilitation from happening. Those procedures are likely to involve: ● providing clear guidance from management that the facilitation of tax evasion is not acceptable ● ensuring staff are provided with appropriate training, and ● ensuring that appropriate due diligence is carried out before entering into relationships with customers, suppliers or agents. HM Revenue & Customs’ (HMRC’s) guidance recognises that a range of existing procedures might already be in place which will assist in addressing the risks, such as existing financial controls, client identification and anti-money laundering procedures. Importantly, the guidance makes clear that the approach which businesses take ought to be proportionate and based on the risk assessment. requirement to have particular procedures in place depending on the nature of specific risks. However, such a judgement would need to be based on an appropriate risk assessment. As well as considering their own obligations as a relevant body, payroll service providers also face a challenge in that they are likely to be ‘associated persons’ of It is possible that a business could legitimately decide that there is no
...applies to both the evasion of UK tax and the evasion of foreign taxes...
| Professional in Payroll, Pensions and Reward | November 2017 | Issue 35 18
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