HMRC may come knocking, but will corporates be ready?

HMRC may come knocking, but will corporates be ready?

Rachel Cook, senior associate at Peters & Peters, questions whether HMRC could do more regarding those who do not pay corporate tax

HMRC may come knocking, but will corporates be ready?

Mounting pressure on HMRC

On 6 March 2019, MPs and House of Lords peers wrote an open letter to Theresa May, reminding her of her Government’s commitment to “[get] tough on irresponsible behaviour in big business”. It called for a new corporate liability offence for failing to prevent economic crimes, such as fraud and money laundering, and for the Law Commission to conduct a 12-month review of the UK’s corporate criminal liability (legal) framework. On 8 March 2019, the Treasury Select Committee published its recommendations and threw its weight behind these calls for reform.

To add to the mood music, in December 2018, a report by the House of Lords Economic Affairs Committee’s found that HMRC’s powers disproportionately affected lower-income taxpayers. HMRC was criticised for appearing to prioritise the “recovery of tax revenue over justice by targeting individuals, rather than promoters (who could be considered more culpable), so it can more easily recover liabilities”.

A questionable approach

In its top ten prosecutions of 2018, HMRC did not list a single corporate conviction and most of the individuals prosecuted were not tax professionals. The sentences for the convicted professionals ranged from three to nine-and-a-half years’ imprisonment. But, to what extent will these sentences act as deterrents for corporates?

When resources are limited, there will no doubt be a tendency by HMRC to target cases that are more likely to achieve positive outcomes for a modest investment in time and labour. However, it will have to justify its prosecution strategy and address criticisms that it focuses on low hanging fruit. In short, HMRC is under increasing pressure to prosecute corporates.

In response, HMRC last week (13th March) outlined its commitment to “intervene appropriately with those that pay less than they should” and its approach to tackling tax avoidance, evasion and other forms of non-compliance. Within this, the corporate offence of failing to prevent the facilitation of tax evasion regularly rears its head.

Tax is tricky

 Tax offences are notoriously difficult to prosecute, which is especially true when pursuing a well-resourced corporate. These cases involve not just HMRC but also the Crown Prosecution Service (CPS). The facts can be complex, which make it difficult for a jury to understand the allegation and to convict the alleged wrongdoer.  It can also be difficult to prove the corporate’s intent to commit the tax offence. This position has changed somewhat with the introduction of the corporate offence of failing to prevent the facilitation of tax evasion, which is a strict liability offence.

Failing to prevent is an offence

HMRC does not need to prove an intent by a corporate to facilitate evasion; it will be sufficient to prove that the corporate did not have adequate procedures in place to prevent it. Tax advisers should now be well-versed in how to benefit from the statutory defence against failing to prevent the facilitation of tax evasion. This includes implementing risk assessments, proportionate prevention procedures, a board level commitment and robust due diligence processes.

However, HMRC recently confirmed that a number of corporates are actively being investigated for this new corporate offence, but it is unclear whether they know that they are being investigated.

Dawn raids

Corporates should therefore be ready for the worst-case scenario of a dawn raid. Preliminary preparation measures need to be in place.

For example, there should be a nominated person who will co-ordinate the corporate’s response in a raid scenario. They should have the out-of-hours contact details of specialist lawyers and advisers who can assist at short notice.

The investigators attending the dawn raid will come armed with search warrants and so it is essential that its detail is checked so only permissible searches are undertaken.

A careful note should be kept of HMRC’s actions and of any questions asked during the raid.

Legal professional privilege

On 5 March 2019, in a disappointing ruling for the Institute of Chartered Accountants in England and Wales (ICAEW), the High Court upheld the Lord Chancellor’s 2017 decision that it is “one thing for accountancy practices to be expert in taxation, but quite another for them to be proficient in the conduct of civil or criminal litigation in the court”. By again refusing to designate the body as an approved regulator and licensing authority, those regulated by the ICAEW will still not benefit from legal advice privilege or litigation privilege, unless in conjunction with advice from a lawyer.

Post-raid alternatives to prosecutions

Experienced advisers have a key role to play in post-raid strategies. Corruption Watch recently criticised the UK for outsourcing its corporate financial crime enforcement to the US. Indeed it has a far more successful track record of pursuing corporates, as well as using alternatives to prosecutions.

In the last 15 years, many corporates have entered into deferred prosecution agreements (DPAs) with the US Department of Justice (DoJ) and settled multi-million-dollar cases. Most recently, it secured a $547m settlement with Julius Baer for alleged tax evasion.

In the UK, DPAs were first introduced in 2014, but their application by the Serious Fraud Office (SFO) for corporate offences (unrelated to tax) has so far been controversial and complicated. For DPAs to become credible alternatives to prosecutions in tax cases, and on a similar standing to their use in the US, corporates must first believe that a prosecution is a real possibility. HMRC has to show its teeth, and needs examples of successful prosecutions in its arsenal to encourage corporates to cooperate.

Which corporates will HMRC target?

The reality of Brexit means that HMRC does not want to be responsible for a large corporate relocating offshore because of a hostile environment.

HMRC is most likely to respond to the call for action against corporates, with a prosecution of the strict liability offence of a failure to prevent facilitation, rather than for conspiracy to cheat the revenue.

The targets are likely to be mid-tier corporates in addition to the usual suspects of sole practitioners or advisers working for small practices, who are less likely to be able to rely on the defence of having reasonable procedures in place.

We know that a number of investigations are in progress. Corporates should therefore be taking the necessary precautionary steps now. Whoever comes knocking, will they be ready?



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