Aziz Rahman of Rahman Ravelli
Aziz Rahman, of award-winning business crime solicitors Rahman Ravelli, explains how the authorities are clamping down on tax evasion and what businesses can do to avoid problems.
Tax evasion is back in the news. Almost a year after the Panama Papers scandal revealed elaborate international schemes to evade the tax man, the Criminal Finances Bill is now working its way through the Houses of Parliament.
The Bill, which will probably become law this year, includes many measures to tackle tax evasion, money laundering, bribery and corruption. Among its measures is a new offence of corporate failure to prevent tax evasion – which carries the penalty of unlimited fines.
Tax evasion is the non-payment of tax owed to the government. It should not be confused with tax avoidance, which is the use of elaborate but legal schemes to pay either no tax or as little as possible.
In the past, if a company’s employee helped facilitate tax evasion that person could be prosecuted. When the Criminal Finances Bill becomes law, however, the company that person works for could also be prosecuted. The only defence that a company in such a situation can use is that, at the time of the offence, it had reasonable prevention procedures in place to prevent tax evasion.
If those in business didn’t already know it, there is a real need for them to take precautions to avoid any involvement in tax evasion. This decade, the Crown Prosecution Service has been aiming for a huge increase in tax evasion prosecutions. It sees business as an area where it can achieve this.
So what do you have to do to make sure you or your business is not one of those prosecution statistics?
A few basic precautions can go a long way to reducing your risk of a tax evasion prosecution.
For example, if an investment scheme that you or your staff are being asked to create or invest in for tax purposes (or other financial advantages) does not make sense, alarm bells should start ringing. Do not be fooled by the slick sales patter of the person who wants you and your company to become involved.
Similarly, if a deal you are involved in seems to be unnecessarily complicated and involves more people or companies than seems necessary, you have to be wary. Companies can become caught up in a trading chain that may be linked to VAT fraud. If you or your company becomes involved – however innocently – you could find yourself in serious legal trouble. Reducing the risk of this involves doing due diligence and having robust policies in place.
If this seems daunting, do not despair! Tax law specialists can advise you on how to avoid the pitfalls. They can train staff in the skills necessary to spot possible tax evasion and can devise and implement procedures in your workplace to minimise your vulnerability to it.
But you can also take the initiative yourself by introducing some relatively straightforward measures to make it harder for anyone to use your company for tax evasion.
Making sure your accounting system is fit for purpose can go a long way to reducing the potential for tax evasion. Is the system adequate for the company’s workload? Is it kept up to date and subject to regular reviews? Are measures in place to ensure that a number of people – as opposed to just one person - can gain full access to it?
This can help prevent a person abusing their position in order to commit tax fraud, as they know that their wrongdoing could be identified and reported.
For that reason, it is also important for every company to have a comprehensive whistleblowing procedure. This will ensure that anyone with suspicions about illegal behaviour – whether it be tax evasion or other business crimes such as money laundering or bribery – can report it, knowing that their concerns will be treated seriously and investigated. It can be invaluable in helping identify wrongdoing.
Such measures reduce the chances of the tax investigators coming knocking. They also mean that even if they do come knocking, you are likely to have proof that all your dealings have been legal. If there is still a problem, you can demonstrate that you did all you could to prevent wrongdoing. There is no greater defence than being able to show that your house is in order – a fact recognised by the Criminal Finances Bill.
HM Revenue and Customs (HMRC) uses what is known as the Code of Practice 8 (COP8) procedure to investigate when it is looking to recover tax, interest or penalties it believes it is owed from an individual or company.
COP8 is used when HMRC suspects that people have been using tax avoidance schemes. Anyone investigated under COP8 has to take expert advice immediately.
The right advice is even more important now, as HMRC also has the Code of Practice 9 (COP9) at its disposal. This is used when HMRC suspects tax fraud but offers those under investigation the chance to make a full admission of wrongdoing, pay the taxes owed and a penalty but avoid a criminal prosecution.
If faced with a COP9 investigation, there is the potential to put right the wrongs. But such matters have to be handled carefully by someone familiar with both the relevant law and the workings of HMRC.
As I mentioned earlier, being able to show you had made a serious effort to prevent tax evasion will go a long way towards receiving the most favourable outcome.
We are in an era when greater responsibility is being placed on those in business regarding their tax affairs. But this does not mean everything is doom and gloom.
A few well thought-out measures and, if necessary, some expert legal advice can ensure that everyone meets their obligations and does not fall foul of the law.
Aziz Rahman is founder of Rahman Ravelli; a top-ranked business crime law firm in national and international legal guides.
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