22 August 2022
Tax expert, Paul Marcroft, highlights the potential impact of the Corporate Criminal Offence (CCO) legislation on the energy and natural resources (ENR) sector, and discusses what companies can do to avoid finding themselves under investigation.
As of 13 May 2022, HMRC had seven live CCO investigations and a further 21 live ‘opportunities’ under review (having reviewed and rejected a further 69).
What is the Corporate Criminal Offence legislation?
CCO applies to all companies, LLPs and partnerships, regardless of size. The CCO legally obliges these entities to actively prevent tax crime.
Under the Criminal Finances Act, it is an offence for any company or partnership to fail to prevent anyone acting on their behalf from facilitating a third party’s tax evasion. This may include the evasion of PAYE in a labour supply chain, or the failure to operate or pay over to HMRC the appropriate level of VAT.
CCO is a strict liability offence, meaning that it applies even if the organisation was unaware of what was going on. Penalties include an unlimited fine and a criminal conviction.
The only defence against a charge under CCO is having ‘reasonable prevention procedures’ in place. This requires a business to, at the very minimum, conduct a risk assessment to:
identify activities and processes that could be exploited to deliberately assist a third party to commit tax evasion; and
address the gaps in existing controls.
How will the CCO legislation be applied to the ENR sector?
HMRC has previously referred specifically to ‘oils’ as an area of interest, and it seems reasonable to expect that HMRC sees the sector as high risk (particularly in terms of VAT and logistics linked risk). This is because of the scope for moving significant funds across borders, and the potential for transactional audit trails to be inadequate in some territories.
We know that HMRC approaches CCO in the context of ‘badges of risk’, including the:
- territories transacted with;
- services provided;
- complexity of transactions; and
- relationship between parties.
The ENR sector tends to feature high value transactions, in some cases with high risk jurisdictions and involving politically exposed individuals. The sector can also feature significant fluctuation in terms of price and volume as a result of geopolitical factors.
As such, we would expect it to be seen as a high risk sector by HMRC in the context of the evasion of tax and its facilitation. That would lead to a higher burden for affected entities in terms of implementing reasonable prevention procedures.
In addition to a rising number of formal criminal investigations, we are also seeing more supply chain checks, in which HMRC focuses closely on the due diligence procedures of the transacting parties. This focus is specifically in terms of two key risks:
- whether the tax lost in the supply chain can be recovered from another party to the transaction (joint and several liability); and
- whether a person acting on that other party’s behalf has facilitated the third party’s tax evasion, and whether the CCO has been breached.
How to protect your ENR business
- If your business is subject to a CCO investigation, it is important to be able to demonstrate to the investigators that you have conducted a risk assessment and applied reasonable prevention procedures.
- We are aware that the number of investigations triggered by findings of tax evasion in supply chains (either up or downstream) is on the rise. In some cases the investigations result from whistleblowing by the target entity’s competitors, so we would urge ENR businesses to mitigate their CCO risk by seeking professional input without delay.