19 January 2024
It has become apparent in recent years that HMRC and other law enforcement agencies have a sharp focus on holding companies and partnerships (relevant bodies) to account for any fraudulent acts committed by their employees or other persons acting on their behalf (associated persons).
The introduction of the Bribery Act 2010 and the Criminal Finances Act (CFA) 2017 were some of the earliest signs of things to come, and the Economic Crime and Corporate Transparency Act (ECCTA) 2023 is the latest step in the implementation of the government’s anti-fraud strategy.
The structure of ECCTA follows the well-trodden path of the Bribery Act and the so-called corporate criminal offence (CCO) within the CFA, including potential criminal prosecution and unlimited fines for any relevant body found to be in breach of a very broad failure to prevent fraud offence.
ECCTA and tax evasion
The fraud offences subject to the ECCTA include cheating the public revenue, which of itself includes the evasion of tax.
So, where an associated person facilitates the evasion of tax, the relevant body may be liable to criminal prosecution for failing to prevent the facilitation of tax evasion if it meets two conditions.
Firstly, it must be ‘large’. This means exceeding two of the following thresholds.
- Turnover: £36m (£36m net or £43.2m gross for groups).
- Total assets: £18m (£18m net or £21.6m gross for groups).
- Employees: 250.
Secondly, it or a subsidiary must benefit from the evasion of tax or, alternatively, a recipient of the services of the associated person must benefit (typically a customer).
In simple terms, if an associated person facilitates the relevant body’s or its subsidiary’s evasion of tax, or the evasion of tax of a customer, it is potentially exposed to criminal prosecution under the ECCTA for failing to prevent the fraud offence.
This throws up the interesting question of how will the criminal offence of tax evasion, especially where the body in question is the beneficiary of that offence, interact with the new failure to prevent fraud provision within the ECCTA?
Also, how will exposure to criminal prosecution under the ECCTA interact with HMRC’s existing approaches to managing the civil settlement of instances of tax evasion, including its Contractual Disclosure Facility?
ECCTA – a defence
Whilst it is apparent that relevant bodies can be exposed to criminal prosecution as a result of the actions of associated persons, there are also specific safeguards in place to protect against prosecution in certain circumstances.
Where the body is a victim of the fraud in question, maybe through the manipulation of a transaction with a customer that understates the customer’s exposure to tax and increases that of the corporate, a breach of the failure to prevent fraud provision will not be in point.
Furthermore, and in line with similar concepts in the Bribery Act and the CCO, a statutory defence against any breach includes the implementation of reasonable prevention procedures. Essentially, if an associated person facilitates the relevant body’s tax evasion but it can demonstrate the existence of processes that would be considered reasonable with a view to preventing that fraud from happening, no such criminal exposure would arise.
ECCTA and the CCO
There are some meaningful similarities between the ECTTA and CCO, which include:
- exposure to criminal prosecution as a result of the actions of associated persons;
- a focus on the failure to prevent tax evasion; and
- a statutory defence of having implemented reasonable prevention procedures.
There are, however, some significant differences in the provisions and how and to which entities they apply, including the following.
- There are no size thresholds applicable to the CCO: it applies to all relevant bodies of whatever size.
- The ECCTA includes a benefit test, such that a criminal offence only arises upon the realisation of a benefit by the relevant body, its subsidiary or a recipient of its services. No such test applies for the CCO.
- For the CCO, an exposure to criminal prosecution arises in the event an associated person facilitates the tax evasion of any third party. For the ECCTA, the only relevant third parties are the recipients of services. This typically restricts the exposure to the customer population, whilst the CCO would be equally relevant to other members of a supply chain.
- For the ECCTA, it is necessary to consider how associated persons might unduly influence the relevant body’s own tax position. This is generally of little relevance for CCO purposes.
- The ECCTA applies only to offences relating to fraud under UK law. For tax purposes, an exposure to criminal prosecution can arise in the event UK tax is evaded. The CCO has a much broader jurisdictional scope, and a UK criminal prosecution could therefore arise in respect of the facilitation of third-party tax evasion in another country.
Whilst there is commonality between exposure to criminal prosecution under the CCO and the ECCTA, particularly with regard to the preventative measures to be taken to mitigate a relevant body’s exposure to risk, there is little doubt the two provisions exist independently of each other and generally serve to address materially different risks.
The implementation of the ECCTA is another weapon in the arsenal of law enforcement with regard to criminal liability and it will serve to compliment, rather than replace, existing anti-fraud measures.
For more information, please get in touch with Paul Marcroft or your usual RSM contact.