Residential property
30 Oct 2018 News

The Criminal Finances Act - One Year On

The Criminal Finances Act 2017 came into effect on 30th September last year.  However, almost one year on, many charity trustees are still unaware that it may have important implications for them.

The Act introduced a new corporate criminal offence for organisations failing to prevent the facilitation of another person’s UK or foreign tax evasion.  It applies to partnerships and bodies corporate - including Companies Limited by Guarantee, Charitable Incorporated Organisations and Scottish Charitable Incorporated Organisations.  The rules are not specifically aimed at charities but they will apply to charities which are constituted in one of these ways. 

Many charities believe that the rules relate to the charity’s own tax affairs - but they do not.  They are concerned with tax evasion committed by third parties where a person associated with the charity has facilitated that tax evasion.  Essentially, a charity can be held criminally liable for the actions of its staff, volunteers, agents and other “associated persons” acting on its behalf.

An offence occurs where:

(i) A taxpayer criminally evades tax; and
(ii) An “associated person” of the charity facilitates that offence.

Examples of situations where an associated person of the charity (or a trading subsidiary) might facilitate tax evasion include:

  •  A member of the charity’s finance team makes a payment to a supplier to a bank account registered in the Channel Islands for no apparent reason. This could help the supplier to hide income offshore.
    • A member of the charity’s HR team deliberately records false information about an individual’s employment status, showing them as self-employed, to help the individual to evade PAYE and National Insurance Contributions.
    • A member of the trading subsidiary’s finance team is asked by a customer to issue a credit note against an invoice and to reissue the invoice to another person.  This could be an attempt to allow another person to claim a corporation tax deduction or a VAT input tax credit.  If the staff member complies with this request without making further enquiries they could be facilitating their customer’s tax evasion.

The consequences of falling foul of the legislation are severe.  If found guilty, the charity would be liable for corporate prosecution and an unlimited fine - not to mention the reputational damage the charity would suffer.

The key to avoiding criminal liability under the new legislation is to ensure that reasonable procedures are in place to prevent staff, volunteers, contractors and other associated persons from facilitating the evasion of UK or overseas taxes. 

What are reasonable procedures?  There is no “one size fits all” answer to this question.  What HMRC will regard as reasonable will vary from charity to charity depending on the size of the charity and the nature, scale and complexity of its operations. 

To understand what is reasonable in any particular case, the charity will need to undertake a risk assessment of all areas of its business, identify gaps or weaknesses in its controls and take corrective action by introducing an appropriate policy and internal control procedures.

HMRC have published guidance which outlines 6 guiding principles which organisations should take into account when developing their prevention procedures.  These are:

  • Risk assessment: To what extent is the charity at risk of facilitating tax evasion?
  • Proportionality: What controls are proportionate given the level of risk?
  • Top level commitment: Senior management should be committed to preventing the facilitation of tax evasion and should be involved in the risk assessment process.
  • Due diligence: Checks should be undertaken on those who will act on the charity’s behalf.
  • Communication (including training): The risks, policies and procedures should be communicated to staff and others to enable them to identify and report issues.
  • Monitoring and review: Policies and procedures should be reviewed periodically to ensure that they remain effective and that they deal with new and emerging risks.

Charity trustees should be aware of their obligations to prevent the facilitation of tax evasion and consider what steps they need to take to comply with the rules.

For more information please contact Anne Marie Renz or a member of the tax team.

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