Out-Law News | 01 Oct 2018 | 1:07 pm | 3 min. read
“FTSE100 firms failing to publicly address tax evasion could raise questions for stakeholders over their management of reputational and financial risks,” said Jason Collins, a tax expert at Pinsent Masons.
Under the Criminal Finances Act 2017, which came into force on 30 September 2017 businesses are now criminally liable if any of their employees, agents or other third parties facilitate tax evasion whilst providing services on their behalf.
Failure to comply with the new law could result in unlimited financial penalties, ancillary orders such as confiscation orders or serious crime prevention orders, and serious reputational damage. A successful criminal prosecution may also prevent a company from bidding from public sector contracts.
“With the potential for unlimited fines it is not surprising that shareholders and other stakeholders will want reassurance that big businesses have got the risks of tax evasion under control,” Collins said.
In contrast to the general figures, the research shows that only 33% of the financial services businesses in the FTSE100 make no mention of tax evasion or how they manage the risk of it. The proportion of financial services firms addressing tax evasion is considerably higher than the FTSE100 average, as it is one of the sectors most at risk of being caught by the tax evasion facilitation offence, Collins said.
“Compliance practices at FTSE100 firms are increasingly under scrutiny now that they are liable for tax evasion at any level. Financial services firms in particular will be under the spotlight – it comes with the territory,” he said.
Collins said that FTSE100 financial services businesses would, by their very nature, face the biggest challenges when it comes to preventing the facilitation of tax evasion by employees and others.
"These firms handle high numbers of financial transactions for high net worth individuals and international corporates, who tend to have the most complex tax affairs. Financial services firms frequently engage in large scale cross-border transactions, rely on contractors and deal with more than one tax authority. These are all red flags for the new offences," Jason Collins said.
"However, all sectors have risks – especially those that operate in territories with a reputation for lax tax regimes. Energy, infrastructure and manufacturing businesses have complex supply chains and frequently pay large sums to consultants and engage in largescale cross-border transactions. This activity can present risks, especially when it concerns Asia, the Middle East and Africa, with the UK having a particular interest in ensuring that FTSE companies do not assist with tax evasion in any African countries," he said.
Employment tax compliance is also a significant risk area for the UK's new corporate criminal offences of failing to prevent the facilitation of tax evasion, he said. For example, an employee who deliberately turns a blind eye to a contractor misrepresenting their position could be facilitating tax evasion, exposing their employer to criminal liability.
The Pinsent Masons research was based on an analysis of tax strategy documents, annual reports, environment social and governance policies and other related documents. From 2016, it has been compulsory for UK companies with a turnover of £200 million or more to publish a tax strategy which must contain extensive details of the company’s tax planning arrangements and attitude towards HMRC.
A company's published tax strategy does not need to set out how a company is managing the risks of the new corporate criminal offence, but Collins said the lack of communication by the FTSE100 on this topic could cause concern for shareholders and other stakeholders, as this is an area of increasing reputational and financial risk.
There is a defence to the offences of failing to prevent the facilitation of tax evasion if a business can show it has ‘reasonable prevention procedures’ in place.
"Lack of communication could make it harder for companies to demonstrate that they have reasonable prevention procedures in place," Jason Collins said. "This may also be troubling for shareholders."
A company does not have to be directly involved in the tax evasion or even be aware of it to be prosecuted under the new law.
“Companies can now effectively become criminally liable for third party tax evasion. It will no longer be a reasonable excuse to say that management was totally unaware of any tax evasion that took place and would never allow it had they been,” Collins said.
Pinsent Masons’ analysis found that in contrast to tax evasion, just 10% of FTSE100 firms failed to mention how they deal with corruption in their published documents. Companies have been required to set out their approach to corruption since the Bribery Act was introduced in 2010 – the latest requirements for tax evasion mirror these existing ones.