Facilitating tax evasion – why charities need to consider the Corporate Criminal Offence

Susan Cattell By Susan Cattell, Head of Tax Technical Policy

19 December 2019

Susan Cattell explains why all incorporated charities, regardless of size, need to think about the corporate criminal offence of failing to prevent the criminal facilitation of tax evasion - and highlights the publication of some guidance which might help small charities.

Why is the offence relevant to charities?

The legislation applies to all partnerships and bodies corporate. There are no exemptions for smaller entities, or for charities. Therefore, charities structured as bodies corporate, whatever their size, need to ensure that they have assessed their risk and put in place appropriate procedures to prevent facilitation of tax evasion. It is important to realise that facilitation does not necessarily involve complicated transactions or structures; as outlined below it could be as simple as a charity employee agreeing to pay for services in cash, to enable a supplier to avoid paying VAT and income tax.

Research published by HMRC in March 2019 indicated that awareness, amongst partnerships and companies interviewed (including some ‘not for profit’ organisations) was low. 72% of participants in the research were not aware that the new legislation meant that companies and partnerships can be found criminally liable for failing to prevent the facilitation of tax evasion. Only 24% had assessed the risk of being exposed to the facilitation of tax evasion by those providing services on their behalf.

What is the corporate criminal offence of failing to prevent the criminal facilitation of tax evasion?

The corporate criminal offence legislation came into force on 30 September 2017. It is important to note that tax evasion was already illegal. Deliberately and knowingly facilitating tax evasion by someone else was also illegal. However, prosecution, particularly of large companies, had historically been difficult because prosecutors needed to demonstrate that the members of a company’s Board of Directors were aware of and involved in the illegal activities. The intention behind the 2017 legislation was to make it easier to prosecute corporate entities.

Broadly, there will be an offence under the new legislation where a partnership or corporate body fails to prevent an associated person criminally facilitating the evasion of UK or overseas taxes. Three stages must be present:

  • Criminal tax evasion by a taxpayer (either an individual or a legal entity) takes place;
  • An ‘associated person’ of a partnership or corporate body, acting in that capacity, criminally facilitates that tax evasion (for a charity an associated person could include an employee, volunteer, agent or contractor of the charity); and
  • The relevant body failed to prevent the associated person from committing the criminal facilitation.

The only defence available to the partnership or corporate body is to demonstrate that it had reasonable procedures in place at the time of the offence to prevent the associated person committing the offence – or that it was unreasonable to expect it to have such procedures.

Is there any guidance?

HMRC has published detailed guidance. However, it is nearly 50 pages long and not specifically aimed at charities. Concerns were raised at a meeting of the HMRC Charity Tax Forum that awareness of the legislation amongst small incorporated charities was probably very low and that it would be helpful to have some form of short and cautionary guidance available for them.

Following the discussions at the forum a briefing on the implications of the legislation for small charities was prepared by Trevor James (Association of Church Accountants and Treasurers) and Richard Baldwin (Sport and Recreation Alliance). This is hosted on the Charity Tax Group website. Tailored guidance for churches and sports clubs is also available via the CTG website.

The legislation is complex, and the guidance provides a brief general outline of the law which incorporated charities may find useful in addressing actions to be taken. However, charities (even the smallest ones) may need to take professional advice, in order to protect themselves.

The remainder of this article outlines some key issues which small incorporated charities may wish to consider.

Risk assessment and reasonable procedures

The precise nature of the reasonable procedures which need to be put in place, in order to have a defence, will vary according to the circumstances of different charities. HMRC’s guidance sets out 6 guiding principles:

  • Risk assessment: carrying out and documenting an assessment of the nature and extent of the exposure to the risk of associated persons criminally facilitating tax evasion. The assessment must be kept under review;
  • Proportionality of risk-based prevention procedures: excessively burdensome procedures to eradicate all risk are not required – but mere lip service is not enough.
  • Top level commitment: top-level management should be committed to preventing facilitation of tax evasion and foster a culture where it is unacceptable.
  • Due diligence: should be carried out on persons who perform or will perform services on behalf of the organisation, in order to mitigate identified risks.
  • Communication (including training): prevention policies must be communicated, embedded and understood throughout the organisation, through internal and external communication, including training.
  • Monitoring and review: preventative procedures should be monitored and reviewed – and improvements made where necessary.

The first step for a charity within the scope of the legislation would be to carry out and document an assessment of its exposure to the risk of its associated persons criminally facilitating tax evasion. The reasonable procedures which need to be put in place can only be designed and implemented once a risk assessment has been undertaken.

HMRC’s guidance makes clear that organisations facing significant risks will need more extensive procedures than those with limited risks. It also notes that in general small organisations are unlikely to need procedures as extensive as large multinationals. For example, a very small lower risk business, may be able to rely on oral briefings to communicate its policies while a large business may need more extensive written communications.

In some limited circumstances it could be unreasonable to expect an entity to have any prevention procedures in place. HMRC gives the example of a body which has fully assessed all the risks, these are considered to be extremely low and the cost of implementing any prevention procedures would be disproportionate or cost-prohibitive in relation to the negligible risks faced. However, HMRC goes on to say that it will rarely be reasonable not to have at least conducted a risk assessment.

The briefing on the CTG website gives an example of the possible contents of a risk assessment (and mitigation procedures) for a small charity.

Examples of facilitating tax evasion

In order to develop appropriate prevention procedures, a charity would need to identify scenarios its associated persons (which could include employees, volunteers, agents or contractors) might encounter, which would fall within the offence. The briefing on the CTG website gives examples of some facilitation scenarios which could be relevant to charities; two of these are:

"Cash payments to avoid VAT
A plumber called to repair the charity’s boiler suggested to the charity administrator that if he pays in cash his charges will be £200 rather than £240 since he will not be charging VAT. The administrator accepts the lower offer and pays cash without an invoice since the charity is not VAT registered and would not be able to recover the VAT. The plumber will avoid paying VAT and income tax by not declaring the charges for tax purposes. This is tax evasion which has been knowingly facilitated by the administrator, a charity employee.

Cash payments to an employee
The charity engages a cleaner who works regular hours during the week. The treasurer, who is a volunteer, does not run a payroll for the charity but pays the cleaner each week in cash as the cleaner has requested since “this will save the charity NICs and I will be better off because the cash will be tax free”. This is tax evasion by the cleaner which has been knowingly facilitated by the charity treasurer, its volunteer.”

Penalties and self-reporting

A prosecution and conviction under the legislation could result in an unlimited financial penalty – but there could also be reputational damage for the charity. It is therefore important for charities to take action, if they have not already done so.

It is also worth being aware that HMRC (which is responsible for investigating the offence) has set up a self-reporting mechanism for organisations to notify that they have failed to prevent the facilitation of tax evasion.

HMRC explains that it may be beneficial to self-report because it can be:

  • used as part of the corporate body’s or partnership’s ‘reasonable procedures’ defence if they are charged with an offence;
  • taken into account by prosecutors when they make a decision about prosecutions;
  • reflected in any penalties that are imposed.

It goes on to say that self-reporting does not guarantee that a company or partnership will not be prosecuted but it may be taken into account by HMRC, prosecutors and the courts.

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