In light of the Panama papers scandal, David Cameron has announced that parliament will fast-track legislation making it a criminal offence for companies to fail to prevent staff assisting in tax evasion, but how will this work? This post looks at the similar provisions in the Bribery Act 2010 to assess the likely success of Cameron’s tax evasion legislation plans.
Tax Evasion and Bribery Law, UK
Cameron’s new tax evasion plans will introduce a criminal offence applying to companies who fail to prevent their staff evading or assisting in evading tax. The Prime Minister stated that the offence will be introduced through legislation this year. However, there has been much speculation as to whether the law would work in practice, and also whether it is fair to punish companies for ‘rogue’ employees, who seek to evade or assist in the evasion of tax without the company’s knowledge or consent.
The best comparator for this kind of provision legislation is that introduced under the Bribery Act 2010. The Bribery Act 2010 provides that organization must prevent bribery from taking place. Where bribery has occurred in the institution, the burden of proof is on the company to show that they have taken adequate steps to prevent bribery. One of the most interesting facets of the Bribery Act is its overseas reach – an aspect which may also be important in the new tax evasion legislation.
So, will this kind of legislation work for tax evasion? It will be important when drafting the legislation to carefully consider exactly what companies will be held liable for. The example of the ‘rogue’ employee, who seeks to deceive his employer in their tax activities has been regularly cited, but if the legislation is similar to the Bribery Act, only companies with adequate measures in place to prevent tax evasion will be spared from criminal charges. However, whilst bribery often occurs in the course of business, how one conducts their tax affairs is normally a very personal issue. It may be difficult to present a case where although those involved in a company are evading tax, these individuals have sought external advice on how to do so. Furthermore, as a fungible asset, it can be difficult to tell exactly what income is being used to evade tax. For example, an individual could, in theory, be legally paying tax on all of their income from the company in question, but may be evading tax on their income from other investments or sources. Would the company they work for still be held liable for failing to prevent such evasion? Would it make a difference whether the money was held in a slush fund or kept entirely separate? Similarly, if shareholders in the company invest their dividends in another project and then seek to evade tax on the income, which company if any, will be held potentially liable for the soon to be introduced criminal offence?
Theses are all important questions to be considered, and it may, in fact, be the role of the court to clarify these very specific, but common instances where the new tax evasion legislation will apply. It will be interesting to see the final form of the legislation and also how the interpretation of the legislation plays out in the courts.