Scottish companies could face fines running to millions over tax evasion and cash in hand payments

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Scottish businesses could be sleepwalking towards hefty fines for failing to anticipate the implications of  the imminent Criminal Finances Act 2017, which comes into law at the end of September.

While many organisations are planning for the forthcoming General Data Protection Regulation (GDPR), PwC tax director Jon Preshaw, believes that focus means that some nearer-term risks are being underestimated.

Under The Criminal Finances Act 2017 companies and partnerships will become criminally liable if they fail to prevent tax evasion by either a member of their staff or an external agent, even where the business was not involved in the act or was unaware of it. The legislation covers tax evasion that occurs both in the UK and overseas.

Jon Preshaw believes that the industries most at risk include those offering financial services to clients (which would include lawyers, accountants and financial advisers), those who engage with customers and suppliers through agents, those who are operating across a large number of jurisdictions (such as oil and gas service businesses) and those businesses dealing in cash.

Cash in hand danger

Jon Preshaw, tax director at PwC in Scotland, said:

“One of the big issues is going to be around the cash-in-hand economy. A good example is a scenario where a Scottish-based haulier uses an agency to hire drivers. If the drivers are paid cash in hand in the knowledge that they won’t report the income received, there is a chance that the haulage firm could be guilty of the offence.

“Penalties include unlimited fines, reputational damage and regulatory consequences,  including potentially the withdrawal of licences by the relevant regulators.

“Tax evasion is already an offence, but until now it has not been possible to ascribe criminal liability to the company of partnership  where it occurred. The only defence will be to demonstrate that the business had ‘reasonable procedures’ in place to prevent the facilitation of tax evasion.

“The rules are very widely-drawn and are broad in scope. This is deliberate to ensure organisations proactively assess the risks associated with their customers, employees and anyone else acting on their behalf.”

Defining reasonable procedures

The main ways firms are going to be able to show they have reasonable procedures is by:

  • Carrying out a risk assessment to identify the specific risks of facilitation

  • Implementing procedures which are proportionate to the specific risks identified in the risk assessment

  • Performing due diligence of staff, third parties and clients in proportion to the risks that they pose to the business

  • Ensuring that there is a top level commitment within the organisation to preventing the facilitation of tax evasion.

  • Communication (including training) to employees and third parties to ensure procedures are embedded and understood.

  • Carrying out ongoing monitoring and review of procedures and risk assessment

Huge impact before GDPR

Jon Preshaw added:

“It doesn’t appear that the Criminal Finances Act has generated as much interest as, for example GDPR, but it could have a really profound impact on companies and partnerships that aren’t prepared.

“The legislation does not create any new offences at an individual level; rather it targets deliberate and dishonest behaviour and will punish organisations for failing to anticipate and risk-assess the potential for tax evasion to occur.

“When the legislation goes live on 30 September, Scottish businesses that have failed to prepare could face fines running into millions. What would be really frustrating about that is that for many of the companies affected, it will have been entirely avoidable.

“Working out compliance around The CFA needn’t be onerous if organisations take an integrated approach to their economic crime frameworks and follow the steps above but time is running out.”


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