New legislation on corporate criminal liability for tax evasion could put UK financial institutions at a competitive disadvantage - and their legal advisers at risk of compliance breaches, lawyers have warned as details of the proposed offence emerge.
The government this week published a further consultation on its plan to introduce a new criminal offence for corporations that fail to prevent employees from facilitating tax evasion. It will affect mainly the financial services, legal and accounting sectors.
The measure was first announced in the March 2015 budget but put on the fast track in response to the furore over leaked files from Panamanian firm Mossack Fonseca.
Although facilitating tax evasion and dealing with the proceeds of evasion are already criminal offences, the new offence puts more stringent obligations on corporations to monitor their employees.
The legislation will also make businesses liable if employees facilitate evasion anywhere in the world.
But specialist lawyers said that the broad geographical scope could hurt the competitiveness of companies based in the UK by adding an extra layer of regulation that companies outside the UK would not have to contend with.
Jason Collins, head of tax at international firm Pinsent Masons, told the Gazette: ‘UK law firms will be placed under a burden which comparable businesses in the US or France wouldn't be.’
He said plans to punish companies for tax evasion overseas should be formulated in collaboration with other large jurisdictions rather than unilaterally, in order to 'level the playing field'.
Andrew Smith, a partner at criminal defence firm Corker Binning, said while companies could take ‘limited comfort’ from the fact the proposals emphasise that companies need only develop reasonable rather than all-encompassing compliance measures, this ‘does not square’ with the geographical scope of the plans.
He warned that multinational businesses would ‘rightly regard’ the scope as a ‘compliance nightmare’, and said the offence should be limited to UK tax evasion.
David Sleight, a criminal litigation partner at Kingsley Napley, agreed the legislation would require an additional layer of compliance, which could put UK businesses at a commercial disadvantage.
He said: ‘Whilst some of these amendments are welcome, the scope of the proposed legislation remains exceptionally broad. In particular, under the new offence, a UK-based corporation could be found guilty of failing to prevent facilitation of foreign tax evasion offences.
'This means that a company will be criminally liable if it does not have reasonable procedures in place to stop an “associated person” committing an offence of tax evasion in jurisdictions outside the UK.’
He added: ‘More importantly, one has to consider whether such investigations are really going to assist the UK in plugging its reported “tax deficit”. Why should the UK be spending significant resources in enforcing the laws of foreign jurisdictions with respect to the tax which is ultimately payable in that jurisdiction?’
A summary of responses to a consultation on the legislation published last December shows that a number of City firms, including Baker & McKenzie and Simmons & Simmons, responded, as well as the City of London Law Society (CLLS).
Minutes from a CLLS committee meeting at the time highlight concerns that the measures could result in additional red tape for firms.
But John Baldry of Temple Tax Chambers and chair of the Law Society’s tax law committee, said that while the legislation would require more stringent behaviour from UK businesses, ultimately someone has to take the lead in this area.
Law Society president Jonathan Smithers said: 'Corporations must be held accountable particularly where there is a failure to prevent agents from facilitating evasion which is, of course, already a criminal offence.
‘While we would support plans to speed up the introduction of legislation that tackles this, it is important that enough time is given for proper consideration and scrutiny. If you legislate in haste, you frequently have cause to repent at leisure.’
5 Readers' comments