Is your plan as cunning as a fox who’s just been appointed Professor of Cunning at Oxford University?” (Captain Blackadder). A year on from the introduction of the criminal corporate offence of failing to prevent the facilitation of tax evasion, this is the question that fund managers should be asking themselves: is there a plan?

What is the criminal corporate offence of failing to prevent the facilitation of tax evasion (other than an offence with a rather clunky title)?

The offence is a strict liability offence that applies where a company or partnership anywhere in the world fails to prevent its “associated persons” from criminally facilitating tax evasion anywhere in the world. Broken down in a fund context:

When might this apply in practice?

  • A key investor asks a junior member of the team to amend their distribution notice to show capital rather than income.
  • A portfolio company decides to pay staff in cash to avoid social security payments and the fund has an appointed director on the board.
  • The management team of an investee company asks for their consideration to be paid into a bank account in an unrelated country so that they can avoid tax in their local jurisdiction.

What are the penalties?

Unlimited financial penalties and the reputational / regulatory consequences flowing from having a criminal offence levied against the fund.

Is there a defence?

The offence is strict liability, so it does not matter whether the fund knows what’s going on or not. In recognition of this, a complete defence is available where a “relevant body” has put in place reasonable preventative procedures to prevent its associated persons from facilitating tax evasion.

What are reasonable preventative procedures?

What is reasonable will depend on the organisation and should be determined by undertaking a risk assessment. HMRC have indicated that they view a third party risk assessment as having more weight. Any risk areas identified by the risk assessment should be addressed, we would also expect that most funds should have in place a policy on this topic and be able demonstrate senior buy-in. Further, there should be a process for ongoing monitoring of the policy and training on the policy for partners and staff.

Practical steps

You wouldn’t be jumping the gun here to suspect that the words “cunning” and “plan” are marching with confidence in the direction of this conversation.

  1. Has a risk assessment been undertaken?
  2. Have reasonable preventative procedures been implemented?
    • Is there a policy?
    • Can you demonstrate top-level commitment?
    • Has training taken place?
    • Has diligence been done on third party service providers?
    • Is there a system to monitor compliance?
    • Has the policy been linked in to the fund’s tax strategy (where applicable)?

If the answer to any of the above is “no”, we're back to Blackadder and “a plan so cunning you could pin a tail on it and call it a fox”: ensure that you can answer yes to all of the above.