Corporate criminal offence and supply chain reviews

HMRC is due to publish an update on its activity regarding the corporate criminal offence (CCO) soon. As at 27 May 2021, HMRC had a total of 14 live CCO investigations, whilst a further 14 were under review. We had expected those statistics to be updated before the end of 2021.

Although details of these active cases have not yet been made public, we know they involve tax and duty regimes across organisations of all shapes and sizes, spanning ten different business sectors, including recruitment.

What is the corporate criminal offence?

The CCO applies to all companies, LLPs and partnerships, regardless of size, with affected entities being legally obliged to actively prevent tax crime.

The offence, introduced by the Criminal Finances Act on 30 September 2017, can result in an unlimited fine and a criminal conviction for companies and partnerships that fail to prevent anyone acting on their behalf from facilitating a third party's tax evasion. Examples include the evasion of PAYE in a labour supply chain, or the failure to operate or pay over to HMRC the appropriate level of VAT.

The CCO is a strict liability offence, meaning that it applies even when the organisation was unaware of what was going on. A business can therefore be subject to the criminal charge for being 'asleep at the wheel' while someone associated with it knowingly helped another individual or entity commit tax evasion.

The only defence against a charge under the CCO is having reasonable prevention procedures in place. This requires a business, at the very minimum, to conduct a risk assessment to identify activities and processes which could be exploited to deliberately assist a third-party to commit tax evasion, along with addressing the gaps in existing controls.

What are we seeing in the recruitment sector?

We know from the information released in May that HMRC has a specific focus on the recruitment and labour provision sector, and there are live criminal investigations in the sector.

In addition to the formal criminal investigations, we are seeing an increasing number of supply chain checks. These checks are as prominent in respect of labour provision as they are in any other sector.

In the supply chain checks, HMRC focuses a great deal on the due diligence procedures of agencies, particularly where umbrella companies are included in the supply chain.

Often these enquiries are triggered by the identification of tax evasion in the supply chain. HMRC is focusing on two key risks, namely:

1. whether the loss of tax within the supply chain can be recovered from another party to the transaction (joint and several liability); and
2. whether a person acting on that other party’s behalf has facilitated the third party’s tax evasion, and whether the CCO has been breached.

How to protect affected businesses

If a business is subject to an HMRC supply chain review, it is important to be able to demonstrate that suitable due diligence has been undertaken in respect of all suppliers prior to engagement. HMRC has published a wide range of guidance focused around due diligence in labour supply chains.

In the absence of such evidence, HMRC may invoke joint and several liability in respect of certain unpaid liabilities.

Where the investigation goes a step further, with a focus on tax evasion in the supply chain and facilitation of that evasion by persons associated with the business, it is fundamental to be able to demonstrate to HMRC that reasonable prevention procedures have been implemented. This includes risk-assessing the business with a view to identifying areas of vulnerability, and implementing systems and processes to mitigate the risk.