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Invoice Finance and the Criminal Finances Act

Although invoice finance remains by and large unregulated by Government, there is little doubt that the pace of regulation marches on and recently concerns have been expressed by some in the invoice finance industry that invoice financiers may be at risk of committing offences under the Criminal Finances Act 2017, for example where clients are suspected of building up substantial VAT/PAYE/Corporation Tax arrears.

Offence of Facilitation of tax evasion

The offence of facilitation of tax evasion was introduced by section 45 of the Act and turns on the following definition:

“(5) In this Part “UK tax evasion facilitation offence” means an offence under the law of any part of the United Kingdom consisting of—

(a) being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax by another person,

(b) aiding, abetting, counselling or procuring the commission of a UK tax evasion offence, or

(c) being involved art and part in the commission of an offence consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax”.

In our view the mere fact that the client has tax arrears falls well short of the commission of a tax evasion offence by the client.

Even if there was such an offence committed by the client, in our view in order for the invoice financier to be liable in relation to such an offence, there must be criminal dishonesty facilitating that offence by an employee or agent of the financier.

The position is clarified in the Government guidance issued when the legislation came into effect in September 2017 “Tackling tax evasion: Government guidance for the corporate offences of failure to prevent the criminal facilitation of tax evasion” which explains the position as follows at paragraph 1.3:

“For the corporate offence to be committed there must be criminal facilitation of the taxpayer evasion by a person acting in the capacity of a person associated with the relevant body (stage two). The associated person must deliberately and dishonestly take action to facilitate the taxpayer-level evasion. If the associated person is only proved to have accidentally, ignorantly or even negligently facilitated tax the evasion offence then the new offence is not committed by the relevant body”.

There is a similar provision relating to the offence of facilitating tax evasion outside the UK under section 46.

Preventative steps

If an invoice financier wishes to take a belt and braces approach to counter the risk that an employee may become complicit in dishonest and deliberate tax evasion by a client, then our advice would be for it to carry out a risk assessment and put in place any preventative steps which that risk assessment identifies.

This should enable the financier to rely on a statutory defence to the offence under section 45 to the effect that it has taken reasonable steps to prevent such activity:-

“(2) It is a defence for B to prove that, when the UK tax evasion facilitation offence was committed—

(a) B had in place such prevention procedures as it was reasonable in all the circumstances to expect B to have in place…

(3) In subsection (2) “prevention procedures” means procedures designed to prevent persons acting in the capacity of a person associated with B from committing UK tax evasion facilitation offences”.

In this regard the Government guidance referred to above sets out some very high level issues to be considered.