What Tax Evasion?

55% of FTSE100 firms fail to mention tax evasion in their documentation

A lack of clear policy that could concern stakeholders

SOME 55% OF FTSE100 companies do not mention how they are managing the risks of tax evasion in their published documents, shows research by Pinsent Masons, the international law firm. It also showed that a third of financial services firms in the FTSE100 make no mention of tax evasion in their published documentation, either.

The research was based on an analysis of tax strategy documents, annual reports, Environment Social and Governance (ESG) policies and other related documents. From 2016, it has been compulsory for large UK companies (with an annual turnover of £200 million or more) to publish a tax strategy that must contain extensive details of the company’s tax planning arrangements and attitude towards HMRC.

Pinsent Masons says new legislation means the FTSE100 and other businesses are now at risk of criminal sanctions if they fail to prevent the facilitation of tax evasion.

Under the Criminal Finances Act (CFA) 2017, which came into force on 30 September 2017, businesses are now criminally liable if any of their employees, agents or others third parties facilitate tax evasion while providing services on their behalf.

The lack of communication by the FTSE100 of how they are managing the risks relating to tax evasion could cause concern for shareholders and other stakeholders, as this is an area of increasing reputational and financial risk.

Pinsent Masons says the lack of communication could also make it harder for companies to demonstrate that they have taken ‘reasonable prevention procedures’, which is a key defence for a company found liable under the new laws. This may also be troubling for shareholders.

Failure to comply with the new law could result in unlimited financial penalties, ancillary orders such as confiscation orders or serious crime prevention orders, and serious reputational damage. A successful criminal prosecution may also prevent a company from bidding from public sector contracts. A company does not have to be directly involved in the tax evasion or even be aware of it to be prosecuted under the new law.

Pinsent Masons’ analysis found that in contrast to tax evasion, just 10% of FTSE100 firms failed to mention how they deal with corruption in their published documents. Companies have been required to set out their approach to corruption since the Bribery Act was introduced in 2010 – the latest requirements for tax evasion mirror these existing ones.

Some 33% of the financial services businesses in the FTSE100 make no mention of tax evasion or how they manage the risk of it. The proportion of financial services firms addressing tax evasion is considerably higher than the FTSE100 average, as it is one of the sectors most at risk of being caught by the tax evasion facilitation offence.

Pinsent Masons adds that the FTSE100 financial services businesses are, by their very nature, going to face the biggest challenges when it comes to preventing the facilitation of tax evasion by employees and others. These firms handle high numbers of financial transactions for High Net Worth individuals and international corporates, who tend to have the most complex tax affairs. Financial services firms also frequently:

• Pay large sums to consultants.
• Engage in largescale cross-border transactions.
• Rely on contractors.
• Deal with more than one tax authority.

Jason Collins, a Partner at Pinsent Masons, said: “FTSE100 firms failing to publicly address tax evasion could raise questions for stakeholders over their management of reputational and financial risks. Compliance practices at FTSE100 firms are increasingly under scrutiny now that they are liable for tax evasion at any level. Financial services firms in particular will be under the spotlight – it comes with the territory.”

He added: “Companies can now effectively become criminally liable for third party tax evasion. It will no longer be a reasonable excuse to say that management was totally unaware of any tax evasion that took place and would never allow it had they been.

“With the potential for unlimited fines it’s not surprising that shareholders and other stakeholders will want reassurance that big businesses have got the risks of tax evasion under control.”