Distributors are key parties in the supply chain. But the actions of their customers and suppliers as well as their own actions can give rise to criminal liability if as a result of such actions tax evasion is facilitated. The fact that it is the customer or the supplier which evades tax is irrelevant. It is also immaterial that the tax evasion was committed outside of United Kingdom.
How has this situation come about?
As mentioned in last month’s blog, in late 2019, HM Revenue & Customs (HMRC) announced that it was soon to start exercising its powers under the Criminal Finances Act 2017. Whilst there have been no prosecutions so far, HMRC has been undertaking dawn raids and office visits with a focus on VAT fraud in supply chains.
In December 2019, HMRC reported that nine live investigations were underway with a further 21 investigators under consideration.
Why should I care?
The starting point is that the offence aims to highlight the fact that it is not possible to simply overlook or ignore the question of whether those in the supply chain are tax compliant.
As such if a distributor overlooks or ignores the question whether in respect of its supplier or customer and is caught, it will be exposed to a heavy fine and serious reputational damage.
Evidence of criminal intent, knowledge, or condoning the actions of another party is not required. Lack of knowledge is not a defence!
HMRC has also been clear that the size of the organisation is not a factor it considers when deciding whether to take action against an organisation which has failed to take the reasonable precautions necessary to prevent tax evasion.
It is not just large organisations, therefore, that should be wary of HMRC action – small organisations also risk prosecution if it is found they have failed to prevent tax evasion by others in the supply chain.
So how can I protect myself?
One of the key defences is to demonstrate that ‘reasonable prevention procedures’ have been put in place to identify tax evasion.
There are six guiding principles:
Usually it the supplier which issues the distributorship agreement to the distributor. As a result of HMRC’s new found focus on supply chains and the facilitation of tax evasion, going forwards as part of the reasonable prevention procedures adopted by suppliers it can be expected that distributors will be presented with agreements which contain clauses which:
It follows that distributors which are presented with agreements with such clauses should:
By implementing these procedures, distributors will be in a much better position to identify the risks that often lead to facilitation of tax evasion.
Finally if you are involved in selling outside of the UK, adoption of such procedures may assist you in avoiding committing a tax evasion facilitation offence in the country in which you are selling.
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