Suppliers supply and distributors distribute - a regular blog, January 2020

Using a distributor – commit a criminal offence!

Could you commit a criminal offence for something done by your distributor? The answer, scarily, is “yes”.

Where your distributor acting in that capacity (that is, as your distributor) commits a tax evasion facilitation event, you are at risk of being found to be guilty of an offence as well. The fact that the evasion facilitation offence is committed outside of the United Kingdom is irrelevant.

How has this situation come about?

Towards the end of 2019, HM Revenue & Customs let it be known that it was soon to start exercising its powers in respect of new offences introduced by 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. As at 31 December 2019, HMRC has reported that nine live investigations were underway with a further 21 investigators under consideration demonstrating the stark reality of the situation.

As a result, a company or partnership which fails to prevent a distributor from facilitating tax evasion will be guilty of a criminal offence.

Why should I care?

The idea behind the offence was to highlight that when you use a distributor in your supply chain, you cannot simply overlook or ignore the question of whether those in the supply chain are tax compliant.

If you do overlook or ignore the question and are caught, you will be exposed to a heavy fine and serious reputational damage.

With reference to this, it is worth noting that criminal intent, knowledge or condonation by senior management is not required. As such, 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. Therefore it is not just large organisations which should be wary of HMRC action – small organisations also risk prosecution action if it is found they have failed to prevent tax evasion by their distributors.

So how can I protect myself?

One of the key defences is to demonstrate that “reasonable prevention procedures” have been put in place by you in order to identify tax evasion. There are six guiding principles:

  1. risk assessment – assessment of the nature and extent of the risk should be documented and kept under view.
  2. Proportionality of risk-based prevention procedures – the nature, scale and complexity of your business activities will be considered in determining proportionality.
  3. Top-level commitment – you or your senior managers should be fostering a culture where it is acknowledged that activity intended to facilitate tax evasion is never treated as being acceptable.
  4. Due diligence – an appropriate and risk-based approach should be taken in respect of persons who perform or will perform services on behalf of your business.
  5. Communication, including training – all prevention policies and procedures should be fully disseminated throughout the business and any training should be proportionate to the business’s risks.
  6. Monitoring and review – continuous monitoring and reviewing of the preventative procedures should be carried out.

As part of the reasonable prevention procedures it can be expected that clauses will be used in distributorship agreements which:

  • reflect these principles; and
  • require the distributor to adopt a similar approach with the next party in the supply chain.

Certainly, by implementing these procedures, you will be in a much better position to identify the risks which often lead to facilitation of tax evasion.

And 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 your distributor is selling.

Stephen Sidkin
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