Risk of criminal liability when acting as a distributor
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:
- Risk assessment – assessment of the nature and extent of the risk should be documented and kept under review.
- Proportionality of risk-based prevention procedures – the nature, scale and complexity of your business activities will be considered in determining proportionality.
- 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.
- 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.
- 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.
- Monitoring and review – continuous monitoring and reviewing of the preventative procedures should be carried out.
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:
- Reflect these principles; and
- Require the distributor to adopt a similar approach with the next party in the supply chain.
It follows that distributors which are presented with agreements with such clauses should:
- Read and make sure that they understand their new contractual obligations. Assuming that the supplier is going through the motions or that the clauses are just boilerplate will be, at best, risky.
- Depending on the terms of such clauses, ask their suppliers that the clauses are reciprocal.
- Seek written clarification from their suppliers as to what steps the suppliers are taking to reflect the above principles.
- Recognise that such clauses may be included in their suppliers issuing new terms and conditions of sale. This may be especially the case where a formal distribution agreement is not in place.Look to include corresponding clauses in their agreements with their customers or in the distributors’ standard terms and conditions of sale.
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.