Corporate Criminal Offence – Are you taking the right precautions?

The Corporate Criminal Offence legislation (CCO) took effect across the UK back in September 2017.

However, since then, several charitable sector groups have warned that charities are either unaware of the impact of the legislation, or wrongly believe that it does not apply to them due to the use of the word ‘corporate’ in its title. Unfortunately, all incorporated charities (but not charitable trusts) have to abide by the legislation. In this article, we’ll take a look at what the CCO means, and what measures you need to take to reduce the risk in your charity.

What does Corporate Criminal Offence cover?

The new legislation intends to cover tax evasion – both in the UK and abroad. It’s a very broad piece of legislation. Still, its overall goal is to prevent the facilitation of tax evasion through UK entities (including charities) – and simply being unaware that this tax evasion is occurring is not a sufficient defence.

The offences catch not only the taxpayer evading tax, but also any ‘associated person’ who assists them in the evasion, and any entity (such as the charity itself) that failed to prevent this assistance.

Examples of what might be an offence under the CCO include:

• Employees changing or adjusting the amounts on invoices to facilitate a reduction in tax for the customer.
• Employees assisting a supplier in evading tax by paying cash in order to ‘save the VAT’.
• The HR team conspiring with an employee to allow them to be seen as self-employed and avoiding ERS NI taxes; or paying cash in hand so as to save on taxes and NI.
• An individual providing a charity with a donation which has associated benefits and conditions attached to it that would typically prevent relief from git aid; and the charity issues a receipt for the ‘donation’ and accepts the signed gift aid declaration knowing it’s a payment for services

There are numerous ways in which the CCO could catch out charities and their employees, and the charity itself will be liable. In some cases, employees may think they are doing the right thing by the charity such as the ‘VAT saving’ example above – whereby the charity has saved VAT but has also assisted a supplier to avoid declaring income.

What are the penalties for a Corporate Criminal Offence?

The penalties can be severe – fines for breaching the act are unlimited. HMRC has been conducting in-depth CCO investigations since early 2018, including dawn raids on office premises, and interviews with staff on their knowledge of the CCO and the current procedures to see if reasonable prevention steps are in place.

In addition to fines, public conviction and the resultant media attention would result in potentially substantial reputational damage for any charity.

So what can charities do about the Corporate Criminal Offence?

The only accepted defence for a charity against the offences included above is if the charity can demonstrate what the act describes as ‘Reasonable Procedures’. Equally, if such procedures are not present and the charity can show it would be ‘unreasonable’ to have such procedures in place, then this can be accepted as a defence – but it is a hard one to prove.

What are reasonable procedures?

The guidance from HMRC on the act lays out what it considers to be the six fundamental stages of having reasonable procedures in place. These are:

1. Risk assessment – carrying out the initial risk assessment is a key part of the procedures. Highlighting areas where the charity may be vulnerable to instances of tax evasion, and considering all forms of income and expenditure in detail. This assessment should be documented and discussed by the Trustees and management at board level.
2. Proportionality of risk-based prevention procedures – There must be consideration of the nature of the charity activities, and what are reasonable steps to take that do not interfere or drastically impact those activities. At this stage, formal procedures would be produced and implemented.
3. Top-level commitment – Taking the risks seriously and understanding the impact of the offences really should be led from the top. The involvement of the board and senior management in design, communication and implementation is key to leading by example for all staff and stakeholders.
4. Due diligence – The charity should consider due diligence in all aspects of its operations already. Who do they work with and in particular, who is working on their behalf? Taking steps to ensure due diligence is carried out at the early stages gives the charity a good chance of prevention.
5. Communication (including training) – All staff should be aware of the procedures and be given training on how the offences occur and how to spot the risks. Some staff can be unaware that what they are doing is helping to facilitate another person’s tax evasion.
6. Monitoring review and testing – The charity should take steps to monitor its procedures and controls when implemented, and make sure they are adhered to by all staff.

Conclusion

If your charity can take the steps above to increase awareness and close down the opportunities for tax evasion, they will have a solid defence against the fines and penalties that can be levied under the CCO act.

In reality, many charities will already have some or many of the steps above as part of their usual controls and risk assessment – so it may just be that some additional tweaks along with staff training is the best approach.

However, you must always make sure your procedures and discussions are documented. Failure to do so may mean a failure to defend the charity in the event that an offence ever occurs.

This post was written by Michael Cooper-Davis, a charity finance specialist at Price Bailey. If you would like to know more about anything discussed in this post then please contact Michael using the form below.