Tax evasion crackdown in the road transport

London, UK:  The issue of tax evasion in the road transport sector is set to be under greater scrutiny than ever before following the introduction of a new law. Richard Wadkin and Jim Wright of Shulmans discuss how this affects hauliers.

Since 30 September 2017, it is a criminal offence for companies to fail to prevent tax evasion. While the new law affects all commercial organisations, the transport industry should take note, as, due to the sector’s broad exposure to a large number of taxes and duties, it may be at more risk than most of failing to comply.

The question of tax evasion has been around for many years and action has been taken before to prevent it and punish offenders. While some see this as a victimless crime, it reduces the tax income of the Exchequer and effectively increases the tax bills of everyone else who is paying the tax that is due from them. While avoiding PAYE tax and VAT may in some circles be seen as an ‘everyone is doing it’, everyday activity, as a result of the new law it is not only the one at fault that will be in line for prosecution and regulatory sanctions. It can now also stretch to others with whom that individual is associated.

Recent legislation and the actions of authorities, particularly HM Revenue & Customs (HMRC), to try to tighten up the way in which organisations declare their taxable liabilities is noticeable, and its impact on the road transport sector is significant.

In an earlier article (“Working progress” CM 31/08/17) we pointed out the way in which HMRC is looking to regulators like Traffic Commissioners to help identify activities such as ‘self-employment’ which is actually ‘employment’, and the need to report such activity to HMRC. It is also encouraging Traffic Commissioners to take into account any action taken by HMRC, and the impact this has on an operator’s repute, when it comes to making decisions and applying sanctions in relation to operators.

In what appears to be a continuing trend it is important that the transport sector knows about and gets to grips with the provisions of The Criminal Finances Act 2017. Introduced in April, various new laws are now coming into force. The primary offence under the law taking effect at the end of September is concerned with a company being seen to facilitate tax evasion in the UK by a member of its staff or any person ‘associated’ with it.

The purpose of the new law, as discussed in Parliament, is to ensure that the prevention of tax evasion becomes a board level issue within businesses, so that company owners and employers cannot simply ‘blame’ junior employees for any wrong-doing. That said, board members will not be personally liable.
What are the risks for the road transport sector?
Key risks associated with hauliers and commercial fleets include, for example, the claiming of expenses by transport managers and drivers to which they are not properly entitled. Essentially, any acts of employees or third parties which give rise to the unlawful evasion of tax could now lead the company with which they are employed or engaged to be guilty of the new offence.

Agents, and any other person performing services for or on behalf of another, can also create potential issues – including contracted, self-employed and even agency drivers associated with the organisation. Likewise, for example, the use of fuel sources that don’t account for duty accurately, and any other steps taken ‘to cheat the tax man’ are targeted by these new provisions.

Operators cannot, therefore, use particular types of contracts and commercial relationships to avoid their legal responsibilities. It’s perhaps not surprising that this has been a key consideration in creating the legislation given the recent explosion of alternative ‘employment’ models with the potential to manipulate VAT, income tax and National Insurance liabilities.

Understanding the boundaries of responsibility 
Defining ‘associated’ persons has been widely discussed. Various articles published to date have considered that such broad parameters for eligibility could result in a company being unfairly held responsible for its entire supply chain. Operators should be reassured that this is not the position envisaged by Parliament.
Instead, for a company to commit the offence of failing to prevent tax evasion, the individual or entity ‘associated’ with the company, such as a supplier, must be performing services for or on its behalf at the time when the tax evasion takes place. It is entirely possible that a supplier may be acting fraudulently outside of such arrangements, such as how it claims deductions or fails to declare revenue to HMRC, without that being a concern to the engaging party.

Ensuring compliance
The defining point for companies considering their position in light of the new legislation is that there needs to be a UK tax evasion offence in order to fall foul of the new law. This must be an offence of cheating the public revenue, such as deliberate fraud, the making of false statements or a different fraudulent evasion of tax.  Such evasion includes the unlawful evasion of duty, for example fuel duty, VAT fraud, criminal tax fraud or the deliberate falsification of documents, which can include electronic records and tachograph details. The individual, supplier or associated party must be guilty of a tax evasion offence, with evidence of a conviction, before there is any possibility of a company being seen to facilitate it.  But guidance suggests as soon as this occurs, including where there is a guilty plea for a reduced sentence, the prosecution for the failure to prevent offence will rapidly follow.

As with many things in the sector, whilst prevention may not be completely possible, if an operator has in place systems and processes which are ‘reasonable’ in the circumstances then the impact of a regulatory breach can be significantly mitigated. Similarly, it can also defend itself if it can show that it was not reasonable in the circumstances to expect such processes to be in place.

There is an element of ambiguity over what counts as ‘reasonable’ steps for prevention in this context, and the definition is yet to be finalised. In broad terms, it will require an operator to be able to demonstrate it has assessed the risks, understands who might be an associated person and has trained employees on the issues. To be seen to go above and beyond this and provide greater safeguards, an operator might also want to ensure there is board level responsibility for this issue and document actions in board minutes.

So the onus is on the operator to regulate its affairs with third parties and avoid getting caught up in any unlawful activity which they may not be involved in directly. If that’s not possible then it should do all it can to demonstrate attention to the issue to avoid consequences which might taint the company.

This article was written by Richard Wadkin, Regulatory and Jim Wright, Employment, partners and members of the Road Transport team at Shulmans.


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