Chapter 7 Criminal Law and Tort Flashcards
7.2 Criminal Law – basic rules
Civil law is concerned with the rights and duties that arise between private persons. The criminal law is concerned with actions that are regarded as a wrongdoing against the state. The enforcement is entrusted to public officials.
There are both common and statutory crimes, a person is usually guilty of a criminal offence where two essential elements are present:
• There must be a prohibited act (the actus reus) and
• The defendant must have the appropriate guilty state of mind (the mens rea)
Also, the burden of proof (onus) on the prosecution is to prove the commission of the crime beyond reasonable doubt. The actus reus and the mens rea will be different for different crimes. With strict liability offenses, Parliament has dispensed the requirement of mens rea.
The crown prosecution service is responsible for bringing criminal proceedings against individuals. It can be heard at the Magistrates’ Court (summary offenses) or in the crown court (indictable offences). Criminal acts can give rise to civil offences. HMRC has a civil investigations of fraud procedure which is undertaken by staff at the special civil investigation’s unit. They handle cases of suspected serious fraud. Before HMRC take an individual to this court, the taxpayer is given an opportunity to make a full disclosure of their tax affairs.
The specialist fraud division of the crown prosecution is responsible for prosecuting all HMRC criminal cases in England and Wales. A prosecution is more likely to be brought against a tax practitioner and can extended to that practitioners’ clients or members of their firm.
7.3 Criminal Law – general tax offences
There are a variety of criminal offences that either the tax adviser and/or their client could be guilty of:
• Theft under the theft act 1968
• Offences in relation to money laundering under the Proceeds of Crime Act 2002
• Offences in relation to Fraud under the Fraud Act 2006
• Offences in relation to Bribery under the Bribery Act 2010
• Offences in relation to prevent the facilitation of tax evasion under the Criminal Finances Act 2017
• Offences in relation to data protection under the data protection act 2018 and GDPR
• Common law offences such as cheating the public revenue, false accounting, conspiracy and conspiracy to defraud
• Offences such as providing advice they are not authorized to do under the Financial services and Markets Act 2000
7.4 Theft
Theft Act 1968 provides a person is guilty of theft if he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it. The actus reus is an act of appropriation of property belonging to another. The mens rea is dishonesty and intention to permanently deprive the other of their property.
7.5 Offences under the proceeds of crime act 2002
When a tax practitioner has knowledge or reasonable grounds that their client is suspect to money laundering and the knowledge is within the course of a regulated activity, they must make a report to the National Crime Agency, generally through the Money Laundering Reporting Officer.
There is no de minimis limit do a tax practitioner must report all suspicious and knowledge of criminal activity irrespective of the level of proceeds or the gravity of the crime. A tax practitioner will not be guilty of an offence if they have a reasonable excuse for not disclosing to the NCA, this can be not having training or the information being governed by legal professional privilege.
The Money Laundering Regulations 2003 must be complied and they provide for the following:
• Systems and training to prevent money laundering
• Identification and record keeping requirements, and
• Internal reporting procedures.
The Money Laundering Regulations 2017 require firms of tax practitioners:
• Have a firm wide written anti-money laundering risk assessment which takes account the firm’s risk factors (services, geographic area etc)
• Have a money laundering compliance principal from senior management to monitor the firm’s compliance with regulations
• Carry out screening of new and existing employees
• Have an independent audit function to assess AML policies, controls and procedures
• Conduct client due diligence at the beginning of the business relationship. This is normally simplified due diligence in most cases.
• Identify and verify the beneficial owner of the client and the person who purports to act on behalf of a client
• Conduct enhanced due diligence when there is a high risk of money laundering
• Monitor on an ongoing basis their relationship with the client, and
• Monitor their firm’s compliance with the regulation
In addition to this, HMRC can ask the high court to make an unexplained wealth order in respect of property worth more than £50,000. This requires a person to provide a statement setting their interests in the property and how they obtained it and paid for it.
7.6 Offences under the fraud act 2006
Fraud may be committed in three different ways:
• False representation – dishonesty, making false representations of fact or law, intending to make a gain or cause another part loss or to expose that party to the risk of making a loss
• Failure to disclose information – failing to disclose information where there is a legal duty
• Abuse of position – abusing a position in which a person is expected to safeguard or not to act against the financial interest of another
7.7 Offences under the bribery Act 2010
There are four main offences under this act:
• Bribing another person
• Being bribed
• Bribing a foreign public official
• Corporate failure to prevent bribery – when a person who performs services on behalf of an organization bribes another person. A defence is available if the organization proves it has adequate procedures in place to stop this.
The maximum penalty is ten years imprisonment and/or an unlimited fine.
7.8 Offences under the criminal finances act 2017
This act provides for the offence of failure to prevent the facilitation of tax evasion. It is a strict liability office and applies to all corporate bodies and partnerships. The business entity is liable for the criminal acts of its associated persons in facilitating tax evasion by others. The entity is liable to an unlimited fine and publication of the conviction. The crime is committed where:
• Criminal tax evasion has taken place
• A person associated with the entity has criminally facilitated the tax evasion while performing services for that entity
• The entity has failed to put in place and document reasonable procedures to prevent an associated person from committing the offence
A business has a defence if it can prove they have reasonable procedures in place to prevent this. There are six principles of having reasonable prevention procedures, these are risk assessment, proportionality of risk-based prevention procedures, top level commitment, due diligence, communication and monitoring and review.
7.9 Offences under the data protection act 2018 and GDPR
Personal data is information that relates to a living individual (data subject) who can either be identified from that data or from the data combined with other information. Sensitive personal data refers to racial or ethnic origin, political opinions, religious beliefs, genetics, biometrics, health, sex life and criminal convictions. The new acts give data subjects, the right to:
• Be informed about the data processed of them
• Have access to their personal data
• Require rectification of data which is wrong
• Be forgotten and have information erased
• Object to the purposes for which their personal data is being process
Tax practitioners must have a valid lawful basis to process personal data and ensure that all clients consent to this. A tax practitioner can be a data controller (determining the purposes and means of personal data) and/or a data processor (responsible for processing personal data on behalf of a controller). Under the GDPR there are seven principles that data controllers and processors must comply with to ensure that personal data is:
• Fairly, lawfully and transparently processed
• Processed for limited purposes
• Adequate, relevant and not excessive for the purpose (data minimization)
• Accurate
• Not kept for longer than is necessary
• Held securely and with integrity and confidentiality
• Processed by persons who take responsibility for complying with the principles and have appropriate processes and records in place to demonstrate compliance
You must have a designated data protection officer and must be registered with the information commissioner’s office. Data breaches must be notified to them within 72 hours of awareness of the breach. The ICO can issue enforcement notices and penalty notices where non-compliance occurs. Failure to comply can result in a fine from ICO of up to £17 million or 4% of the annual worldwide turnover. There are three criminal offences under the 2018 Data Protection Act:
• To obtain, disclose or retain personal data without the consent of the controller
• To re-identify personal data which has been de-identified or redacted
• To alter, deface, block, erase, destroy or conceal information to avoid disclosing information legitimately asked for by a data subject.
7.10 Cheating the public revenue
Committed where a person intends to dishonestly and deliberately deprive HMRC of tax. An essential element of the mens rea is dishonesty. The jury considers if the conduct was dishonest by reference of the standards of the ordinary reasonable and honest man.
7.11 Offences under FSMA 2000
This restricts the type of advice that a tax practitioner may provide to a client. If a tax practitioner has permission under Part IV of the FSMA 2000 or is a member of a designated professional body, they can provide a wide range of investment advice and activities. The ICAEW id a DPB, the ATT is not.
7.12 Civil Liability – contract law
Under the law of contract, a practitioner could breach their contract for failing to carry out the terms of the contract. Legislation protects a client if services fall short of what is expected by a reasonable person.
Business clients – the supply of Goods and Services Act 1982 implies certain items into a contract between two businesses. If the tax practitioner is in breach, the client can sue. The SGSA protects the clients in two main ways:
• Where terms are agreed in a contract but the terms do not comply with the principles of the Act.
• Where there is no written contract.
The act stipulates that:
• The tax practitioner will carry out their work with reasonable care and skill to a proper standard
• Where no time limit is stipulated, the service should be performed within a reasonable time
• Where the price is not stipulated, the client will pay a reasonable charge
Terms cannot be overridden by a tax practitioner in a contract if it is not reasonable to do so under the Unfair Contract Terms Act 1977.
Consumer clients – contracts are regulated by the Consumer Rights Act 2015, which states contracts are only binding if they are fair.
• A consumer can challenge a term in a contract if it is unfair, any term deemed unfair will not apply. Unfair terms may be:
• Fees or charges that are hidden in the small print of an engagement letter
• A term that limits the consumer’s legal rights
• An excessive charge if the client chooses to terminate the agreement early or otherwise defaults
Unless they are prominent and transparent, the court will assess whether the key terms of the agreement are fair, they may be deemed unfair if they are not in good faith, cause significant imbalance between the rights of the practitioner and client and are to the detriment of the consumer.
7.13 Civil Liability – the tort of negligence
Tax practitioners need to be aware they could have a civil liability to parties other than their clients. Third parties have no recourse to sue under contract law, as they do not have a contract. This is where the common law tort of negligence might come into play. A tort is a civil wrongdoing by one person (tortfeasor) to another. It is the breach of a legal duty or infringement of a legal right arising independent of contract, which gives rise to a claim for damages. A tort is a breach of duty imposed by the law. The law of tort provides remedies for the victims of harmful conduct. There are a variety of torts, the most relevant for tax is negligence.
To be successful in a negligence claim, the claimant must prove each of the following:
• The tax practitioner owed them a duty of care; tax practitioners owe a duty of care to whom they have a special relationship with under the neighbor principle
• The tax practitioner breached the duty of care. They breach the duty of care if they fail to reach the standard reasonably expected of them. The courts will look at the ethical guidelines of the CIOT/ATT and what other professionals have done. Due regard will be given to any terms in an engagement letter.
• The claimant suffered a loss as a result of the breach. They must show a connection between the breach of duty and the loss suffered and the loss would not have occurred but for the breach of duty.
A tax practitioner may defend against a claim by including a clause in a report that this is prepared entirely for the recipient and not to be disclosed or relied upon by a third party. However, some circumstances could inadvertently owe a third party a duty of care.
A claim must be logged with the court within six years of suffering the loss. The remedy is normally claiming for damages. Damages for tort is compensatory and assessed according to the following criteria:
• How far was the loss foreseeable?
• Did the claimant mitigate their loss?
• Did the claimant contribute to the loss?
Some practitioners put a limitation cap in their engagement letter seeking to impose a maximum limit on the amount that can be claimed. This is only effective if it is deemed reasonable and only applies within the areas of the contract.
Tax practitioners can be liable for professional negligence committed by another person (vicarious liability). The claimant can sue either or both of the parties. This applies in the following cases:
• Partners in a partnership are generally jointly and severally liable for the professional negligence acts of their fellow partners
• An employer is generally liable for negligent acts of their employees.
