Corporate criminal liability: How the Criminal Finances Act 2017 presents a fresh challenge for English football clubs

Published 18 May 2018 By: Simon Pentol

Football on stack of coins

In England, all professional football clubs are limited companies (private or public). They are therefore susceptible to corporate criminal liability (CCL). However, the “the identification principle” or “controlling mind test1 (see below) that applies to all criminal offences requiring proof of a mental element (intention or recklessness - as opposed to strict liability offences, such as health & safety) has acted as a procedural bar to prosecuting companies, unless it can be established that any such offence has been committed by an individual who can be identified as a “controlling mind of that company.

The Bribery Act 2010 (BA 2010) punctured the corporate veil by introducing the strict liability corporate offence of failing to prevent bribery. As of 30 September 2017, the Criminal Finances Act 2017 (CFA) has extended corporate strict liability to cover failing to prevent the facilitation of UK (Section 45) and foreign (Section 46) tax evasion by an “associated person” (i.e. an employee, agent or any other person performing services on behalf of the corporate entity).

This article examines:

  • The background and surrounding circumstances to the new regime

    • Legal theory

    • Developments in CCL outside the “identification principle

    • Section 7 The Bribery Act 2010

    • Deferred Prosecution Agreements

    • The direction of travel

  • An overview of CFA 2017

    • Section 45 facilitation

    • Section 46 facilitation

    • The “Reasonable prevention procedures” defence (and HMRC guidance)

  • The implications for football clubs

    • Player’s tax affairs

    • Payments to agents/intermediaries

    • Payments to introducers

    • Image rights deals

    • The crossover between bribery and tax evasion

  • Going forward

Background and surrounding circumstances to the new regime

Over the past twelve months English football has hit the headlines (often overblown) with allegations of individual Bribery (Daily Telegraph exposés)2 and Tax Fraud (raids by HMRC at Newcastle United & West Ham United)3. HMRC announced that it is making enquiries into the tax affairs of 67 footballers, 39 clubs & 13 agents across a range of issues including image rights deals and into more than 100 footballers for tax avoidance schemes.4 Because it is taken to be true that bribery begets tax evasion and huge money entices minimizing tax burdens, the current climate which continues to blur tax avoidance with tax evasion means that English professional football clubs must now join the new corporate world of risk assessment & compliance by having in place “reasonable prevention procedures5 if they are to properly defend themselves and avoid a CFA prosecution.

Despite being introduced as a response to the LIBOR cases and being aimed primarily at large corporates (whether regulated or not) within the financial sector and or the tax advisory sphere, the breadth of these new CFA offences and low threshold of (mere) facilitation will capture all corporate entities that might facilitate tax evasion even if they receive no benefit as a result. What might start as a routine tax enquiry, may uncover the evasion of domestic or extraterritorial tax. If the club or its agents/associates have facilitated tax evasion, only its prevention procedures will avoid prosecution.

With no limit fines upon conviction and huge reputational damage an inevitable by-product, those Authorities (HMRC, SFO & City of London Police) that in the author’s experienc6 have long believed professional football to be a hotbed of financial misappropriation, bribery & tax evasion will, in the author’s view, be more than enthusiastic to get a football club in the dock. Whereas the clubs themselves have previously avoided prosecution for tax fraud because of the “identification principle” (and other evidential considerations), the CFA is a potential game-changer.

Although the criminality created by the CFA is confined only to tax evasion that amounts to the criminal offences of Cheating the Revenue or fraudulently evading tax, its scope is wide enough to encompass any dishonest behavior by misrepresentation, non-disclosure or reckless turning a blind eye that facilitates tax evasion whether the club benefits by it or not (see below). The CFA is not retrospective but, going forward, football clubs can no longer consider themselves outside the regime of CCL.

Legal theory

A company (as registered under the Companies Act 2006) is a legal person and can therefore be prosecuted.

It has been traditionally difficult however to prosecute a corporate entity in England & Wales for a criminal offence amounting to tax evasion because the offence requires a mental element (intention or recklessness) and the “identification principle” will apply. This is where the acts and state of mind only of those who represent the “directing mind and will of the company” (at board level or superior officers) who speak and act as the company, will be imputed to the company itself (Tesco Supermarkets v Nattrass7). Whereas criminal acts by superior officers will render those individuals liable to prosecution, the company cannot be prosecuted unless those individuals can be identified as "controlling officers" of the company. Historically it has proved difficult to identify the controlling minds of large companies. The structure within football clubs makes it just as difficult to pinpoint any wrongdoing on someone (Chairman or owner) who is indeed the controlling mind of the club.

The CFA offences of failing to prevent tax evasion remove the need to identify the individual perpetrator of criminal tax evasion as a controlling mind of the corporate football club.

Developments in CCL outside the “identification principle

The Corporate Manslaughter & Corporate Homicide Act 2007 and BA 2010 have created specific CCL for the offences with which they are concerned which otherwise require a mental element. The CFA 2017 bites because of the obvious crossover between bribery with tax evasion and the fact that unlike the BA 2010, it matters not whether any benefit has been obtained from facilitating the tax evasion for a CFA offence to be committed.

Section 7 The Bribery Act 2010

The CFA is largely modeled on Section 7 BA 2010 that created stand-alone CCL for corporate entities that fail to prevent persons associated with them from bribing another person to obtain or retain business for them or to obtain or retain an advantage in the conduct of their business. This offence like the CFA 2017 focuses upon the failure to prevent bribery whether committed domestically or extraterritorially. The Section 7 BA offence is (also) a strict liability offence and provides a defence (Section 7(2)) of having “adequate procedures in place designed to prevent persons associated with the commercial organization from undertaking bribery”.

Deferred Prosecution Agreements (DPAs)

Alongside the BA and CFA are DPAs8 that as of February 2014 both provide an investigative tool and allow for a prosecutorial authority to enter into an agreement with a body corporate not to prosecute it in return for certain conditions being met including the payment of a large financial penalty + costs.

For failing to prevent bribery, DPAs have been reached with Standard Bank PLC, XYZ Ltd, Tesco for £235m and Rolls Royce for (a whopping) £500m.9 The application and use of DPAs against corporates for failing to prevent the facilitation of tax evasion has an obvious attraction.

The direction of travel

For CCL, “failure to prevent” offences are clearly the direction of travel for UK lawmakers. The Ministry Of Justice’s 2016-17 "call for evidence"10 on “economic crime11 demonstrates that the way ahead for corporates will be focused even more on risk and compliance. The "call for evidence" has been prompted by the successful DPAs reached for failure to prevent bribery, the widening of that principle to cover “economic crime” sought by SFO director David Green12, and the public clamour for corporates to be held to account in tax matters.

Added to the political rhetoric to shut down aggressive tax avoidance, the distinction between tax avoidance and evasion has narrowed considerably both attitudinally and legally.

We have come a long way since the famous statement of Lord Tomlin in the Duke of Westminster case in 1934:

Every man is entitled if he can to order his affairs so that the tax . . . is less than it otherwise would be. If he succeeds . . . he cannot be compelled to pay an increased tax”.13

The widespread use of marketed tax avoidance schemes to generate losses by which sideways tax relief is claimed (e.g. investing in film funds or dividend strips etc.) may not be criminal per se but may be, if in their facilitation, a tax investigation discloses that false or dishonest representations were made and the only purpose of the scheme amounts to an intended abuse of the tax system.

Overview of the CFA 2017

Section 45 facilitation

Section 45 is restricted to tax evasion crimes – Cheating the Revenue and other fraudulent evasion offences that require a dishonest intent of the underlying offence to be proved. It does not extend to strict liability offences, aggressive tax avoidance that falls short of evasion or negligent facilitation but will encompass acts of misrepresentation, non-disclosure and reckless turning of a blind eye that are the hallmarks of evasion as opposed to avoidance.

Section 46 facilitation

Covers non-UK tax evasion by a UK corporate entity.

The “reasonable prevention procedures” defence

The offences are strict liability so that the only available defence is for corporate entity to demonstrate that it has put in place a system of reasonable prevention procedures that identify and mitigate its tax facilitation risks. The implementation of proper procedures will render prosecution unlikely and if necessary, found a defence.

The HMRC has issued guidance14 that is predicated upon “bespoke prevention measures” based on the “unique facts of the business” and the risks identified.

The guidance focuses on the following six principles:

  • A risk assessment to identify the risks of facilitation;

  • Proportionate procedures to the risks identified;

  • Due diligence of staff, third parties and others in proportion to the risks they pose to the business;

  • Top level commitment to preventing the facilitation of tax evasion;

  • Communication (including training) to employees & operatives to ensure the procedures are embedded and understood;

  • Ongoing monitoring and review of procedures and risk assessment.

The implications for football clubs

Footballers are employees of the clubs. Clubs frequently utilize the services of an agent/intermediary in a player transfer/renegotiation or an introducer in a commercial deal. Such persons will be categorized as an “associated person” for the purposes of the CFA. Payments made by the clubs to them will have tax implications especially where a non-UK entity is involved or payments are made offshore. If there is tax evasion, the club will be deemed to have facilitated it.

Critical to issues of tax evasion are:

  • Players’ tax affairs;

  • Payments to agents/intermediaries;

  • Payments to introducers;

  • Image rights deals; and

  • The crossover between bribery and tax evasion.

Player’s tax affairs

With criminal investigations into the tax affairs of high-profile players abroad15 and HMRC investigations into aggressive tax-avoidance schemes (bordering on evasion) at home,16 the issue of clubs facilitating tax evasion can no longer be ignored.

Payments to agents/intermediaries

Although the "intermediary" system demands greater transparency, and despite payments being made through The FA clearing house, the very nature of transfers and agent’s payments nonetheless carry tax implications that both attract interest from HMRC and call for the club(s) to exercise particular vigilance to ensure no tax evasion has been facilitated. Historically, clubs prefer to pay one agent in any transaction.

In any player transfer, there are three parties: (i) selling club; (ii) buying club and (iii) player. There will be three key negotiations between: (i) selling club and buying club re transfer fee; (ii) buying club and player’s agent re player’s personal terms and (iii) buying club and player’s agent re agent’s fees.

It is commonplace for the club to pay the player’s agent’s commission as a "benefit in kind" on behalf of the player that is taxable in the UK as a deduction from the player’s gross basic salary. But what if the relationship between agent & player changes or the player moves on so that tax is no longer due as the benefit in kind for a service received?

Aside from conflicts of interest, the rules allow for dual or even triple representation by one agent of more than one party to the same transaction – Mino Raiola famously acted for all three parties in the transfer of Paul Pogba from Juventus to Man U. Where duality exists, the share/split of paying the agent’s fees must be proportionate otherwise insufficient tax will be deducted as a benefit in kind.

And what if the agent is foreign and his/her fees are to be paid abroad? Or payment is to be made offshore? Or if the agent to whom payment is made is on top of a chain of other intermediaries to whom he/she will make payment?

Payments to introducers

Commercial/sponsorship deals are the life-blood of football finance and although clubs have in-house operatives, they still rely on outside "introducers" to bring deals. The same tax considerations as to payments of player agents apply.

Image rights deals

These are the bane of HMRC and open to tax abuse. They are attractive to players & clubs saving substantially on tax and NI.

In short: players are taxed at 45% as PAYE and clubs pay 13.8% of the player’s salary as employers’ NIC. If a player is to be paid £5m p.a. but £1m of that is paid to an image rights company, the player won’t pay 45% tax on that 1m, but rather 19% as corporation tax (or less or none if the company is offshore) and the club won’t have to pay 13.8% of that 1m as NIC.

Although standard player contracts cover the use of player images to a limited extent and there is no such thing as a specific image right, HMRC have come to recognize image rights deals if they are properly structured, commercially viable, capped at 20% of the player’s salary and do not exceed 15% of the club’s total commercial income.

An image rights deal for a player with little/no commercial value, and/ or where the rights have not been properly transferred/licensed and/or where the club have not attempted to use the image to generate additional commercial income, will not only result in HMRC disallowing any tax savings but also put the club at risk of facilitating tax evasion by entering into an arrangement designed purely to evade tax by dishonest avoidance. The ongoing case before the tax tribunal of the Brazilian player Geovanni once of Hull City17, in which HMRC consider payments to his image rights company “a sham” (per First Tier Tribunal decision) is a flavor of things to come. A “sham” is a breath away from evasion.

For more on the tax treatment of image rights in football, please see this LawInSport article by Pete Hackleton: The current legal status of image rights companies in football.18

The crossover between bribery and tax evasion

Clubs should have “adequate procedures in place to prevent bribery” (see above) although very few (if any) do. These will both ring-fence the club from CCL should any “associated person” (who might be paid on results) accept or offer facilitation payments to secure the services of a player or commercial contract(s) and provide the building blocks for the introduction of “reasonable prevention procedures” to prevent the facilitation of tax evasion.

Going forward

The changing landscape of CCL under the CFA means that clubs must now take steps to ensure that all contracts and the roles of intermediaries, agents and staff are carefully and properly defined so that payments are made after appropriate due diligence is carried out. Whereas this will be onerous and is likely to create added hurdles to business, it is far better to be safe than sorry.

By now, clubs should have identified specific risks of facilitation of tax evasion that exist across their organizations and devised a plan to address any shortcomings to deal with those risks. The measures need only be “reasonable” and advice should be sought from legal counsel experienced in tax fraud and football to build a bespoke strategy. The sooner clubs begin to address any weaknesses the sooner the correct strategy can be put in place.

One thing is certain: buoyed by its recent success at the Supreme Court against Glasgow Rangers FC regarding an Employment Benefit Trust scheme that facilitated tax dodging19, HMRC will be champing at the bit to prosecute a club for acts that do no more than merely facilitate tax evasion!

This is an extract from the Governance chapter of the LawInSport and BASL Sports Law Yearbook 2017/18. To obtain a full copy of the Yearbook, which contains 10 chapters and over 50 articles like this from the industry’s leading sports lawyers, please visit our website:

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Simon Pentol

Simon Pentol

Simon is a leading London barrister in the Chambers of Paul Mendelle QC and George Carter-Stephenson QC at 25 Bedford Row. Having spent years leading in numerous high profile cases of serious and organised crime and revenue and corporate fraud, Simon has uniquely developed a parallel practice in the specialist field of Sports-related work.

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