Contractual Disclosure Facility Letter – Help i just got one!

What do you do when you receive a Contractual Disclosure Facility letter?

Anton Lane has over two decades experience specialising in handling tax investigations. Anton is a qualified Chartered Tax Adviser having trained whilst working at the Big Four. Anton’s career started in EY’s Tax Investigations Service handling cases for high profile and high net worth individuals.

HMRC’s approach has changed over the past two decades and their target for suspected fraud investigations have focused on entrepreneurs and people identifiable within a community. This change arose from identifying that the general population do not relate to high profile individuals and therefore do not perceive they are at the same risk of prosecution.

The Treasury has also taken many steps to deter the use of avoidance schemes. Anton has been the author of many Tolley’s Tax Digests focusing on tax investigations and offshore tax arrangements. In the Tolley’s Tax Digest ‘Practicalities of Tax Investigations’, May 2021 the following was noted:

HMRC’s (and the Treasury’s) approach has been (in some people’s minds and not necessarily the view of the author although he can appreciate the viewpoint):

messy, inconsistent, illogical, ineffective, commercially absurd, not thought through, poorly implemented, poor drafted, ridiculous case law/judicial review decisions and possibly lacking consideration of taxpayer’s rights.

A person may receive a letter from HMRC inviting them to use the Contractual Disclosure Facility (‘CDF’). When a person receives such a letter they may be fearful and are also likely to start wondering:

• What do HMRC know?
• Is it sensible to wait and see what HMRC know?
• What is it possible to ‘get away with’?
• What tactical approach should be taken?
• How can the exposure to tax (penalties and interest) be limited?
• Can my existing accountant help?
• Is dealing with HMRC going to cost me a bucket load of professional costs?

HMRC know a lot

“I was thinking that HMRC might not know about some of the things resulting in me having a lower tax liability. They couldn’t possibly get the information and even if they did, they wouldn’t be able to analyse it and conclude that I have a tax liability.”

To think this way when facing a Contractual Disclosure Facility is potentially what might result in someone being prosecuted. The Contractual Disclosure Facility opportunity is for someone to come clean and to do so with a material omission, is likely to result in prosecution. It is not for HMRC to tell someone what they have done, it is for someone to demonstrate they want to come clean. The concept can be difficult for a client to embrace or understand because why would a HMRC officer not want to help or indicate what they know? The simple fact is that Contractual Disclosure Facility is almost like a test of a taxpayer’s willingness to come clean. If that willingness is absent, prosecution is an option.

Schedule 23 Finance Act 2011 provided HMRC with data gathering tools for groups of taxpayers. At its introduction, sixteen broad categories of ‘data handlers’ could be approached to provide information automatically and in a specified format to HMRC i.e. electronic to allow its easier analysis. The number of categories has slowly increased to twenty two categories. The additions have included ‘merchant acquirers’, ‘providers of electronic stored-value payment services’ ‘money service businesses’ and ‘postal operators’. The original categories included employers, agencies, person by or through whom interest is paid or credited (banks and building societies), a person who, in whatever capacity is in receipt of money or value belonging to another, business intermediaries, those receiving payments from or dealing in securities, agents managing land and property, and insurers.

Public records available to HMRC and other Government departments now share information automatically: Land Registry, electoral role, Council tax, Planning consents, Companies House, Passport Control, licensing departments, business rates, import and export records, tax returns (SA/CT/VAT/SDLT).

Wait and see

A person will never know what information HMRC has in their possession or what particular area they are more ‘concerned’ with. A specialist adviser will usually be able to identify from correspondence between HMRC and a person where their concerns are. Often to do so will require a review of other available information.

If to wait and see means to enter Contractual Disclosure Facility but limit the initial disclosure, the person runs the risk of HMRC not accepting the initial disclosure and ‘continuing’ to investigate with a view to prosecution. Up to the point that the Contractual Disclosure Facility letter has been issued, a person has unbeknown to them been under investigation for quite some time. We suspect investigations ahead of issuing a Contractual Disclosure Facility letter have been underway for say up two or three years.

For example, one client was issued with Contractual Disclosure Facility in 2021. In 2013 he had entered into arrangements for an unconnected company to operate trading activities. By order of the court the company was put into winding up 2015. A liquidator was appointed in 2017. The liquidator would have reviewed company records and even spoken to the named directors and shareholders. After a while of reviewing information, the liquidator would have made reports of their findings to the Insolvency Service, which in turn were likely shared with HMRC. In respect of other unrelated companies that had been trading insolvent, the individual was disqualified as a director in 2015.

HMRC in possession of information around say 2018 or 2019 would have then undertaken their own review connecting individuals with trades and premises and linking point of sale information obtained from third parties to the disqualified director. Following this review, a decision would have been made to issue Contractual Disclosure Facility.

Getting away with it

Walking into Contractual Disclosure Facility with the intent of getting away with something does not embrace the process thereby increasing the risk of prosecution. However, that does not mean there are not legitimate ways of mitigating the exposure to tax interest and penalties.

Tax law is exceptionally complicated both the mechanics of when a person is liable and how the liability is arrived at. For example, under Contractual Disclosure Facility a person is admitting a deliberate act for which the exposure to tax could be up to twenty years.  For non-deliberate acts the exposure is up to six years. What makes an act deliberate or non-deliberate can be equally complicated and needs to take into account an number of influencing factors. For example, recently a HMRC officer suggested that where an accountant had advised a client to deduct wages to his minor children the act must have been deliberate. The client was ‘academically challenged’ and fearful of challenging his accountant and probably didn’t feel he should challenge. The act could not be deliberate although the officer felt the client should have known better.

The officer commenced her correspondence requesting speculative comments and information not relevant to the taxpayer thereby nicely demonstrating the difference between someone in possession of knowledge and someone without i.e. the client would have likely responded to appease the officer whereas us as advisers with knowledge used the point to illustrate ours in relation to the client.

Tax legislation isn’t straightforward and some areas are much more complicated than others. For example, offshore structures are subject to highly complicated anti-avoidance legislation and case law. We like complicated and it is important the person representing a Contractual Disclosure Facility has the skills not only to deal with the case management but also the tax technical. A good technical argument can result in lower taxes!

Tactical approach

Ahead of submitting an initial disclosure, thought should be given to the approach. The initial disclosure needs to be thorough enough to be accepted but allow for other areas to be included should they arise.

The initial disclosure identifies deliberate and non-deliberate acts, therefore a thorough approach should be adopted to establishing what the potential acts are but also whether they are non-deliberate. In a recent case where we were advising another accountant in relation to jointly working a Contractual Disclosure Facility for a client, we debated whether income arising on overseas bank accounts was non-deliberate. The client, a non-UK domiciled person, had previously faced an enquiry so there was a clear date at which he had become aware overseas income was caught due to the change in tax treatment of long term residents. Before the enquiry, he may not have been acting deliberately.

The history giving rise to the acts resulting in tax liabilities are important. The details and circumstances why someone did something can be the difference between a deliberate act and a non-deliberate one. The influence of third parties may also assist. For example, a client established an ‘Asset Protection Trust’ following representations of a third party shortly after being diagnosed with a serious illness. The clients child was also a vulnerable person. The adviser had given ill advice on the trust resulting in tax irregularities.

Would there be any benefit to HMRC meeting the client? If that is appropriate, the client needs to be prepared and the meeting needs to be managed and controlled. There is no harm asking for agendas and specific questions. Ahead of one opening meeting, the HMRC officer confirmed the agenda was a general chat and he had not prepared specific questions. At the meeting, the officer held thirty four pages of specific questions, which we confirmed we would happily take and prepare responses or include within the disclosure report. HMRC may suggest not attending the meeting is not cooperating. Non attendance at a meeting doesn’t necessarily mean not cooperating.

HMRC will hold a scoping meeting with advisers to discuss what needs to be reviewed and included within the disclosure. This meeting can be exceptionally useful. An officer knowing a practice has extensive experience with disclosure reports will likely be reassured the review work and content of a report will be a suitably thorough disclosure. This may result in a more productive relationship between agent and HMRC.

A CDF needs to be supported by a review of extensive primary information. That information can take weeks or months to collate. The early identification of what is required is important. It may be important to obtain a lot ahead of an initial disclosure and certainly ahead of the final disclosure report. The quantum of information and work to be undertaken will govern whether the normal parameters of the Contractual Disclosure Facility can be met. Will extra time be required?

Making payments on account demonstrates the willingness of the client to settle. Some consider that if large payments on account are made, HMRC officers will anticipate greater payments later. Also, if there are technical issues to be debated, making a payment in respect of a potential liability could result in the officer not being willing to compromise. Whereas not making a payment could result in increased interest. The client may not have liquid funds and it may be prudent to explain to HMRC what will be undertaken to afford liabilities.

There are many more tactics to be considered although outside the scope of this article, which is already quite lengthy.

Exposure

We have set out ways exposure may be mitigated:

1. Identify deliberate and non-deliberate
2. Identify reasonable excuses
3. Consider technical arguments
4. Make payments on account
5. Embrace Contractual Disclosure Facility with the right support
6. Manage the process with HMRC

My accountant

An accountant who has not specialised in investigations will likely cause you more problems – sorry. An accountant may not have been aware of the irregularities and may wish to consider whether they continue to act. You may need a specialist adviser who can also keep you compliant during the Contractual Disclosure Facility process if your accountant disengages. If your accountant considers they can continue to act, a close working relationship with the tax specialist may prove beneficial and reduce the overall costs of the Contractual Disclosure Facility.

Some tax investigation specialists are ex-HMRC officers, which could be advantageous if they also possess the tax technical skills. The adviser you choose acts for you and not HMRC. Some professionals inevitably form judgment on what you have done – avoid these advisers. You will need someone who wants to get the best outcome for you, whilst protecting you from a criminal investigation.  It is important to find a specialist or team of specialists that are not only good at managing the process of a Contractual Disclosure Facility but possess the required technical knowledge relevant to your tax problems. It is also useful to like and trust your adviser.

Costs

The cost of a Contractual Disclosure Facility spanning many years and with many different omissions can be considerable. The cost of a Contractual Disclosure Facility with very few years and few omissions may be a lot lower. The process of a Contractual Disclosure Facility and the risks associated with not managing that process are challenging requiring careful preparation and review. Costs can therefore escalate.

At Edge Tax we handle a large number of Contractual Disclosure Facility cases as well as COP8 and enquiry work. We support a network of accountants on enquiries and investigations. Our approach and systems are structured to handle cases efficiently. We also evaluate cases early on to identify where we will add value i.e. save you professional costs or tax. We work with insurers and have formulated a way to provide accurate fee quotes, which manages the insurers exposure. We take the same approach for direct clients. The preparation of fee quotes is dependent on having information with which to ascertain the work required but if in possession, we can quote.  

Need to speak to a tax expert about the Contractual Disclosure Facility or any other tax issue contact a member of the team