COP 8/9 Frequently Asked Questions

In relation to a code of practice 8 or 9 investigation, you do not have to attend a meeting with HMRC. However, not doing so can be detrimental so your approach needs to be considered very carefully. Below we set out HMRC’s view on the need for and attendance at meetings.

HMRC state:

“If you decide to co-operate with us, we regard attendance at meetings as an important part of that co-operation. Meetings give us both a chance to ask questions and clarify points as the investigation progresses.

Once you have provided your Outline Disclosure, Denial Letter or you have done nothing and the sixty day period has passed we may ask you to attend a meeting. We will explain the purpose of the meeting provided we are proceeding with a civil investigation.

We view attendance and your full cooperation at these meetings as a strong indication of your engagement with the process. This will help to reduce the level of any penalty that may be due.

We may use what you say or any information you provide at a meeting in assessing your liability to tax or to a penalty. We may also seek to give evidence of this in any appeal proceedings, or disclose the information to other organisations where appropriate and lawful.”

You may have good reasons for not wishing to attend a meeting or it may not be in your interest to do so. If this is the case, carefully evaluating your reasons and conveying them to HMRC may prevent your non-attendance from being detrimental to your position.

Where you decide to attend a meeting with HMRC, you will need to ensure that you are fully prepared. You will need to anticipate potentially difficult questions and identify your answer. It is possible that your answers to questions will give rise to further enquiries and both the suitability and approach of extended responses needs to be considered.

It may be that you are unable to give accurate responses to questions at the meeting and deferring to a later response on certain points may be appropriate. This response may seem uncooperative although HMRC are likely to agree it is not where good reasons for deferring a response can be given.

Attending meetings can be a very useful tool for understanding exactly what HMRC are thinking, however they can also cause issues where you unable to present the facts of your cases accurately. A good relationship with your adviser is required so that they may guide you and handle such meetings with authority.

No, you do not have to deal with HMRC personally. Due to the serious nature of code of practice 8 and 9 it would be prudent to engage a tax consultant with relevant experience and of course with whom you can work.

You are responsible for your own tax affairs and inevitably managing a code of practice 8 or 9 will require your involvement. An experienced tax investigations consultant will know how to minimise the inconvenience to you and your family for prolonged periods of time as well as minimise your direct involvement with HMRC.

HMRC state:
“We recommend that you approach a professional adviser to represent you during our investigation although, again, this is a matter for you.
Your adviser can accompany you to all meetings with us. They may also correspond with us on your behalf.
We make notes of all meetings and you or your professional adviser can ask for copies at any time.
You may change or stop using a professional adviser at any time.
You should give your professional adviser all the facts because you are personally responsible for your tax affairs and the accuracy of any information supplied to us.
We expect high standards from professional advisers. We will normally deal with your adviser but if there are delays or difficulties, we might deal directly with you.”

If you have committed a tax fraud then, yes, you can be prosecuted. Tax fraud or tax evasion is the illegal manipulation of ones affairs so as not to pay tax or to defraud the Revenue in other ways (i.e. falsely claiming benefits etc.).

Seeking tax advice or undertaking tax planning does not always amount to tax evasion. If however, the actual intent is to defraud the Revenue and the only reason why the “tax planning” works is because you (even on receipt of advice) have stretched the circumstances or meaning of the law, it could amount to tax evasion.

It may be that you have acted on tax advice and had good reasons to rely on it and that advice has been incorrect or manipulated to fit your particular circumstances without you realising. Since the onus to ensure your tax position is correct is yours, there is a risk that even in these circumstances, you could be regarded as evading tax. However, it may also be strongly argued that your actions lacked intent and therefore do not amount to evasion.

A scenario in which prosecution is more likely is where you have been given the opportunity to disclose tax irregularities under code of practice 8 or 9 and do not make a full disclosure of all material irregularities. The risk of prosecution in these circumstances is far greater.

HMRC state:
“The Commissioners of HMRC reserve complete discretion to pursue a criminal investigation with a view to prosecution where they consider it necessary and appropriate.

Under the investigation of fraud procedure, the recipient of COP9 is given the opportunity to make a complete and accurate disclosure of all irregularities in their tax affairs.
Where the recipient fails to make a full disclosure of the tax frauds they have committed, the Commissioners reserve the right to commence a criminal investigation with a view to prosecution.

In the course of the COP9 investigation, if the recipient makes materially false or misleading statements, or provides materially false documents the Commissioners reserve the right to commence a criminal investigation into that conduct as a separate criminal offence.

If we discover that the irregularities have continued during the course of the investigation this may result in a higher level of penalty or a criminal investigation in relation to what you have done since being given this Code of Practice.

We expect your disclosure to cover all tax frauds you have committed. By tax fraud we mean any offence for which we have administrative responsibility and could commence a criminal investigation as part of our functions.

A person commits an offence if he is knowingly concerned in the fraudulent evasion of tax or duty, by him or another person.”

HMRC can obtain information from a variety of sources.  Methods of collating information include accessing publicly available information and the issuing of informal and formal requests.  

Information may come into HMRC’s hands from a variety of sources and they may receive it unbeknownst to you.  Public sources include companies’ house, land registry, electoral roles, social media sites, web forums and newspapers to name but a few.  To the trained eye, the information contained in these sources can often reveal a good deal about the activities of individuals and businesses sometimes prompting the seeking of further information.

Where HMRC are suspicious of tax irregularities, they may gather information through routine compliance visits (VAT and PAYE) or self-assessment enquiries.  

A prime facet of the legislation is that the information must be reasonably required to check the tax position of the individual.
This partly links back to the fact that it can only be reasonably required if it relates to a tax position and “reasonably required” (once it has been established that it relates to a tax position) is getting the balance right between:

• The burden put on someone to provide the information
• How important the information is in deciding on the correct tax position

HMRC will only issue code of practice 8 and code of practice 9 where they have a reasonable amount of evidence in their possession to suspect that there are significant tax irregularities. The process by which HMRC obtain the information that initially gives rise to suspicion varies although, it would be sensible to assume they are in possession of information that makes it practical for them to investigate your tax affairs in more detail. HMRC takes a commercial approach to investigating taxpayers due to limited resources available to undertake such reviews.

Once HMRC has a suspicion that an individual or business has underpaid tax liabilities, they can utilise their wide range of powers and tools in order to analyse a taxpayer’s affairs, often without them knowing. Some of the tools are specialised for example, HMRC has invested in a computer system with the capability to analyse information on transactions, including trading profits and disposals of assets allowing HMRC to easily collate this information to assist in identifying tax irregularities.

It could be that differences found between your accounting records and those of similar businesses has led to a wider review and a social media site represents you as someone wealthier than those accounting records might suggest.

Another tool often used to assist in identifying irregularities is a routine VAT or PAYE inspection. Most businesses would never consider that a routine inspection might be an information gathering exercise especially where those inspections appear to have resulted in little or no findings. Although, wouldn’t it be strange if a wider investigation followed within a few months or a year of a routine inspection?

HMRC also have the ability to request information from taxpayers and from certain third parties. For example, in relation to rental properties, HMRC has the power to issue a demand to any tenant, compelling them to inform HMRC how much rent they pay and to whom it is paid. This information would naturally be compared to the landlord’s tax return. In addition, it is relatively easy for HMRC to obtain Land Registry and housing benefit records, which could all be used to identity whether income has been suppressed. HMRC can also review local papers or the internet to find details of house sales and historic house sale prices making it easy to identify gains realised on property.

HMRC also employ more generic tools including web-trawling software as well as utilising publicly accessible information such as that available on Companies House, the Land Registry and social media sites.

Press articles and media coverage have long been used by HMRC as the starting point for further investigation into an individual’s affairs. Press coverage is not limited to high profile celebrities and could be something as simple as an article on the intended expansion of your business, which again is not something that correlates to the businesses’ financial records.

HMRC also receives a significant amount of information from informants, disgruntled third parties, who are most commonly: business associates, ex-employees, and ex-spouses (partners).

Ahead of a standard enquiry into a tax return, little may have been done to identify a more severe tax irregularity. However, tools available to HMRC are likely to have identified you as being high risk, for example having more complicated tax affairs or the type of business is more prone to tax irregularities. Often an enquiry will result in a modest adjustment to the tax position (and sometimes even a repayment). However, where the recipient of an enquiry has a larger tax irregularity, it would be more prudent to consider whether HMRC are aware of something potentially more serious and of course review the tax position and the advantages of making a complete disclosure.

Unsurprisingly, you should make a full and complete disclosure of any tax irregularities to HMRC. Given the complexity of tax law, you may not be aware of all those irregularities and it is sensible to engage a professional to work with you to consider your exposure and risks.

Certain disclosure facilities consider only a specific period in time. Code of practice 8 and 9 may require consideration over a longer period of time. In the event of fraud HMRC may look at a period of up to twenty one years and therefore a certain skill is required to forensically establish and disclose the tax position over potentially long periods of time.

At the outset of a disclosure, the parameters of that disclosure can be agreed with HMRC. The parameters may identify a particular period of time under review as well as the areas of review. However, if there are known irregularities, these should be disclosed. It is sensible for you and your adviser to identify what needs to be disclosed ahead of any representation to HMRC in order to protect you from the consequences of not making a full and complete disclosure.

A disclosure report should contain the following:
I. A transmittal letter accepting the contents of the disclosure
II. A statement of bank accounts operated
III. A statement of assets and liabilities
IV. Quantification of tax irregularities
V. A detailed personal and historic background
VI. A technical analysis of the tax treatment (in particular where HMRC could provide a counter arguments)
VII. Evidence of the tax position (bank statements and other available primary evidence)

Intentionally not disclosing tax irregularities will put you at significant risk of criminal prosecution. The likelihood of prosecution is enhanced where the items not disclosed are material or that the “offensive” behaviour continues even in a new form.

A reputable adviser will only represent you where you are willing to make a full and complete disclosure within the parameters of a disclosure facility or those agreed with HMRC.

Your view of an innocent error may not be shared by HMRC. It is for you to ensure that you are paying the correct amount of tax and the onus to do so lies with you.

Where planning has been implemented on advice and that advice has been overly optimistic, it is your adviser’s responsibility to present the facts clearly to HMRC. Whilst there is no guarantee that you will be regarded as innocent, the facts and circumstances surrounding your entrance into arrangements to mitigate tax may assist in reducing your overall exposure. Each situation will have to be considered in light of the facts and your adviser will need to consider how to best represent you to HMRC.

Most routine tax enquiries are opened because you have been identified as being high risk, for example having more complicated tax affairs, where there is a greater possibility of errors occurring.
More serious investigations are opened because HMRC has come into possession of some information that identifies that you have tax irregularities. That information could come from a number of sources including:

• Analysis of available data on you and your business (this is generally automated by computers and clever software in HMRC’s possession)
• Poor and repeated poor tax compliance
• A routine PAYE or VAT inspection
• Review of another person’s tax affairs which you are linked to
• Exchange of information from offshore jurisdictions
• A disgruntled business associate, spouse, partner, lover or ex-lover, or employee
• Your media or social media presence

Yes, any enquiry can escalate where errors or anomalies arise that were not originally suspected or discovered.

HMRC may undertake a routine enquiry where they have evidence of an actual tax irregularity or they suspect one. It is important that even routine enquiries are handled carefully and with an element of suspicion, bearing in mind that HMRC may be fishing for more information. The exercise of information fishing is not normally detected by the untrained eye as often it is assumed that HMRC are entitled to all of the information they request. Sometimes when HMRC are information gathering, they will ask for information that they are not entitled to or is not necessarily relevant to the enquiry being conducted. A tax investigation specialist will be able to identify whether it is likely HMRC’s enquiries are going to escalate.

The incorrect suspicion of an irregularity by HMRC can also result in more involved enquiries and inevitably more time spent dealing with them. In these situations, a specialist adviser should be able to assist you to confirm there are no irregularities and manage HMRC accordingly.

Tax legislation provides that you must keep certain books and records to support your or your business’ tax returns. Broadly, records need to be kept as follows:

• To support an individual’s tax return, records need to be kept for twenty two months from the end of tax year unless you are in business or letting property, in which case you need to keep records for five years and ten months
• Companies need to keep records for six years following the end of the accounting period; failure to retain records can result in penalties

In the absence of records, there are number of methods with which to forensically build a clear picture of transactions undertaken. Normally most transactions can be identified by obtaining bank information, which banks normally keep for ten years or more. As such, bank account information for a long period of time is available to an account holder (or ultimate beneficial owner). HMRC also have methods and powers to obtain information directly from UK and overseas banks.

An absence of records or willingness to have records reviewed will be considered to be a lack of willingness to cooperate, which may result in increased penalties and/or likelihood of prosecution. It is far better to have your specialist adviser review available records and present information to HMRC within a disclosure report.

You don’t have to cooperate with HMRC’s enquiries or investigation into your tax affairs although, not doing so could result in HMRC taking a more penal approach against you.

Lack of cooperation can result in increased penalties and possibly encourage the escalation of an investigation to prosecution. What is important is that your adviser understands what is reasonably to be expected of a “cooperative taxpayer” in your circumstances and manages HMRC’s expectations and understanding of cooperation. There could be many reasons why information is sensitive, unavailable, takes longer to collate or why a meeting is not appropriate. It’s in your best interest that your adviser has a good understanding of cooperation in HMRC’s eyes is and is proficient in corresponding effectively with HMRC.

If you are facing a code of practice 8 or 9 investigation, or wish to make use of a contractual disclosure facility, you should engage a specialist adviser to manage representations to HMRC.

Additionally, where your tax affairs are complicated, involve offshore structures or the transfer of assets/funds overseas intended to give rise to a tax advantage which you suspect is wrong or has failed, it is also highly likely you should engage a specialist adviser.

It is likely that your daily professional advisers will not be familiar with tax investigations or disclosures and they would prudently suggest you seek specialist advice. We specialise in tax investigations and disclosures and do not seek to provide compliance services such as accounts preparation or tax returns. We are therefore unlikely to be conflicted with your existing advisers and this will often assist our interaction with them to resolve your tax issues efficiently.

HMRC state:
“We recommend that you approach a professional adviser to represent you during our investigation although, again, this is a matter for you.
Your adviser can accompany you to all meetings with us. They may also correspond with us on your behalf.”

If you are subject to a code of practice 8 or 9 investigation, HMRC will seek to request payments on account. It is sensible to make payments on account where tax liabilities are known or can be qualified. Making payments on account will demonstrate to HMRC that you are proceeding towards bringing your tax irregularities up to date. They will also assist to limit the exposure to interest.

The quantum of payments on accounts needs to be considered. If tax irregularities are considered to give rise to a significant liability and only a small payment on account is made, HMRC may not consider that a willingness to rectify tax problems has been demonstrated. If however, you do not hold cash or assets are not realisable easily, no payments on account (for the time being) or small regular payments on account may be agreed.

Once a tax liability is clearly identified, it and penalties will be offered to the Board of Commissioners. The tax liability will carry interest. Once accepted, payment is agreed by a specific date. Alternatively, if your circumstances warrant payments over a period of time, HMRC will normally be agreeable to this.

The affordability of historic tax by those subject to an investigation is a common problem. In particular, those that have implemented tax planning to defer the liability which is then successfully challenged may not have funds readily available. Also, you may have invested funds and asset value may have fallen or the assets are difficult to realise.

Where the person making a disclosure is unable to pay the tax, interest and penalties it may be possible to enter into a time to pay arrangement with HMRC. Each arrangement will be subject to consideration of:

• Why you cannot pay
• What you have done to try and raise funds to meet your liability
• The proposal for payment
• Assets available
• What changes are being made or action taken affecting affordability

Any proposed pay arrangement needs to be considered carefully and be achievable. Specialist assistance will be needed to prepare a proposal to HMRC in respect of Code of Practice 8 and 9.

The penalties HMRC can impose have become onerous and complicated. There are specific penalty provisions for contractual disclosure facilities, which are generally more favourable. Code of practice 8 and 9 set out the penalty regime, which can be mitigated through factors affecting the quality of the disclosure you make, your cooperation and the seriousness of the tax irregularity.

From 6 April 2011, increased penalties are levied where there is:

• A failure to notify
• A failure to file a return
• An inaccuracy within a return involves an offshore matter

Under these new rules the maximum penalty can be up to 100%, 150% or 200% of the potential lost revenue depending on a number of criteria.

As mentioned above, penalties can generally be reduced dependent on your disclosure, your cooperation and the seriousness of the tax irregularity.
In respect of direct taxes (i.e. income tax, corporation tax, CGT and IHT), HMRC should consider the following when calculating penalties:

• Disclosure: a reduction of up to 30% for full voluntary disclosure or up to 20% where disclosure is subsequent to an ongoing challenge by HMRC.
• Co-operation: a reduction of up to 40% is possible where your disclosure is carefully managed, which will include supply of information quickly, attendance at meetings/interviews, providing honest and accurate answers to queries, providing all relevant facts, and paying tax on account. It should be noted that where there are mitigating factors for non-attendance at meetings or delays to provide information in order to be accurate, HMRC should take these factors into account.
• Seriousness – a reduction of up to 40%. This reflects the seriousness of the tax irregularities and is arguably subjective for each case. Factors such as provision of advice in relation to transactions should be considered when negotiating the level of mitigation.

In respect of indirect taxes (i.e. VAT , stamp duty and SDLT), HMRC should consider the following when calculating the mitigation of a penalty from the 100% maximum:

• up to 40% for the early and truthful disclosure
• up to 40% for cooperating 
• in exceptional circumstances HMRC will consider giving a further reduction, where you have made a full and unprompted voluntary disclosure

HMRC will not simply negotiate a settlement. Your disclosure needs to be prepared based on facts and supported with primary evidence to demonstrate your tax position accurately. You and your adviser's approach towards making a tax disclosure, as well as the managing of relations and presentation of your tax position can significantly assist in negotiating a settlement with HMRC.

Often the passing of time affects the amount of primary evidence available to support a client’s tax position and it is necessary to consider alternative methods to robustly present the facts. In these situations experience and the ability to agree a workable methodology with HMRC is essential to resolving the irregularities.

Where there are tax grey areas, then specialist tax technical knowledge combined with experience of handling tax disclosures will be pivotal to achieving a mutually agreeable compromise.

You won’t simply be able to negotiate your way out of a tax investigation, however you will benefit from skilled representation and you will make the negotiations easier by cooperating with the disclosure process.

The onus of proof that your tax position is correct lies with you. This basically means that you need to be able to defend and present your position to HMRC. Where HMRC have opened an investigation under code of practice 8 or code of practice 9 it is only done once they have either come into fact or have reasonable grounds for suspecting a serious tax irregularity.

It is therefore important to present the facts carefully to HMRC in order to mitigate your exposure where you have either:

• Not done anything wrong
• Unknowingly made an error
• Acted on advice

It is equally important to manage a disclosure to HMRC where someone has purposely not declared income or gains for tax purposes. Whilst the circumstances may be considered initially as more severe, the reality is that a good deal can be achieved from managing the disclosure and demonstrating cooperation.

If there are tax irregularities, your business could be significantly affected as they may impact on its cash position now and in the future. However before calculating the tax irregularities the following needs to be undertaken:

• Identify the tax liabilities
• Agree those liabilities
• Agree the payment of those liabilities whether immediately or over a period of time

The above may sound simply although, due to the care that needs to be exercised in order to ensure your disclosure is accurate and the need to access primary information, it can take a considerable amount of time. Your adviser should be structured in a manner that allows this work to be thoroughly and systematically undertaken in a timely manner.
Whilst the above is being considered and if there are known tax liabilities within a business, it is prudent to make payments on account to HMRC which prevents the accumulation of interest and demonstrates a willingness to rectify the tax position.

A business can also be affected by the time allocated to dealing with and the inconvenience caused by an investigation. Where it is agreed to approach a HMRC investigation alongside experienced professionals, they should be able to significantly reduce the exposure you and your business has to potential disruption. Whilst you may have to assist with either the provision of information or mandates to your adviser to allow them to obtain information directly from third parties, the disruption is likely to be minimal when compared to the potential plethora of exhaustive communications from HMRC.

It is unlikely that your tax affairs will become public knowledge especially if you choose to and make a full and complete disclosure of any tax irregularities. The confidentiality and professionalism of your advisers is very important in protecting your reputation. For example, where a specialist adviser telephones your business and leaves their name, it wouldn’t be unusual for a receptionist or assistant to search the internet (maybe quite innocently) for details – what would they think discovering a tax investigation specialist contacting you? To avoid such situations, the parameters of engagement will need to be considered thoroughly at the outset.

If you are already in the public eye, it is possible that your affairs will be looked into by investigative journalists and the like. Where possible, carefully prepared responses can help diffuse the attention and your specialist tax adviser should work with your media consultants to manage the press and at the same time reduce HMRC’s interest!

A tax investigation or disclosure can place considerable indirect pressures on a family (and direct if they are a secondary subject of a disclosure). Often the family will not be aware of the intricacies of the business, family finances or aware of relationships that have led to HMRC’s attention.

Where a tax investigation and resultant settlement are going to affect the family lifestyle, an enormous amount of anxiety and stress can upset family relations. Also, where a family member wishes to deal manage the position with HMRC without causing a disturbance to the wider family, a high degree of professionalism needs to be adopted. You should consider your wishes ahead of engaging an adviser and ensure they are familiar with acting in sensitive situations and aware of your desires for full confidentiality and procedures for communication. These simple steps can assist to cause as little disruption to the family as possible.

If you feel that you have been directly or indirectly involved in something that HMRC are going to be significantly unhappy with then the simple answer is, yes.

It has to be noted that over the past decade or so, what had previously been considered acceptable practice in the market has altered and as such any review of either your personal tax planning or that undertaken for clients’ needs to be considered carefully. HMRC are likely to take matters more seriously where they believe that a professional person (accountant, solicitor, wealth manager or tax adviser) has intentionally caused a loss to the Revenue. Whenever a professional is subject to increased HMRC attention, it is always advisable they seek independent specialist advice.

Many tax “schemes” offer what appears to be significant protection in the event of HMRC enquiry or investigation. However, in reality it is unlikely that this protection will be adequate to support a full investigation and regardless of the support of the promoter or provider, your tax affairs are still your responsibility.

The fact that you have received advice may be of assistance when considering the seriousness of any tax irregularities. Furthermore, that advice may offer useful angles with which to rebut HMRC’s challenges. However, the obvious issue with tax schemes is that they are normally undertaken for tax avoidance purposes. That in itself causes a number of problems since many transactions undertaken for tax avoidance have a nil effect for tax purposes.

Despite what may appear to be negative comments, a number of transactions that have been promoted do legitimately work for tax purposes. The difficulty HMRC and advisers alike may have is separating what is a “scheme” without commercial intent and what is a “transaction” with commercial intent.

Each situation needs to be considered in regards to the specific circumstances and your adviser will need to be technically competent in these areas as well as having extensive experience with HMRC investigations.

The time parameter for a Code of Practice 9 disclosure will normally be six months although this is subject to the complexities of the particular case.

Historically, tax investigations and disclosures could take several years to conclude. This is no longer the case and HMRC desire a much quicker resolve to tax irregularities. It is generally considered much better to work efficiently towards identifying, presenting and negotiating tax irregularities.

Your experienced adviser, in possession of the facts, will normally be able to estimate and provide a timeline of your disclosure at the early stages of an engagement.

The fact that you have been subject to a serious investigation does not automatically result in you being a future target for an investigation. However, where for example you have been issued with code of practice 8 or code of practice 9, there is a significant prospect that your tax affairs will be risk monitored for a number of years following the conclusion of that investigation/disclosure. It is also likely that your disclosure will be tested post submission to HMRC.

In the event that your disclosure is found to be materially inaccurate, there is a significantly higher risk of HMRC seeking criminal prosecution.