The start of a new tax year is an exciting time for investigators. The flurry to conclude investigations has passed and the time to start new ones has started. This will include issuing of Code of Practice 9 (COP9) notices, which generally happens for existing enquiries where HMRC suspect serious fraud and the taxpayer isn’t coming clean. COP9 may also be issued where there are no existing enquiries, although rarer.
Where HMRC suspect tax fraud or evasion they can pursue matters either via a criminal prosecution or along civil lines. If HMRC uses a civil process, the investigation will be conducted in accordance with COP9. HMRC don’t issue COP9 without first obtaining a considerable amount of information and identifying with significant justification serious tax irregularities. Furthermore, an investigation under COP9 will be run as if it could proceed towards prosecution; behind the scenes criminal investigators and lawyers will be involved.
COP9 investigations are usually carried out by HMRC specialist investigations staff (Special Investigations “SI”, or Civil Investigation of Fraud “CIF”), which is an indication that it believes significant amounts of tax may have gone unpaid.
Once HMRC issue COP9, they will offer an opportunity for the individual to disclose the nature of the tax fraud. This offer is known as the Contractual Disclosure Facility (CDF) under which there are only two options: co-operation (admit to the fraud) or non-cooperation (ignore the CDF).
If a taxpayer decides not to cooperate, HMRC has the right to begin a criminal investigation into their affairs with a view to prosecute. They have the right to obtain information direct from third parties, raise tax assessments and charge much higher penalties than under the CDF. HMRC is not obliged to tell a taxpayer if they have started a criminal tax investigation; legal proceedings could be brought to secure a charge over the taxpayer’s assets with a risk of imprisonment.
If a taxpayer accepts the terms of the CDF, they need to submit an outline disclosure to HMRC within 60 days. It needs to be an honest description of the tax irregularities and should set out the series of events that led to the fraud, the amounts involved and the records available. HMRC will then agree not to carry out a criminal investigation into the amounts and events mentioned in the outline disclosure – it may still start criminal investigations into any other tax irregularities it uncovers that were not mentioned in the outline disclosure.
Where the nature and extent of the tax fraud is straightforward, it may be possible to conclude without preparing a formal disclosure report. However, in most cases, a detailed report will be required to explain how the fraud has been committed and how the tax liability has been calculated. The disclosure report should be prepared with exceptional care by an specialist given the risk of significant penalties and prosecution.
HMRC will generally desire a meeting with the person under investigation to discuss the scope of the outline disclosure report and the fraud involved. Attendance is not compulsory although demonstrate an engagement with the process. It is not always appropriate to hold a meeting and it may be sufficient for HMRC just to meet the specialist adviser.
There are inherent complexities in the calculation of tax liabilities over a prolonged period. A disclosure spanning two decades may be affected by legislative changes as well as various case law. It is possible that each transaction or investment could have a tax implication (or be challenged as having one). These issues coupled with the potential negotiations with HMRC in respect of interest and penalties means that HMRC’s suggestion to “seek specialist independent advice” is well-placed.
In all cases the taxpayer will be required to provide a certified statement that they have made a full, complete and accurate disclosure of all tax irregularities. This allows HMRC to review the liabilities and understand the reason for the irregularities; without this information they are not able to agree settlement (including interest and penalties).
Whilst the initial disclosure can be relatively quick, the analysis of primary information and preparations of the associated report and calculations can be time-consuming. The expectation of the individual and HMRC need to be managed to ensure ‘full cooperation’ is maintained throughout the process.
The CDF route may also be appropriate in cases of voluntary disclosures of tax fraud because it offers protection from prosecution. Someone wanting to regularise their tax affairs may request a specialist adviser to approach HMRC and request COP9. Often this approach is done informally and a discussion is held with the officer responsible for issuing COP9. After the discussion a formal request can be made. This approach allows the taxpayer to best present the facts and tax liabilities whilst mitigating the potential penalty position.