HMRC’s Fraud and Investigation Service are responsible for issuing Code of Practice 9 as part of the Contractual Disclosure Facility. COP9 sets out HMRC’s position in relation to the Contractual Disclosure and their process investigating suspected serious fraud. The letter is an invitation to take part in the Contractual Disclosure Facility:
‘I am writing to you because I have reason to suspect you have committed tax fraud. I enclose a copy of Code of Practice 9 (COP9).’
HMRC form their reason to suspect tax fraud based on information in their possession. They gather information from many sources including other government bodies and third parties such as financial institutions, digital wallets, merchant facilities, online platforms, insurers, auctions, overseas tax authorities and property agents to name a few. They also have the capability of comparing the profiles of taxpayers and their businesses.
Leading up to the issue of COP9, HMRC may have undertaken some enquiries through a self-assessment enquiry, a PAYE or VAT audit. The enquiry may not have appeared significant although HMRC would have used the opportunity to gather information.
Even where an informant alleges to HMRC that a person is committing tax fraud, HMRC won’t solely rely on that information. They will always obtain information from many different sources to ascertain the appropriateness of issuing COP9.
In summary, if someone is issued with COP9, it is highly likely that they have committed a deliberate act to suppress their exposure to tax and HMRC are aware of it. You may wonder why HMRC don’t simply confront the taxpayer about the potentially known irregularity. HMRC use the process of COP9 to effectively work out how naughty the taxpayer is. For example, if the taxpayer does not come clean, HMRC will either seek higher penalties or prosecute. If the taxpayer does come clean and co-operates to conclude HMRC’s investigation, they will seek lower penalties – although some HMRC officers still don’t appear to know how penalties are calculated!
HMRC under COP9 invite the taxpayer to:
‘make a disclosure of all losses brought about by your deliberate and non-deliberate conduct.’
For most, accepting an act is deliberate (intently done) is difficult. However, there must be a deliberate act or the protection from prosecution under COP9 would not be required (or COP9 issued). It is important to analyse the acts that may be deliberate and those that are non-deliberate ahead of making the initial disclosure. HMRC may be wrong, and all acts may be non-deliberate. This is unusual and in over two decades and over a thousand COP9 cases handled, only two have turned out to be a result of non-deliberate behaviour.
From the date of receiving the letter, the taxpayer has sixty days to accept whether to make a disclosure under the CDF. COP9 envisages two different situations: Accepting or rejecting to make a disclosure. There is also the option of simply not responding:
‘If you fail to tell us one way or the other, we will take that to mean you have made a conscious decision not to accept the offer, and we may start our own investigation, which could be a criminal investigation.’
Accepting to make a disclosure involves completing the appropriate forms enclosed with the letter. The forms will not be accepted if they are unsigned, amended or if both the acceptance and rejections forms are returned.
‘If we receive the CDF contract and you have not signed it, we will treat this as if you have rejected the offer and we will proceed with our investigation into your tax affairs.’
In return for making an admission of all tax losses brought about by deliberate conduct, completing the outline disclosure within the timeframe, co-operating and making a formal disclosure of tax irregularities, HMRC will not start a criminal investigation brought about by the deliberate conduct disclosed in the outline disclosure.
The outline disclosure form accompanying the letter requests details of any payments on account, a description of the deliberate conduct, the individuals and entities involved, the period over which the conduct took place, the approximate amount of tax owed, records available, other relevant information, and details of any non-deliberate tax irregularities.
Whilst it is important to accept the behaviour that is deliberate, it is equally important when making the initial disclosure not to simply accept all behaviour as deliberate. Ahead of making the initial disclosure, advice should be sought to ascertain the acts that need to be included within the form along with ascertaining which of those acts are deliberate and non-deliberate. Errors within the initial disclosure could result with HMRC undertaking a criminal investigation or having more difficulty later when negotiating penalties!
Inevitably during the review of information potentially stemming two decades, further items requiring disclosure may be identified. The initial disclosure should therefore be drafted to catch specific known irregularities but also broad enough to encompass the unknown.
The information HMRC provides stresses the importance of appointing a specialist adviser with experience of COP9 disclosures. Furthermore, most professional bodies state in relation to enquiries and tax investigations, a member without experience should involve a specialist.
The acceptance letter issued if HMRC are agreeable to the initial disclosure state:
‘We may start a criminal investigation, with a view to prosecution, for any tax losses that you have not:
- Included in your Outline Disclosure
- Admitted were caused by your deliberate conduct on your Outline Disclosure’
Assuming acceptance is given, HMRC will request a meeting to discuss the disclosure with a taxpayer. There is no legal requirement for a taxpayer to attend a meeting although doing so can be beneficial for both HMRC and a taxpayer. There are also going to be occasions when a meeting would be inappropriate. If a meeting is to be held, the specialist adviser is likely to run a mock meeting with their client to prepare them for what can be an intensive few hours. We would always request an agenda as well as specific questions, although unsurprisingly HMRC don’t like to provide specific questions (although state this wish to work collaboratively). HMRC will view attendance at the meeting as being cooperative although depending on the officer handling the case, the meeting could be staged to challenge the taxpayer, identify facts that could confirm a behaviour, manipulate confirmation of facts resulting in leverage for higher penalties.
The meeting is referred to as an ‘opening meeting’ and the HMRC officer will run through a formal process seeking confirmation from the taxpayer that they understand the seriousness of the CDF and the risk to prosecution. The officer will be accompanied by at least one other officer and likely another two officers. The other officer(s) are present to help make an accurate recording of the meeting. The other officers could be specialists in a particular tax field and/or a senior officer who is overseeing the case. For the client the meeting will feel like an interview under caution.
‘X said that he and his colleagues would be making notes of the day’s meeting and that two copies would be sent to X1 and X2. X asked that one copy be returned signed and dated, with any comments or amendments to be made on a separate page.’
Meetings with HMRC need to be handled with care and if answers to questions are given, they should be accurate or accompanied with a statement that the accuracy will be checked, and the facts included within the disclosure report if appropriate. If HMRC are given an unqualified answer, that answer could be used to determine the behaviour of the taxpayer or the tax treatment of a certain transaction. A specialist adviser will be comfortable interjecting answers as well as steering the meeting, hopefully to a conclusion within a reasonable timeframe.
The opening meeting is useful for an adviser used to handling disclosures. The meeting can provide a sense of how the officer likes to operate. It can indicate where HMRC’s main concerns are, although an adviser is likely to establish more in a subsequent scoping meeting. Scoping meetings tend to follow the initial meeting or be held shortly after and have the purpose of agreeing the period of review for the disclosure report and the main areas to be considered.
A specialist is unlikely to agree to their client or them signing a copy of the notes and returning them to the officer. Instead, they are likely to confirm they will write to the officer with any comments they have.
A letter issuing Code of Practice 9 is the commencement of a process that can easily become all-consuming for a taxpayer. Most will fear the risk of prosecution and at the same time the potential quantum of tax, interest, and penalties they may have to pay. The client will need to obtain records some of which they will no longer possess. They may need to make a request to third parties, such as banks. The preparation of a detailed report covering up to the past twenty years must cover both deliberate and non-deliberate acts. The report will inevitably be extensive covering the client’s personal history, business history, relevant transactions, technical analysis, quantum of tax liabilities – income tax, corporation tax, VAT, PAYE, NIC, Stamp duty and SDLT! The purpose of providing personal and business history is to enable the presentation of relevant factors that could have influenced the reason for a tax irregularity. It can help prepare for reasonable excuse arguments or defending why an act was non-deliberate. The job of the specialist is to prepare the report to enable a settlement to be entered, which keeps the tax costs to its lowest and mitigates penalties as far as possible and reduces the burden to the client so they can get on with their life.