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Contractual Disclosure Facility

In the run up to Christmas we would normally see an increase in the number of enquiries opened by HMRC (thanks Santa). Given the depleted coffers, the missed HMRC targets, and the prevalence of suspected furlough fraud it is unlikely this year will be any different. Below we set out what a taxpayer might expect from a civil investigation under the Contractual Disclosure Facility and what can be done to mitigate the risk of prosecution.

By admin
15 Oct 2021
Manage Tax Risk

In a recent newsletter highlighted the stark reduction in civil investigations opened by HMRC during the course of the pandemic. Between 1 April 2020 and 31 January 2021 HMRC opened 278 COP9 enquiries, down from 425 in the 2019/20 tax year. Even accounting for the shorter period, that’s a 22% reduction. However, all evidence indicates that the number of enquiries may be about to crank up a notch or two.

The investigations, known as Code of Practice 9 (COP9) are opened where HMRC suspects that a taxpayer has committed serious fraud. Where HMRC opens an investigation under COP9, a taxpayer is invited to make a disclosure under the Contractual Disclosure Facility (CDF), a fraudulent taxpayer may also voluntarily request to make disclosure under the CDF if they feel its protections are necessary.

The CDF is a contract under which the taxpayer admits deliberate behaviour which has led to an underpayment of tax, agrees to make a full and complete disclosure of all irregularities, and pays the tax due. In return for this, HMRC agrees not to prosecute the individual for tax evasion.

In accepting CDF (and thereby admitting deliberate behaviour) a taxpayer is allowing HMRC to review the past 20 years of a their tax affairs, it is labour intensive and as such is not issued lightly. HMRC generally takes a commercial approach to investigating taxpayers, and CDF is not offered unless there is reasonable evidence to suspect significant irregularities. A taxpayer should therefore give serious thought (and perhaps a discussion with an advisor) before considering rejecting an offer of CDF.

HMRC use software that allows them to connect information from a myriad of sources such as banks, land registry, companies house, employers, and electoral rolls. They also have powers to make informal and formal requests from third parties, imposing fines for non-compliance. Furthermore, approximately 150 countries have signed up to the Automatic Exchange of Information and there is a disturbing amount of information readily available in the public domain.

The taxpayer has 60 days from the date of issue to confirm or reject the CDF. After this date HMRC will generally request submission of the full disclosure within six months. An effective method is in the preparation of a report which will require the review all primary documentation (bank statements, invoices, accounts etc) and preparation of tax computations. In some cases, the quantum of information can mean that this timescale is not realistic. HMRC should be kept up to date of progress throughout the process. Once the disclosure has been submitted there may be follow-up queries and potentially complex negotiations in which case, the full timescale can be much longer.

Occasionally HMRC may request a meeting and whilst there is no requirement for you to attend such a meeting, not doing so can affect HMRC’s perception of your co-operation unless reasons are carefully explained.

HMRC’s charter states that they must accept a taxpayer can appoint a representative. Due to the serious nature of the CDF it would be prudent to engage a suitable experienced tax specialist who can assist with your disclosure and attend the meeting with you. Ultimately it is the taxpayer who remains personally responsible for their own tax affairs and the accuracy of any information contained within the disclosure.

If HMRC suspects that the taxpayer has failed to make a full and complete disclosure, has provided materially false statements or information, or has failed to correct their behaviour in the course of the disclosure process they reserve the right to start a criminal investigation with a view to prosecution.

After submission of the report, HMRC may have further queries and there may be negotiations around the interpretation of the law and its applicability to a taxpayer’s affairs. Once these have been agreed and the quantum of liabilities has been finalised, HMRC will make proposals regarding their view of the taxpayer’s behaviour and the applicable penalty rate.

Penalties are applied with reference to the potential lost revenue (PLR) which is broadly the tax underpaid – by understating income, overstating expenses, or applying the incorrect treatment to a particular relief. The penalty rate is laid out in the relevant legislation and is determined by reviewing the behaviour of the taxpayer which has led to the underpayment. The maximum penalties for UK irregularities are:

  • deliberate behaviour with concealment: 100%
  • deliberate behaviour with concealment: 70%
  • failure to take reasonable care: 30%

Where the irregularities relate to offshore assets the penalty can be up to 200%.

By its very nature acceptance of the CDF confirms deliberate behaviour, although these can be mitigated where the disclosure is unprompted, and where you have co-operated fully with HMRC. Furthermore, the deliberate behaviour may not relate to all tax irregularities and where there are irregularities in respect of more than one form of tax it would be prudent to analyse the behaviours for each tax separately.

Where there has been an underpayment of tax, interest accrues from the original due date until the date of payment. Interest is charged at HMRC’s official rate which is currently 2.25% although has changes periodically in line with the Bank of England base rate.

Where a taxpayer has entered the CDF, HMRC will provide them with a SAFE reference by which payments on account (POA) can be made. Not only does making a POA reduce the future interest, it also demonstrates a willingness to co-operate with HMRC and bring tax affairs up to date. The quantum of the payments should be considered once an estimate of the liability has been calculated.

Provided a taxpayer has adhered to the rules of the CDF HMRC are usually willing to agree a payment plan. The taxpayer must demonstrate that they have made an attempt to raise capital either by way of a loan, or by the realisation of assets. A period of 12 months is normally readily accepted, although this is ultimately at the discretion of HMRC, and longer periods can be negotiated.
Following conclusion of the disclosure and agreeing settlement with HMRC the taxpayer may be included in a ‘managing serious defaulters’ list for a period of between two and five years. This list is not published, it is simply held by HMRC and allows them to monitor the tax affairs closely to ensure they remain compliant. Depending on the nature of the disclosed irregularities they may also impose additional reporting requirements in relation to tax returns and may open subsequent enquiries to ensure behaviour has changed.

Those contacting HMRC (for any reason) over the past eighteen months will not be unaware of the extensive delays in service provision largely as a result of the redeployment of employees to manage Covid-19 claims and enquiries. Now furlough has come to an end (and kids are back in school), it is likely these personnel will be able to return to their offices and normal service will be resumed. Just in time for Christmas. Yippee!

I has not gone unnoticed that over the past few years HMRC seem to take a strange delight in serving enquiry notices in the festive period. It is not expected that this year will be any different, particularly in view of the depleted coffers, the fact that (owing to redeployment) HMRC have failed to reach their targets, and the numerous headlines regarding furlough fraud. HMRC take tax evasion seriously (and some inspectors can be more bullish than others), if you would like an informal conversation about any of the points raised above, please do not hesitate to contact us.

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