COP9 and Criminal Investigations

We were happily getting ready for the summer months: we continue to churn out work without the phone ringing as much whilst others holiday (Holidays are often considered a good reason to defer paying our fees until September – not true). However, something rather sinister has happened over the past two weeks.

Firstly, there has been an unprecedented number of Code of Practice Nine (COP9) cases issued and finding their way to us. Secondly, the opening of those cases under COP9 compared to what has been historically been the case is a little unusual. If you are subject to or have clients who are (or could be) subject to an enquiry, I encourage you to read on.

COP9 is issued where HMRC suspect fraud. That suspicion is founded on evidence obtained from information in HMRC’s possession (see our article: HMRC’s Connect). In addition, inspectors managing COP9 cases will have access to HMRC’s Connect software system.

Connect has access to more than 1bn records from taxpayers and third parties. Information includes income, interest from bank accounts and other sources, taxes paid and unpaid, land registry information, border agency information, business ownership, accounts and data from tax authorities in other countries. The software uses analytics to spot connections that show true level of income and spending that can reveal tax irregularities.

Why are so many cases being opened now when over the past few years very few COP9 cases have been opened? The following reasons spring to mind:

1. We predicted last year that enquiries would, as a result of HMRC taskforces moving to the South West and Wales, increase
2. HMRC have been reorganising investigation teams throughout the UK pooling specialist investigators, tax specialists, criminal investigators and litigators to tackle tax evasion
3. The targets for criminal prosecutions have significantly increased
4. COP9 may be a prelude to criminal investigation

The cases we have seen are a little unusual in that accountants were handling tax enquiries in a manner that would appear to be rather satisfactory. The issue here must be that HMRC know something and believe the accountant doesn’t and that the taxpayer is not going to cooperate whilst the enquiry appears to be managed very well. This theory is supported by the fact that HMRC have considerable information in their possession and accessible through Connect.

In October 2014, HMRC published “Measuring tax gaps 2014 edition”, which is rather useful in establishing where they will consider making enquiries and potentially issuing COP9.

Tax gap by type of tax:

Tax gap by customer group:

It doesn’t take a genius long to establish that concentrated efforts should be allocated to businesses (both SMEs and Large) and income tax and VAT should be the subject of investigations. It would therefore be prudent to adopt a little caution where a VAT inspection is planned or enquiry opened.

Whilst an educated guess points towards areas of tax risks, a client shouldn’t simply assume that HMRC won’t know or find out about another irregularity. HMRC do not inform a recipient of COP9 what their suspicions are because it is for that recipient to choose to make a full and complete disclosure. Where the recipient chooses not to cooperate, HMRC will investigate and may:

• Investigate with a view to criminal investigation
• Obtain financial and business information from third parties
• Take action to protect the Revenue including:
• Assess the tax they consider due
• Commence legal proceedings to secure assets
  o Seek financial security against certain unpaid taxes and duties.
• If irregularities are proven, it is likely to attract higher penalties as a result of the lack of cooperation

Under COP9, the Commissioners of HMRC reserve complete discretion to pursue a criminal investigation with a view to prosecution. The recipient of COP9 has the opportunity to make a complete and accurate disclosure of tax irregularities: those arising from deliberate and non-deliberate conduct. HMRC reserve the right to start a criminal investigation where there is a failure to make a full disclosure, or materially false or misleading statements are made or false documents provided.

Under COP9, HMRC offer the chance to make a full disclosure under a contractual arrangement called a Contractual Disclosure Facility (CDF). Those issued with COP9 have 60 days to respond once an offer is made. If a full disclosure is made, HMRC will not pursue a criminal investigation with a view to prosecution.

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