When HMRC has reason to suspect a taxpayer has committed tax fraud, one of two actions is usually taken. Either the ‘fraud’ can be the subject of a criminal investigation with a view to prosecution, or the matter can be dealt with by HMRC in the civil arena under Code of Practice 9 (COP9) by offering the Contractual Disclosure Facility (CDF).
For an individual accused of tax fraud, avoiding criminal prosecution is usually the primary objective, but that is not to say that being the subject of a civil COP9 investigation is not a serious matter – far from it. When HMRC opens a COP9 investigation, they are not claiming errors have been identified as a result of carelessness, poor record keeping, or a misunderstanding of complex tax law; they are asserting a criminal offence has taken place. However, instead of prosecuting, they are offering the individual the opportunity to ‘come clean’ in exchange for immunity from prosecution.
Contractual Disclosure Facility
Under COP9, HMRC agrees to resolve the matter civilly in respect of the tax fraud perpetrated, if the person under investigation agrees to enter the CDF. This will require them to:
- admit to the deliberate behaviour (i.e. fraud) behind the loss of tax
- make a complete, open and honest disclosure
- reveal all irregularities in their tax affairs, not just those identified by HMRC
- cooperate throughout the investigation
- agree to pay the additional tax, late payment interest and a deliberate level penalty.
The immunity from prosecution only relates to irregularities specifically disclosed. If an incomplete or materially inaccurate disclosure is made, HMRC reserve the right to still pursue a prosecution.
Appointing an advisor
Navigating through the COP9/CDF process can be extremely difficult, and an individual who is the subject of a fraud investigation should always appoint a suitably qualified professional advisor. Similarly, advisros should not take on this kind of work without the relevant experience and expertise to handle it correctly. Paragraph 2.13 of the Professional Conduct in Relation to Taxation manual, produced and adopted by the AAT, ACCA, ATT, CIOT, ICAS, ICAEW and STEP, states:
“A member must not undertake professional work which they are not competent to perform unless they obtain appropriate assistance from a suitably qualified specialist.”
For a professional advisor, it is vital to understand that their primary aim is to manage a fraud investigation in a way that prevents it from becoming a criminal case, and this takes experience and complete understanding of the process. As well as potentially leading to the terms of the CDF being withdrawn, failure to do so can also have serious financial and reputational consequences for both the client and their advisor.
How does the CDF process work?
When HMRC offers a CDF, the recipient has 60 days to accept or reject the offer and (if accepted) make an outline disclosure describing the fraudulent activity, the years in which the fraud occurred, and an estimation of the amounts involved. HMRC will not grant an extension to the 60-day deadline, and so action has to be taken quickly to gather the information needed. It is vitally important that all fraudulent actions are described at least in outline, as HMRC are not obliged to offer immunity from prosecution in respect of anything that is not included or comes to light later. To ensure that they have the whole picture, advisors often have to be willing to ask their client potentially difficult and uncomfortable questions.
However, nobody should admit to fraud merely for convenience or to make the process easier to manage. If there has been no tax fraud, HMRC’s offer of CDF should be rejected, with the client’s position vigorously defended. If the CDF offer is rejected, HMRC will investigate using all information powers at their disposal and so it is imperative that the adviser is experienced and able to deal with this kind of investigation.
Meeting HMRC
The CDF offer now builds in a requirement for the individual to agree to attend any meetings that HMRC may request to discuss their tax affairs. In the vast majority of cases, HMRC will request a meeting following receipt of the outline disclosure, during which they will question the taxpayer on the issues being disclosed, as well as their personal, business and financial affairs, covering up to 20 years. These meetings need to be handled carefully to ensure that the questions asked are appropriate. Advisers may need to protect their client from aggressive or unnecessarily intrusive lines of questioning and must know what can or cannot be asked.
Disclosure report
Following the meeting, a full disclosure report is usually required to comprehensively explain the fraud in detail and to quantify all losses of tax. This will then form the basis for further discussions with HMRC to progress the case to settlement. Again, this work is highly specialised and should not be carried out without the relevant experience, as any serious omissions could lead to criminal prosecution.
Careful handling
COP9 cases require careful handling from the outset. Whether the correct course is to accept the CDF and make a full disclosure, or to reject HMRC’s allegation of fraud, experienced specialist advice is essential. Acting quickly and adopting the right strategy can help bring the investigation to a controlled conclusion while protecting the client against unnecessary financial, reputational and criminal risk.
If you are dealing with a COP9 matter and would like specialist support, please reach out to our Tax Disputes and Investigations team, who can guide you through the process and help you determine the most appropriate course of action.
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