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If you receive a letter from HMRC inviting you to use the CDF, you need to seek expert advice.
The reason for this is simple: HMRC suspects you have committed tax fraud.
You need to act quickly or HMRC will undertake its own investigation and may build a criminal case with a view to prosecuting you.
HMRC prefers to deal with cases of suspected tax fraud through the CDF under the civil procedures set out in its Code of Practice 9 (COP9) booklet. You will be invited to make a full disclosure of all deliberate (and non-deliberate) conduct that has led to irregularities in your tax affairs. The trade-off is that HMRC will not pursue a criminal investigation with a view to prosecution.
The CDF or COP9 is complex and far from routine. It involves admitting that tax has been lost because of deliberate conduct and means HMRC may be able to seek recovery of the tax, interest and associated penalties as far back as 20 years.
A specially trained HMRC officer will handle the investigation and HMRC strongly advises taxpayers to seek independent professional advice from a specialist advisor who is familiar with COP9.
Accusations of tax fraud should not to be taken lightly. However, the process is manageable with the right support.
Any tax investigation or disclosure is sensitive and complex. The tone of HMRC’s correspondence is intimidating and dealing with HMRC can be stressful at the best of times. However, you will avoid being prosecuted for tax fraud if you meet your obligations under the CDF and make a full and frank disclosure to HMRC.
Crowe’s experienced and award-winning Tax Resolutions team can help you navigate the CDF process and ensure you meet your obligations to ultimately settle matters with HMRC.
We also work with other accountants and solicitors on a regular basis, providing support to their clients who are invited to use the CDF.
It is also possible to make a voluntary request to participate in the CDF to secure immunity from prosecution if such protection is needed. We can make recommendations whether this route is appropriate based on the facts of your case.
If you genuinely believe that a loss of tax has not been brought about deliberately, you should not agree to the CDF as a matter of convenience. In these circumstances, you should reject the CDF offer. HMRC will then start its own investigation, reserving the right to pursue a criminal investigation. Although the 'co-operative denial' route is no longer available, we can help you frame your response in such a way that will encourage HMRC to work with us to resolve any perceived issues.
Our case studies below provide a few common scenarios. Contact us on our free, confidential helpline or email us to discuss your situation in more detail.
2. An individual who had deliberately failed to declare consultancy fees as well as operate PAYE on his housekeeper’s salary sought Crowe’s advice. Our client was an accountant, hence rightfully concerned that HMRC might seek to prosecute him for tax fraud. We recommended he make a request to participate in the Contractual Disclosure Facility in order to secure immunity from prosecution. Given the specific nature of the issues, Crowe managed to agree with HMRC that it would not be necessary to complete a full blown CDF report, which significantly reduced the amount of time and cost involved in reaching settlement with HMRC.
3. We were contacted by an individual who received an enquiry notice into a recent tax return. We noted that HMRC were asking some very specific questions indicative of there being suspicions that larger problems existed. While our client was initially reluctant to discuss the wider issues, we convinced him that it was in his best interests to make a full disclosure, not least because we had analysed publicly available data that pointed towards numerous issues which HMRC would of course already be aware of. The client has since informed us there are numerous inaccuracies, which result in tax liabilities in excess of £1.5 million. We have therefore registered the client for the Contractual Disclosure Facility in order to protect him from prosecution. Furthermore, the act of making a full disclosure will ultimately reduce our client’s exposure to penalties.
Every case is unique, sometimes requiring a robust stance to be taken with HMRC, sometimes needing a practical solution, at other times a discreet discussion.
We will take time to explain and clarify complex issues so that you are kept fully informed throughout the CDF process.
There are a number of formalities under the CDF including:
You will initially have 60 days to either:
The decision to admit to tax fraud should not be taken lightly. You should not accept the CDF offer for convenience if you maintain you have not deliberately underpaid tax.
If no response whatsoever is received by HMRC within the 60-day period, this will be treated as lack of co-operation and/or a conscious decision to deny fraud. HMRC will then conduct its own investigation using its criminal or civil investigation powers, meaning ignoring the CDF letter puts you at risk of being prosecuted.
If you wish to accept the CDF offer, your outline disclosure must be completed and submitted within 60 days.
This outline is not expected to contain precise details about the tax that has been understated, because HMRC recognises that 60 days is not enough time to gather the pertinent documents and information to produce accurate tax computations. Your outline disclosure needs to set out sufficient information for each separate tax loss brought about by deliberate conduct including, but not limited to:
HMRC will not usually say what its suspicions are or enter into any discussion until you have responded or the 60-day response period has expired. This is because HMRC wants to ensure you will be making a full disclosure and not be tempted to cherry-pick the issues you disclose.
The more information you provide in the outline disclosure the better, as HMRC will see this as a sign of you engaging with the investigation.
Deliberate inaccuracies that are omitted from the outline disclosure will not benefit from immunity from prosecution. HMRC will also take a serious view when considering any penalties if it later comes to light that there was relevant information available to you that could have included, but which you chose to omit.
An early payment on account to cover any amount(s) identified should also be submitted alongside your outline disclosure to help demonstrate your engagement with the CDF process and to reduce the late payment interest that is accruing.
Once your outline disclosure has been submitted, HMRC will review it and write to confirm whether or not it is valid and to discuss the next steps.
In most cases HMRC will ask you to attend an opening meeting to learn more about your personal, business and financial history.
Your attendance at the meeting is entirely voluntary, although HMRC views attendance and full co-operation at these meetings as a strong indication of your engagement with the process, which will help to reduce the level of any penalty that may ultimately be due.
We recommend this meeting is attended with your professional advisors, as we can ensure the meeting keeps on track and that the HMRC inspectors do not overstep.
HMRC will eventually prepare a note of the meeting and share this with all attendees as a record of what was discussed at the outset.
These meetings tend to be long and it is not unusual for them to last three to four hours – that can seem daunting, but we can prepare you in advance of the meeting so that nothing comes as a surprise.
This is a discussion between HMRC and your advisor to agree the scope of the formal disclosure report so it is clear on both sides what work needs to be done.
This is an opportunity for us to seek to ring-fence the issues with a view to reducing the amount of work that needs to be done, for example, by agreeing to review your financial statements for a sample period of time to identify issues rather than analyse information covering up to 20 years.
The scoping meeting also enables us to discuss potential issues with HMRC, for example, if there are gaps in your records or you are likely to have issues paying the sums owing.
Timescales for the work and submission of the formal report will be discussed at the scoping meeting, with both sides agreeing to work towards a set date in the future. The time needed will depend on the circumstances of your case and will vary according to, for example, the complexity of the work needed and ease of access to historical data.
After the initial formalities above have been completed, HMRC will take a back seat and allow us to carry out the necessary work.
We will liaise with you to gather any additional information we need and provide you with regular progress updates. We will also work closely with your other advisors, for example, your accountant, lawyer, trust manager or banker to obtain the necessary information and discuss any mitigating circumstances that may help reduce penalties.
HMRC will expect to be kept informed of progress at regular intervals, which may involve regular meetings between us and HMRC.
The formal disclosure should include full and precise details of your deliberate conduct, in whatever capacity you acted (for example as a sole trader, director, partner, executor or trustee) and will normally contain:
When preparing the report, we will ensure that any allowances and reliefs that are available are considered to ensure you pay the fair amount of tax. We will also take time to explain the content of the report to you and ensure you understand everything before it is submitted to HMRC.
We are represented on important committees such as Compliance and Investigations Committee at the ICAEW and the Chartered Institute of Taxation’s Management of Taxes Committee, which means we are kept up to date with HMRC working policies and developments. We also have an excellent working relationship with HMRC’s fraud investigation teams and meet senior personnel to discuss practical and technical issues when the need arises.
HMRC will review the formal CDF report and raise any questions or concerns with us (if applicable). We will then work with you to iron out the final points and make any adjustments, if necessary.
If HMRC believes that a false statement has been made, false documents have been submitted or the formal disclosure report or certificates are incorrect or incomplete, they reserve the right to withdraw from the CDF and instead pursue a criminal investigation.
HMRC may request a final meeting with you to discuss the report and make sure you are satisfied it contains everything it needs to.
Once HMRC is satisfied all irregularities have been resolved, two further documents will need to be completed and signed:
This is evident from the increasing amount of data automatically exchanged cross border between tax authorities, the use of the hugely sophisticated 'Connect' analytical computer system, and deployment of extra investigations staff.
HMRC now has powers to write to Financial Institutions (without prior approval from the taxpayer or the tribunal) if a loss of tax is suspected.