Chris George, Tax Manager explains what happens in a tax investigation.
HMRC has extensive powers to open investigations into the tax affairs of an individual or business. These can range from asking simple questions or requesting further information, to formal enquiries which can examine financial records going back over several years. A Code of Practice 9 (COP9) or Contractual Disclosure Facility (CDF) investigation is one of the most serious types of tax investigation and is only opened when HMRC suspect deliberate tax fraud and/or tax evasion. This includes:
- Failure to disclose a tax or duty liability;
- Misrepresentation of an individual’s or a business’s tax affairs; or
- Withholding or concealing relevant facts in relation to tax affairs.
When opening a COP9 investigation HMRC also has the possibility of opening a criminal investigation as well as the civil proceedings. It is therefore vital that specialist professional advice is sought at an early stage to ensure the risks involved in the process are carefully managed. Engaging a tax specialist experienced in these matters at the start of proceedings will help to negate the risk of criminal prosecution and manage the civil investigation, helping you to properly understand the risks and make the right decisions. It will also help to alleviate the undoubted mental stress that such an investigation will impose on those being investigated.
When a COP9 letter is received from HMRC, some may choose to ignore it in the hope that it will go away; this is never a good strategy and, in this instance, should certainly be avoided. If you have received a COP9 letter from HMRC, there is already a suspicion of tax fraud and HMRC will investigate with or without your cooperation. The only difference is that by cooperating under the CDF you will receive immunity from criminal prosecution. The initial disclosure will be a key document and needs to be made within 60 days of receipt of the letter from HMRC. This disclosure needs to be detailed and thorough, and as such can take a significant amount of time to draft. It is therefore advisable to obtain specialist advice as early as possible. It is crucial that this 60-day time limit for making an initial disclosure is met. If not, the CDF is likely to be withdrawn by HMRC and it they may start a criminal prosecution.
It’s important to note that by accepting a CDF offer, you will be making an admission of guilt with regards to deliberate tax fraud. Therefore, if you believe that any part of the tax irregularity did not arise as a result of deliberate behaviour, a CDF offer should not be accepted in full. The difference between deliberate and non-deliberate behaviour can be complex, which is another reason that specialist advice should be sought.
Once a CDF offer has been accepted, the stages of the facility are:
- Outline Disclosure – Setting out details of the tax fraud, how it occurred, who benefited and what other people and entities were involved;
- Formal Disclosure – A formal report setting out full details of the tax fraud including declarations of all bank accounts, credit cards and a statement of assets and liabilities;
- HMRC Review – HMRC will review the disclosure in detail and may ask for additional information or clarification on some matters;
- Meetings – HMRC may request one or more meetings with the individual (and their adviser if applicable) to discuss any area of the investigation;
- Acceptance – Once HMRC have completed their review of the disclosures, they will confirm their acceptance and levy penalties and interest on any underpaid tax.
Unlike normal HMRC enquiries, with a COP9 investigation, HMRC will go back and look over a 20-year period and demand tax, interest and penalties in return for entering into the CDF and not opening a criminal investigation. This means that the amounts involved could be significant. Utilising the expertise of a tax professional to manage the disclosures on your behalf will mean they will be able to use their specialist knowledge and experience, and negotiate with HMRC to try an obtain a lower rate of penalty. With penalties ranging from 35% to 100% of the tax due, the rate of the penalty can greatly impact on the total amount due for payment.
The Tax Advisory team at Scrutton Bland has significant experience in dealing with all manner of tax enquiries up to and including COP9 investigations. We can also assist with making unprompted disclosures of tax irregularities to HMRC which can lead to much lower or even suspended penalties.