COP9 & Tax Fraud Investigations Explained
HM Revenue & Customs (HMRC) is entitled, where it suspects irregularities in an individual’s tax affairs, to pursue a civil procedure known as a Code of Practice 9 (COP9). This provides an alternative to a criminal investigation that could ultimately lead to prosecution.
Under COP9, HMRC provides the taxpayer an opportunity to make a full disclosure of any activity that has given rise to suspicions of tax irregularities by issuing a Contractual Disclosure Facility (CDF).
Whilst this procedure provides taxpayers with an opportunity to resolve outstanding issues, it carries potentially extremely serious consequences if its conditions are not strictly observed. If HMRC considers that the recipient of a COP9 letter has failed to make a full and accurate disclosure, criminal proceedings may be commenced.
HMRC itself advises that legal advice should immediately be sought by a taxpayer who receives a COP9 letter.
The team at KANGS has for many years provided advice and guidance to clients who have become the subject of investigation by HMRC relating to alleged tax irregularities of every nature, including those under COP9.
In this article, Nazaqat Maqsoom of KANGS explains what receiving a COP9 letter means for taxpayers, the purpose of the CDF process, and the steps that should be taken to protect their position and achieve the best possible outcome.
What Amounts to Tax Fraud?
Tax fraud arises as the result of deliberate, dishonest behaviour such as:
- cheating the Public Revenue, contrary to common law or
- committing fraud under the Fraud Act 2006.
In guidance issued by HMRC it states that deliberate conduct occurs when:
“a person submits documents to HMRC containing information that they knew was incorrect, and/or they did not tell HMRC at the right time about information that they knew was relevant to a liability to tax or duty, and/or they made a claim for a payment from HMRC to which they knew they were not entitled.”
It is only necessary for HMRC to show that the conduct resulted in a potential risk of tax loss as opposed to actual financial loss.
COP9 Investigation Procedure
A COP9 investigation is typically launched by HMRC where it suspects tax has been lost through deliberate conduct.
Initially, HMRC provides the opportunity for the taxpayer to make a complete, honest and accurate disclosure of all information through the issue of a Contractual Disclosure Facility (CDF) which, when completed, amounts to a contract between the taxpayer and HMRC.
In return for the taxpayer providing full disclosure of all tax irregularities which have arisen either inadvertently or deliberately, HMRC promises to forego a formal criminal investigation.
The CDF Process and Disclosure Requirements
The recipient of a CDF has sixty days to comply with two disclosure stages commencing with an ‘Outline Disclosure’ of the deliberate conduct resulting in a tax loss. This disclosure enables HMRC to understand the types of behaviour in issue, the relevant taxes involved, who was involved with the tax loss and the value of such tax loss.
This Disclosure is followed by a ‘Certified Statement’ in which it is confirmed that a full, complete and accurate disclosure of all irregularities has been made which must be accompanied by certified statements of assets, liabilities, all bank statements and credit cards, known as ‘Formal Disclosure’.
In straightforward cases, where the Outline Disclosure confirms HMRC suspicions, it will normally seek to agree the amount of any additional duties payable, interest thereon and any penalty which it seeks to impose.
Once the CDF is in place, an assurance is provided by HMRC that it will not proceed into the irregularities by way of a criminal investigation.
Points of Note
- A COP9 can be requested by a taxpayer who wishes to make a voluntary disclosure of serious, deliberate irregularities. Such a strategic move may seek to avoid an anticipated criminal investigation.
- Although a company cannot seek to engage the facility in its own right, one or more directors can do so in their personal capacities which will, automatically, reveal the company’s conduct, even though they are separate legal entities.
- HMRC has the right to refuse offers for a CDF. Accordingly, detailed consideration must be given as to the suitability of engaging in the scheme at the outset. Representations made in order to try and enter the scheme, may prove detrimental if HMRC refuses to offer the facility.
Circumstances which may lead to a Criminal Investigation
HMRC is likely to proceed with a criminal investigation following:
- the rejection or ignoring of an offer under a CDF,
- failure to provide any Outline Disclosure,
- provision of an incomplete Outline Disclosure,
- inaccurate disclosures or false statements,
- submission of false material documents.
Considering the Merits of Entering a Contractual Disclosure Facility
A CDF is not suitable unless it is accepted that a tax loss has arisen from deliberate conduct. It is intended to make a full disclosure and work openly with HMRC in order to resolve the issues.
- There must be an intent to pay the outstanding tax, accrued interest and any penalty which HMRC decides to impose.
- Where the taxpayer does not accept that a tax loss has arisen as the result of deliberate conduct, a ‘CDF Rejection Letter’ must be served on HMRC within sixty days which, following receipt, may start a criminal investigation.
- Other enforcement agencies may still issue proceedings despite conclusion of a COP9.
- As an exception to the general rule of confidentiality in taxation, HMRC is entitled to publish details of taxpayers who are deliberate defaulters.
- Following completion of a CDF, should HMRC still attempt a criminal prosecution, it is likely to be defeated by way of an Abuse of Process Application. R v Abu Hamza.
Do I Need a Solicitor or an Accountant?
Upon receiving a COP9 letter, it is strongly advisable to seek professional advice from an appropriately experienced solicitor rather than an accountant. A solicitor benefits from legal professional privilege, meaning that communications between a solicitor and client are confidential and generally protected from disclosure to authorities such as HMRC.
An accountant does not benefit from the same direct privilege. Such protection may only apply where the accountant is instructed by a solicitor on behalf of a client.
When supporting individuals and businesses facing an HMRC investigation, the team at KANGS works closely with accountants to achieve the best possible outcome for our clients.
How Can We Assist You?
If it is decided to engage in Contractual Disclosure Facility, it is imperative that HMRC receives complete and honest compliance with all aspects of a COP9 Investigation.
Whilst COP9 provides an opportunity to clear any tax irregularities which have arisen, it is only an option provided by HMRC and, if abused in any way a criminal investigation will almost certainly be commenced.
If you or your business becomes subject to any form of HMRC investigation, it is essential that you immediately seek experienced legal advice. The team at KANGS has extensive experience gained from advising and representing clients involved in HMRC disputes of every nature.
If you believe that you require legal assistance in respect to any type of HMRC matter, including CDF, we are here to help. Our team would be delighted to hear from you, simply contact us using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
Top ranked by leading legal directories Chambers UK and the Legal 500.
