Cases are progressed under HMRC’s Code of Practice 9 (COP9) procedure where HMRC either suspect, or the individual chooses to voluntarily disclose, that their deliberate action or inaction has led to an insufficient amount of tax being paid. HMRC refer to such behaviour as “tax fraud” but this is more commonly referred to as tax evasion.
Tax evasion is a criminal offence and examples include deliberately failing to report some or all taxable trading profits; submitting false invoices or artificially inflating the value of expenses etc. There are an infinite number of ways a taxpayer could deliberately go about paying too little tax. The key point is that the taxpayer knowingly omits or provides HMRC with inaccurate information for a financial benefit.
Code of Practice 9 is a process which allows taxpayers to bring their UK tax affairs up to date on a civil, as opposed to criminal, basis. It is only available to taxpayers who accept that they paid too little tax as a result of their deliberate behaviour.
If COP9 isn’t used and HMRC go down the criminal route, what are the possible implications on the taxpayer?
There are many sanctions the taxpayer could face if found to have committed tax evasion but if found guilty of a summary conviction then this could result in up to 6 months in prison or a fine of up to £5,000. Alternatively if a taxpayer is found guilty by indictment then this could result in a maximum sentence of 7 years in prison or an unlimited fine.
“Cheating the public revenue”
The taxpayer may instead be charged with the more serious offence of “cheating the public revenue” which carries the harshest penalties of a maximum sentence to life in prison or an unlimited fine.
False documentation to HMRC
There also exists other criminal sanctions the taxpayer ought to be aware of, such as providing false documentation to HMRC which carries a maximum penalty of £20,000 or a six-month prison sentence.
The Criminal Finances Act 2017
Furthermore, companies can now be held criminally liable under The Criminal Finances Act 2017 for the offence of failing to prevent the facilitations of tax evasion.
Selective criminal prosecution policy
HMRC has a selective criminal prosecution policy which means they can cherry-pick the cases where they commence criminal proceedings. This means there is not one particularly method of committing tax evasion that would mean HMRC would be more likely to go down the criminal route than any other.
However the groups of taxpayers more likely to be selected for prosecution are high-profile individuals; professionals (for example solicitors, barristers, accountants, tax advisors etc.) and those cases where HMRC are more likely to win (for example where the underlying matter has been going on for multiple years or the tax loss is particularly high). The rationale behind targeting these three groups of taxpayers is because it is thought this sends out the strongest deterrent to others.
Why use COP9 to disclose deliberate errors or omissions?
Code of Practice 9 has been around for many years with cases are now managed through HMRC’s Contractual Disclosure Facility (CDF). Taxpayers can either be issued with COP9 by HMRC, or can choose to voluntarily use the facility.
The main benefit of Code of Practice 9 for taxpayers is that provided a full disclosure is made, HMRC will guarantee the individual receives immunity from criminal prosecution.
What does the COP9 process involve?
There is a formal process to follow with strict deadlines to meet so assistance from an experienced Tax Disputes and Disclosures advisor is highly recommended. It is better to appoint a COP9 specialist advisor at the earliest opportunity. Most cases will proceed as follows:
|1||Application to disclose submitted to HMRC |
(where a voluntarily disclosure is made)
|HMRC form CDF1 is used to register the individual for COP9. On receipt of the application HMRC will complete some basic background checks on the taxpayer, including checking that the taxpayer is not already under criminal investigation.|
|2||Formal confirmation of acceptance into COP9 process||It normally takes around 2 weeks for HMRC to confirm an individual has been accepted into COP9 at which point they will be asked to provide a valid “outline disclosure” within the following 60 days.|
|3||60 day “Outline Disclosure” period||During this time HMRC are not permitted to correspond with the taxpayer or their advisor with regards to the case. Along with completing the outline disclosure form, which provides a summary of the case, the taxpayer will either formally accept or reject the offer to use COP9. A taxpayer is unlikely to reject the offer where they voluntarily entered into the process but if they have received an invitation to use COP9 by HMRC, they may choose to reject the offer if for example they do not accept any errors or omissions were a result of their deliberate behaviour.|
|4||HMRC confirm outline disclosure was valid||HMRC will normally respond to the submission of an outline disclosure within 4 weeks from submission. HMRC reserve the right to commence criminal proceedings on any matter not disclosed within the outline disclosure.|
|5||HMRC opening meeting||Once the taxpayer’s outline disclosure has been accepted they will then be in the COP9/CDF process. The next step is then typically to have a face-to-face meeting between the taxpayer, their advisor and the HMRC case officer assigned to the case. These meetings can be quite formal but the taxpayer is under no legal obligation to attend. They may be encouraged to attend though for other reasons. The meeting presents an opportunity for HMRC to ask further questions about the matters being disclosed and at the end of the meeting the taxpayer will be asked to prepare a disclosure report, or commission their advisor to do this on their behalf which most taxpayers would want to do. The scope of work to be included and considered in the course of preparing the report will normally be agreed with HMRC at this stage too.|
|6||Preparation of disclosure report, computations and completion of standard HMRC forms||Given the nature of the work and the high risks involved if errors are made, only an advisor with experience in this area should be appointed to undertake this type of work. HMRC’s COP9 guidance states that “many people find it helpful to appoint a specialist adviser who is familiar with COP9”. The disclosure report must include a self-assessment of the tax liabilities and interest, giving a detailed explanation of how the figures were arrived at. HMRC may ask for progress meetings or calls with the appointed advisor during the period when the report is being prepared.|
|7||HMRC confirm agreement or raise follow up questions||Around 2 – 3 months following the submission of the disclosure report with supporting documentation, HMRC will respond to either confirm their agreement or ask follow up questions. Once the liabilities are agreed HMRC may request a final meeting with the taxpayer.|
|8||Penalty negotiations||It is good practice for the appointed advisor to be proactive and make representations on the penalty % to apply to the previously undisclosed tax liabilities. Although the legislation sets out a specific range of penalty %’s that apply to various offences, an experienced advisor should be able to articulate why the minimum % ought to apply where the circumstances allow for this.|
|9||HMRC meeting||At the final meeting HMRC will use this as an opportunity to cover any final matters that may not yet be agreed and use the meeting to agree the final penalty % that should apply.|
|10||Settlement by contract||Cases are typically settled by contract at the end of COP9 with the contract setting out the amount the taxpayer has agreed to pay HMRC. A contract settlement can incorporate payment terms if the taxpayer requires this.|