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Contractual Disclosure Facility under Code of Practice 9

Contractual Disclosure Facility under Code of Practice 9

In 2012/13 HMRC raised revenue in excessof £20.7 billion from their tax investigations and enquiry work and various voluntary disclosure facilities. This was £2 billion more than their target for the year. HMRC are putting very significant resources into the investigations field and it seems logical that this will continue, particularly as the yield drops off from initiatives like the Liechtenstein Disclosure Facility.

A new Code of Practice 9 or “COP 9”, for investigating cases of serious tax fraud, came into effect on 31 January 2012, called the Contractual Disclosure Facility (CDF). Just over two years on, it seems timely to recap on the changes and our experience to date of the updated procedure.

As was the case for the previous COP 9, the CDF covers both direct and indirect taxes. However there are significant changes contained within the new approach which need to be carefully considered.

The new CDF procedure offers taxpayers clear choices and requires a contractual commitment by the taxpayer to avoid the process becoming unnecessarily protracted, as was sometimes the case in the past. As before, an incomplete disclosure, a denial or unwillingness to participate in the CDF gives HMRC the opportunity to conduct their own investigation, which can be civil or criminal. The major change is that the CDF is designed to ensure that HMRC can begin its own investigation much earlier if it is clear that a complete disclosure will not be made.

The options available to the taxpayer when HMRC opens a COP9 investigation under the CDF are to:

  1. Agree to fully co-operate by signing and completing an acceptance letter, accepting the offer to participate in the CDF.
  2. Formally deny that there are any irregularities.
  3. Make no response.

The taxpayer has 60 days from the date they receive the offer of the CDF to select one of these options. If the offer of the CDF is accepted an outline written disclosure must be also be made within 60 days.

HMRC’s guidance stresses that the offer of the CDF and the taxpayer’s acceptance creates a valid contract and provides the taxpayer with an assurance that they will not be subject to a criminal investigation for the admissions contained in their outline disclosure. If it appears to HMRC that the outline disclosure is incomplete, consideration will be given to criminal investigation of the suspected tax frauds not included in the outline disclosure.

If HMRC are content that the outline disclosure is satisfactory the case will proceed to an opening meeting and the commissioning of a disclosure report by the taxpayer.

The CDF provides a more structured procedure with more control over the disclosure process for HMRC than it had before. In essence, HMRC have taken steps to remove the scope for taxpayers to deviate from the process once they are in it.

In cases where a denial of tax irregularities is made the taxpayer is not given a second bite at the cherry and the guarantee that a criminal investigation will not be undertaken is removed. Theoretically, this is also the case even where there is a change of heart and a disclosure is subsequently made. Thankfully, we have not experienced this scenario but in practice we would hope a relatively quick about turn following a denial would not result in a criminal prosecution.

In cases where an acceptable explanation for the denial is provided HMRC are required to close the enquiry, emphasising the importance of providing evidence and explanations to HMRC even if there are no irregularities. The fundamental problem remains of trying to “prove a negative” in some cases where HMRC has simply got it wrong but cannot, of course, reveal the nature of their suspicions. In such cases experience of how to manage the attendant risks and attempt to keep HMRC onside is essential to secure a successful resolution.

Alternatively, where no response is made to HMRC an investigation will be undertaken, which may be criminal or civil in nature. This course of action can only lead to problems and increased costs; in our view it is a fundamentally flawed strategy to lose control of the process by maintaining a wall of silence.

Aside from the more structured beginning, there are some other important changes to be aware of. The opening meeting previously included formal questions that had to be answered verbally and written responses were also requested at the meeting. The questions were designed to establish whether business and personal tax returns were

correct and complete, whether accounts were correct and whether the taxpayer would cooperate with HMRC, making all necessary records available.
The logic of removing the need for “the formal questions”, as they were known, is that the answers are implicit by virtue of the prior agreement to accept the terms of the CDF and the fact that an outline disclosure is made in writing before the opening meeting is held. However, sometimes the best way for a slightly reticent client to be protected from themselves is to undergo the rigour of being asked by HMRC to consider each and every tax return and business venture they have been involved with over a 20 year period before they decide how to answer each question. On balance, we believe it would have benefited clients and HMRC to leave the formal questions as part of the opening meeting. The absence of the formal questions is potentially a trap for advisers who are inexperienced in CDF work. The new style of interview places even greater emphasis on the extensive preparation work that must be carried out by advisers to ensure all the relevant business and personal history of the client has been explored in detail in advance to ensure the disclosure is correct and complete.

Another change for advisers to be wary of is the practice of HMRC to require the Statement of Assets & Liabilities, Certificate of Accounts Operated and Certificate of Full Disclosure to be submitted with the disclosure report which, as before, the adviser has 6 months to complete and submit to HMRC. It is not uncommon for HMRC to raise new questions and request further documents following submission of the disclosure report. Occasionally, despite the best efforts of the adviser, this may result in hitherto forgotten issues or assets coming to light. Although this is never ideal, the fact that the forms mentioned above were not submitted under the old COP 9 process until after the disclosure report was accepted or any additional issues agreed offered a significant level of protection for the taxpayer.

The new approach increases the stakes and is designed to make it even clearer that the taxpayer knows that if the disclosure is materially incomplete or incorrect they run a real risk of prosecution. Inviting the taxpayer to sign certificates and statements to accompany the disclosure report sounds reasonable but it is inherently difficult to ensure nothing has been missed over a period of up to 20 years, during which a taxpayer may have operated dozens of bank accounts and credit cards. When HMRC insist on completion of these documents to accompany the report great care must be taken to ensure that all possible protection is obtained for the client.

In summary, the CDF has retained most of the key elements of the COP 9 process but with some important changes that should prevent prevarication and others that require the adviser to be even more vigilant to protect the client’s interests. The very serious nature of such investigations and the imposition of a more rigid framework in the new COP 9 emphasises the need for specialist advice and representation.

If you would like to discuss any aspects of Code of Practice 9 investigations please contact a member of our team.