This note is about responding to challenges under HMRC’s Contractual Disclosure Facility (CDF) – that is, where HMRC suspect that tax fraud has been committed and proceed under Code of Practice 9 (COP9).
Upon receipt of a COP9 challenge, you have four choices.
- “Owning up” (that is, accepting that you have committed tax fraud and making a full disclosure to HMRC)
- Denying that tax fraud has been committed but agreeing to co-operate with HMRC’s investigation
- Denying that tax fraud has been committed and declining to co-operate (the so-called “Go to Hell” route)
- Not replying at all within the 60-day time limit, which will be interpreted as a “Go to Hell” response
It should be noted that “owning up” and making full and accurate disclosure is the only route which both gives a 100% guarantee that HMRC will not prosecute and leaves you in the driving seat as regards any disclosure report.
Sometimes the appropriate response will be obvious. The diversion to an offshore bank account of undeclared takings from a cash business looks pretty unequivocally fraudulent and “owning up” is likely to be the best route. At the other end of the spectrum, if you’re sure you’ve not omitted income or gains you would want to deny fraud but offer to co-operate with HMRC to clear matters up. The problem area is where on reflection and re-consideration you accept (perhaps with the benefit of hindsight or on taking further advice) that your tax returns have been wrong; but you don’t accept that you have deliberately and fraudulently understated your income or gains. In that case, careful consideration of the facts surrounding the transaction and your state of mind when signing the tax return needs to be undertaken, balancing any commercial risks of admitting to fraud against the benefit of securing exemption from prosecution.
We have also started to see HMRC issuing COP9 letters in cases where individuals have invested in failed tax planning schemes. This raises its own difficult questions, especially if the failure is because of a mis-match between what scheme documents record and what actually happened rather than because of some arcane technical point of which the client could be not expected to have been aware.
What is clear is that the best course of action where a COP9 letter has been issued will always be to seek urgent advice from advisers experienced in such matters, and certainly not to wait until the 60-day time limit is about to expire.
For more information on CDF and COP9, please contact us.