In June 2023, HMRC updated its Code of Practice 9 (CoP9) policy paper. A refresher article on CoP9 and the associated Contractual Disclosure Facility (CDF).
CoP9 is the code of practice applied by HMRC when civilly investigating situations where a taxpayer is suspected of committing tax fraud (normally a criminal offence). HMRC will open an investigation into the taxpayer’s affairs and offer them the opportunity to ‘come clean’ and make a full disclosure in exchange for a commitment from HMRC not to commence a criminal investigation into areas that are disclosed. The disclosure is carried out under the terms of the CDF.
Essentially, the CoP9 policy remains the same as previously. The new version is longer (of course) and aims to make clearer exactly what HMRC’s expectations are of the taxpayer engaging in the CDF and the terms on which HMRC reserves the right to commence a criminal investigation.
There is an additional paragraph explaining exactly what Tax Fraud is and this can be useful to point clients to where they are not certain how their behaviour would be perceived. I have had clients previously who may have ‘deliberately turned a blind eye’ to certain areas or perhaps ‘deliberately did not take advice’ in anticipation that the advice would be contrary to what they wanted to hear.
Entering into the CDF requires the client to admit deliberate behaviour and therefore tax fraud. Correspondingly, the penalties are much higher than they could be for careless behaviour or if the client had taken reasonable care. This combined with the risk of prosecution where a client does not make a full disclosure makes it absolutely essential that the taxpayer only accepts the offer of the CDF where there has been deliberate behaviour.
Where the client consistently asserts the errors were not deliberate, I would suggest that in the first instance, advisers look to support their clients and identify the best way to resolve matters without accepting deliberate behaviour and the penalties that go with it.
However, where the client says they did not commit tax fraud and no errors were deliberate but the evidence available either undermines their position or strongly suggests tax fraud, depending on the client’s risk appetite, it might be worth suggesting acceptance of the offer.
Communication with your client to get a clear understanding of the situation is key.
HMRC typically will not tell you or your client what the concerns are. For some clients, this can be disconcerting as they may have a number of different interests and be unaware of some or all technical areas involved.
In other cases, a client may think they know exactly what HMRC is referring to and is likely to ask “...but how would HMRC have found out…?” to determine whether their belief is correct. The answer can be an article in itself; the short version is that HMRC has a number of different sources of information and can now also approach financial institutions and obtain information about a taxpayer without necessarily having to advise the taxpayer of its intentions. So the information could have been passed to HMRC from a number of different sources: exchange of information agreements, social media, disgruntled spouses...to name a few.
I also have had situations where HMRC considered that incorrectly applied tax technical points such as the transfer of properties into the taxpayer’s personal companies without any declaration of the associated CGT was fraud. In situations like this, the client may have done something else relatively minor but be completely unaware of the bigger picture because of the technical nature of the issue. When a disclosure is prepared under CDF, it is possible to allocate different behaviours to different errors and this can be used to reduce the overall financial impact of the situation.
Finally, in some cases, the client may need to take further specialist and/or legal advice as the implications of admitting to tax fraud could be far-reaching in terms of career and other areas. Whilst HMRC is approaching this solely from a tax perspective, we are well-advised to take a more holistic view of the situation before advising the client of the best approach.
Mala Kapacee is a Chartered Tax Adviser and Director of London Tax Network Ltd, a Tax Investigations Specialist consultancy. Her expertise is resolving disputes with HMRC whether for those already being investigated or those who wish to make disclosures. She assists with tax enquiries and CoP8 and 9 Investigations across a range of taxes and situations; self-employment, property, owner managed businesses and non-UK domiciled individuals.
Mala lectures regularly for professional bodies including the CIOT and the CIMA. She founded the London Tax Society in 2017 and actively encourages networking and technical development for Young Professionals. She was a finalist for Best Rising Star in Tolley’s Taxation Awards 2020.
Email [email protected] or call +44 (0)203 953 6660.
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