H M Revenue and Customs (“HMRC”) has operated Code of Practice 9 – a process that is intended to lead to a civil settlement in cases of tax fraud - for many years as it is an efficient way to investigate fraud. Over the years there have been a number of changes to the Code, the previous version of which was the Civil Investigation of Fraud (“CIF”) process.
The government wants to be tough on tax evaders – it is perceived to be a popular policy with the public who want citizens to pay their fair share of tax and is one way to reduce the country’s budget deficit. HMRC were concerned that the CIF process was too lenient and did not enable them to take court action against those who initially co-operated with HMRC’s investigation but then stopped doing so.
HMRC’s response is the new Contractual Disclosure Facility (“CDF”). People who HMRC consider have committed tax fraud will initially be screened to identify those who should be investigated for criminal prosecution. Those who are not going to be prosecuted will then be offered a chance to participate in the CDF. They will receive the invitation by letter and will have just 60 days to respond.
The taxpayer will be asked to sign a form to confirm or deny whether they have committed tax fraud. If they admit fraud then they will also have to submit an “outline disclosure” form within the same 60 day period. If a person fails to reply to HMRC or denies fraud then HMRC are likely to commence their own investigation, which will include issuing demands for information to the person, their banks, their customers, suppliers and potentially their advisers. In extreme cases this investigation may lead to a criminal prosecution.
If a taxpayer decides to admit fraud then they face the challenge of the fixed 60 day deadline. This is quite a tight deadline considering that the outline disclosure should include a description of the fraud, how it was carried out, when it happened, details of the records that are held and an estimate of the amounts involved.
The key point to bear in mind is that a taxpayer only gets protection from prosecution for the issues included on their outline disclosure. If anything is missing then they risk being prosecuted for those frauds. It is therefore crucial to get specialist advice from a tax adviser who is experienced in handling Code of Practice 9 cases immediately after receiving HMRC’s letter.
Once HMRC receive the outline disclosure and admission of fraud they will check the disclosure against the information they already hold. Providing the taxpayer has disclosed all the frauds that HMRC are aware of then the CDF will continue. In many cases, the taxpayer, in the presence of their adviser, will then be interviewed by two HMRC inspectors. The adviser will then investigate the fraud before submitting a comprehensive disclosure report detailing what happened and the tax due.
After the report is submitted, it is usual for there to be discussions with HMRC on technical issues and on the estimates and assumptions in the report. Cases then progress to a civil settlement with tax, late payment interest and a tax geared penalty being negotiated and agreed. Undeclared tax is payable for a period up to 20 years. The tax geared penalty can be up to 100% of the tax at stake and in future may be up to 200% on some offshore issues. A specialist adviser will use their experience to reach a pragmatic agreement on the amount of tax due, minimise the penalty and negotiate time for their client to pay the settlement bearing in mind their financial position.
The benefit of this process is that one inspector deals with all tax issues and is experienced in resolving cases where there is a lack of information due to the time elapsed since the fraud. The taxpayer will have their tax affairs brought up to date so that they can move forward with peace of mind.
When taken together with HMRC’s Managing Deliberate Defaulters programme and HMRC’s powers to publish the names, addresses and other information on people who deliberately evade tax after 1 April 2010, in my opinion the CDF represents a significant tool in HMRC’s arsenal of ways to resolve tax fraud cases and deter people from committing fraud in the first place.
If you know that you have not paid all the tax you should in the past then do not delay hoping HMRC will never find out – they often do in my experience, so seek specialist advice today. If you make a voluntary disclosure to HMRC before they open a CDF investigation into your affairs then you will incur lower penalties. In many cases it is possible to use the Liechtenstein Disclosure Facility (“LDF”) which is a partial amnesty and often a less painful process. The LDF still provides protection from criminal prosecution but also a fixed penalty of 10% for unpaid tax between 6 April 1999 and 5 April 2009 and no tax for errors prior to this period. However, once HMRC issue the opening CDF letter the chance to use the LDF is gone and, in my experience, the cost in terms of time, fees and penalties will be higher.
14 May 2012