James Bailey explains HMRC’s code of practice if they suspect you of committing fraud in relation to your tax affairs.
If HMRC suspect you of committing fraud in relation to your tax affairs, you are likely to be offered their ‘contractual disclosure facility’ (CDF), which is governed by their Code of Practice 9 (COP 9).
We are not talking about a little carelessness in recording sales, or somewhat overestimated business expenses. COP 9 applies to much more serious fraud – keeping false accounts, forging invoices, and generally being seriously dishonest about your tax.
What is the CDF?
The CDF consists of a letter that says HMRC believe you may have deliberately falsified your tax return or other tax documents, and offers you a choice. You can either agree you have ‘deliberately’ caused a loss of tax and agree to cooperate in establishing how much, or you can deny everything, in which case HMRC will investigate anyway. The carrot for cooperation is that HMRC will not bring criminal charges, whereas if you deny everything (or do not respond at all) then HMRC reserve the right to prosecute you if their investigation turns up sufficient evidence to do so.
You have 60 days to respond.
What has changed?
There used to be a third choice – to deny fraud but to agree to cooperate anyway, but this has recently been removed from the letter. HMRC’s justification for this removal is that it ‘confused’ taxpayers, who were not sure whether they were denying that they had committed fraud, or that they had submitted incorrect returns.
There may be some sense to this view. Before the introduction of COP 9 and the CDF, there was a more informal procedure known as the ‘Hansard’ process, which involved reading an extract from a parliamentary debate in which it was stated that HMRC would generally not prosecute taxpayers who cooperated in revealing their wrongdoing in relation to tax. Having read the extract, there were certain questions which required ‘Yes or No’ answers, such as, “Are all your tax returns correct and complete?” and “Have any transactions been omitted from your business accounts?” The only advice to the taxpayer was to admit his returns were incorrect and that things had been omitted from his business records and accounts, and that he would cooperate in revealing the detail. After all, no-one is perfect, and the questions asked about any errors or omissions.
The removal of the ‘deny but cooperate’ option has also been accompanied by the removal of references to ‘fraud’, which is a very good thing, because even if someone has deliberately submitted incorrect returns he will not have the expertise to know whether this conduct actually amounted to ‘fraud’ – which is a criminal law matter and not as easy to define as you might think.
The word ‘deliberate’ has a specific meaning in the context of tax, and crucially it affects the penalties that will be charged, based on the tax underpaid. The maximum penalty for being ‘careless’ about your tax affairs is 30% of the tax involved, but for ‘deliberate’ inaccuracies in your tax, the maximum penalty is 70% of the tax, or 100% if the misbehaviour was also ‘concealed’ (by forging an invoice, for example).
The minimum penalties for the same offences are 35% or (for ‘concealed’) 50%, and the difference is all down to admitting your wrongdoing and cooperating with HMRC, which is why there is really only one answer when offered the CDF.
Planning Tip :
It is most unlikely you will ever receive a CDF letter, but if you do, do not ignore it, and take expert advice from someone who specialises in tax investigations before you respond. A CDF letter means HMRC have some serious evidence against you. By accepting you have ‘deliberately’ paid too little tax, and cooperating, you will reduce the penalties you have to pay, and avoid prosecution!
