Andrew Needham looks at what a business should do if it becomes involved in a VAT investigation.
When HMRC looks at the tax affairs of a business it can take many forms, from a routine VAT inspection through to local investigations and a full blown serious fraud investigation.
HMRC usually conducts investigations in accordance with Code of Practice 9 (COP9) in cases where they have reason to suspect serious tax evasion has taken place.
These investigations are carried out by either the Civil Investigation of Fraud Unit or the Specialist Investigations team. Both divisions are staffed by experienced and highly trained tax fraud Inspectors, and the seriousness of enquiries undertaken by both divisions simply cannot be overstated.
First contact
An investigation will normally start with HMRC obtaining information that a serious fraud is suspected. This could be following a VAT inspection or based on information received from a third party, for example, a customer or disgruntled ex-partner. The first the business will know about it is the receipt of a letter from HMRC stating that serious fraud is suspected and that the business or individual is under investigation.
HMRC will not normally tell the taxpayer what suspicions they have, but will ‘invite’ the taxpayer to make a full disclosure of any fraudulent activities it is involved in. This means that the taxpayer will need to disclose all potentially fraudulent activities, even ones that HMRC may not be aware of, as the taxpayer will not know how much knowledge HMRC has.
Following this initial contact, the taxpayer will have a statutory 60-day time period to comply with the terms of the ‘contractual disclosure facility’.
This will involve the taxpayer:
- preparing and submitting an initial ‘outline disclosure’ of all known areas where tax irregularities are thought to have arisen;
- signing a formal statement to confirm to HMRC that the information provided is accurate and complete;
- greeing to pay all taxes, duties, interest, and penalties due; and
- stopping any evasion with immediate effect.
Formal interview and disclosure
Following the 60 day period, the taxpayer is ‘invited’ to attend an initial interview with the investigator, at which point formal questioning will be undertaken.
At this meeting, the taxpayer will be given the opportunity to discuss matters incorporated within the initial outline disclosure, and to agree to make a full and complete disclosure of all known irregularities in their tax affairs over the last twenty years.
HMRC then formally instructs the taxpayer to produce a full 'disclosure report', which will include a brief business history, the nature and extent of all tax irregularities identified and how they arose. HMRC normally expects this report within six months.
Anybody under a COP9 investigation should obtain professional advice and representation for the interview and to prepare the disclosure; this is a very specialised job.
What if I don’t co-operate?
If a taxpayer does not co-operate he will almost certainly find himself under a criminal investigation and prosecution. The greater the co-operation given by the taxpayer, the more the penalties imposed can be mitigated and reduced. Penalties are generally lower for a ‘deliberate’ error that is not concealed than for a deliberate error with concealment. The penalty for a deliberate error normally ranges from 30% to 70% of the tax due and is up to 100% where it is both deliberate and concealed.
Practical Tip:
If you come under a COP9 investigation you should obtain professional representation and make a full disclosure to HMRC to minimise penalties and avoid possible criminal prosecution!
