HMRC changes COP9 fraud investigation rules

Taxpayers who are being investigated by HMRC for suspected tax fraud now don't have the option of co-operating with the investigation while denying wrongdoing under new guidance.

Denial was one of three options for taxpayers when HMRC decided to investigate for suspected fraud under a Code of Practice 9 (COP9) procedure.

Once this starts, taxpayers have 60 days to come clean about their tax "irregularities", making it less likely that they will face criminal prosecution.

Penalties for tax fraud can be up to 200% of the tax lost.

"Whilst the 'denial route' did not afford a taxpayer immunity from prosecution, it did enable a taxpayer who was genuinely confounded by the receipt of COP9 an opportunity to engage with HMRC – and, in many cases, to reach resolution short of an admission of fraud," said James Bullock of law firm Pinsent Masons.

"Anyone in a regulated profession and, increasingly, anyone looking to borrow significant sums of money for example, can be seriously impacted by having made an admission of fraud - which is what the CDF amounts to. Any taxpayer receiving a COP9 letter should now take urgent legal advice."

In an Any Answers discussion on COP9 in 2010, AccountingWEB member manoja had some useful advice on how to help clients who've had a COP9 letter.

"Going down the formal path can be risky" he said. "You have to be prepared for the matter to end up at the tribunal - costs and preparation time are factors - along with the chance that you will not be successful. It will however demonstrate to HMRC that you are no longer prepared to accept their poor behaviour/attitude."

Comments

COP9

allsaintchris | | Permalink

This is indeed a worrying development as I have several COP9 cases where no fraud has been proven, as HMRC had obtained incorrect information on the taxpayer. Fortunately these were pre-CDF cases, however it does raise the question of what would have happened to these taxpayers who would now have had to deny a fraud (as they genuinely had done nothing AT ALL wrong).

I have also seen a CDF case go to CI unit, only for it to come back to Civil again, but at great cost to the taxpayer, as well as the stress of attending a police station for the interview under caution.

I would like to know the opinion of a legal 'expert' as to whether removing the right to deny a fraud is actually a breach of basic legal principles of innocent until proven guilty?

It should be noted, that HMRC's updated COP9 guidance notes still state that they will consider any accompanying explanation/documents on a person who rejects the CDF, however if a person has no genuine idea why they are being investigated, how can you do this!?

I will be keeping a close eye on how many new CDF's we get through here and HMRC's stance when a refusal to accept CDF is put back to them.

BKD's picture

I can see the logic behind the changes, but ...

BKD | | Permalink

... as the post above says, the taxpayer who is genuinely unaware of any wrongdoing has no option but to reject the Notice and leave themselves open to criminal prosecution.

I do suspect that in the majority of cases where demonstrable fraud has been committed the perpetrator will, by definition, know about it, and in such cases it seems reasonable to me that they should have a simple choice. But those in a position of uncertainty are in an impossible position - in such cases, I would argue that they have every right to ask HRC to provide at least an indication as to the nature of the alleged fraud.

CI involvement

allsaintchris | | Permalink

My main concern is the COP9 guidance notes state that any rejection of the CDF will result in the case firstly being passed to CI, and for them to decide whether to prosecute or hand back to Civil for further enquiries. In the cases I have had, HMRC's suspicions were so high and the fraud allegation so severe that I could not see it being taken on by CI under this revised process if the taxpayer did not accept the CDF.

What are people's thoughts on a taxpayer trying to get back the legal costs against HMRC for defending themselves against a prosecution by CI, only for it to be withdrawn when HMRC accept the information they had was incorrect?

I think HMRC need to tread carefully with how many cases go to CI, however it may just be that they are making the guidance notes seem scarier than what they are actually prepared to do. The word 'criminal' appears 38 times in the document!

davidwinch's picture

Criminal prosecution

davidwinch | | Permalink

We need to be aware that criminal prosecution is not a particularly attractive route for HMRC because of the resources they need to devote to a criminal prosecution and the burden of proof on them to show (in the majority of cases) that the taxpayer has been dishonest.

So whilst HMRC may at an early stage decide to conduct their investigation to a criminal standard with "a view to prosecution" it is by no means certain that they actually will decide to prosecute.

Of course the threat of criminal prosecution is not going to be welcome to the client but if the client is 100% certain that he has engaged in no deliberate conduct that has brought about (or was intended to bring about) a loss of tax to HMRC (contrary to law) then it would be wrong of him to 'admit' something which he has not done IMHO.

David

BKD's picture

The problem

BKD | | Permalink

davidwinch wrote:

it would be wrong of him to 'admit' something which he has not done IMHO.

David

That's the point, David - if the taxpayer is worried that he may have done something wrong, but hasn't a clue what, he can't make a CDF, even if wanted to in order to avoid any potential CI - his only option is to reject. Previously he had the option of saying "I don't think I've done anything wrong, but I'm more than happy to help you with your enquiries in order to put this matter to bed."

Now it's black or white - do HMRC just not get the fact that we live in a very grey world.

davidwinch's picture

Deliberate conduct

davidwinch | | Permalink

BKD wrote:

davidwinch wrote:

it would be wrong of him to 'admit' something which he has not done IMHO.

David

That's the point, David - if the taxpayer is worried that he may have done something wrong, but hasn't a clue what, he can't make a CDF, even if wanted to in order to avoid any potential CI - his only option is to reject. Previously he had the option of saying "I don't think I've done anything wrong, but I'm more than happy to help you with your enquiries in order to put this matter to bed."

Now it's black or white - do HMRC just not get the fact that we live in a very grey world.

BKD

If the taxpayer "hasn't a clue what" then he has not engaged in any DELIBERATE conduct causing a loss of tax to HMRC.  So he should not be convicted of dishonesty.

If, on the other hand, he 'admits' deliberate conduct causing a loss of tax to HMRC (contrary to law) then he is admitting criminal dishonesty.

David

BKD's picture

Ah, but, David

BKD | | Permalink

What if he was involved in deliberate conduct, but has genuinely forgotten about it? OK, so that may be very much the exception and perhaps such an individual isn't deserving of any protection in any case.

Missing the point

allsaintchris | | Permalink

davidwinch wrote:

BKD wrote:

davidwinch wrote:

it would be wrong of him to 'admit' something which he has not done IMHO.

David

That's the point, David - if the taxpayer is worried that he may have done something wrong, but hasn't a clue what, he can't make a CDF, even if wanted to in order to avoid any potential CI - his only option is to reject. Previously he had the option of saying "I don't think I've done anything wrong, but I'm more than happy to help you with your enquiries in order to put this matter to bed."

Now it's black or white - do HMRC just not get the fact that we live in a very grey world.

BKD

If the taxpayer "hasn't a clue what" then he has not engaged in any DELIBERATE conduct causing a loss of tax to HMRC.  So he should not be convicted of dishonesty.

If, on the other hand, he 'admits' deliberate conduct causing a loss of tax to HMRC (contrary to law) then he is admitting criminal dishonesty.

David

 

David, it is not necessarily about the taxpayer being convicted for something he hasn't done, it's the hassle, stress and cost of having to use solicitors etc to defend him as part of the legal process of a potential criminal prosecution, whereas engagement with the taxpayer could have prevented it by the taxpayer being able to deny the allegations HMRC have against him, following  an initial denial (but wish to cooperate) available under the previous CDF terms.

HMRC do get their sources wrong, as I have seen on many occasions, and even where it was dealt with by CI, they would eventually drop it when it was proved to them that the information was false, or the taxpayer was am innocent party.  The poor taxpayer was beside themselves with worry and stress, not to mention the fees incurred both from myself and solicitors to deal with both CI and Civil Fraud teams at HMRC.

 

davidwinch's picture

@allsaintchris

davidwinch | | Permalink

As I said in my earlier post the threat of criminal prosecution is not going to be welcome but IMHO a taxpayer should not 'admit' to deliberate tax evasion if he has not done that.

I simply do not think that an honest taxpayer should 'confess' to dishonesty just because HMRC make a threat of possible criminal prosecution if he does not.

I appreciate that the previous COP9 arrangement was more accommodating than the new version - but I was commenting on the new position.

David

@ David

allsaintchris | | Permalink

I agree with your viewpoint, my issue is the poor taxpayer who denies a fraud, gets no option to cooperate with HMRC in the first instance, instead they could get hauled into a police station without a chance of speaking with HMRC to find out what the issue is.

Even admitting to a fraud, and then effectively retracting that at the first meeting with HMRC, would probably still end up with it potentially going to Criminal as HMRC would then deem the taxpayer to have withdrawn cooperation.

It just seems very unfair and far too biased towards HMRC.  At least old CDF there was always the reasonable chance to good dialogue with HMRC.

 

 

davidwinch's picture

Police station interview

davidwinch | | Permalink

A police station interview (particularly if preceded by an arrest) is surrounded by a good deal of formality which actually serves to protect the innocent interviewee. In particular:- the interviewee is entitled to legal advice before & during the interview, prior to the interview there is disclosure of the reason for the interview & the general nature of the allegation, the interview is tape-recorded & a copy of the recording made available to the interviewee, and the interview is held under caution.

If the matters to be discussed are complex, detailed and refer to events some time ago then the legal adviser MIGHT advise the interviewee not to answer the questions but simply to give his own brief account of the basic facts at the commencement of the interview. (There are pros and cons to such an approach.)

I would certainly not advise anyone to admit to fraud & then later deny it. Self-evidently providing contradictory stories in this way sets one up for the accusation that one has undoubtedly lied (either in the admission or the denial) & that would effectively undermine one's credibility!

David

rbusfield's picture

Agree tax fraud is not black and white

rbusfield | | Permalink

I understand HMRC have removed the cooperation option to streamline and simplify the CDF process.

We have had many clients who have used CFD trades advised by Montpelier. They were told that no DOTAS number was required. HMRC have sent them COP9/CDF letters. It can be tempting for taxpayers to accept the CDF route to obtain immunity from prosecution however these cases show that  tax fraud is not black and white. most of these taxpayers have decided not to accept the CDF route in relatio to Pendulum because they believe they did not intend to deliberately mislead HMRC.

 

By removing the cooperation option it will be interesting to see how this affects penalties going forward. Under the old penalty rules taxpayers receive up to 40% reduction for cooperation.

 

It is true that criminal investigations are expensive for HMRC and it is difficult to prove tax fraud beyond all reasonable doubt, however HMRC have also said they want to increase prosecutions going forward in order to deter serious tax fraud.

 

Although the Mehjoo case was won by the tax agent, tax advisers need to be careful not to take on work outside of their original engagements where specialist knowledge is required. Feel free to call us if you would like to discuss on a no names no obligation basis. 

http://www.wattbusfield.co.uk/contact-us/ 

I am surprised

The Innkeeper | | Permalink

that no one has mentioned yet the issue of Human Rights and self - incrimination.