HM Revenue & Customs is not renowned for its generosity.
However, in circumstances where the department comes across suspected tax evasion, it can offer immunity from prosecution for tax offences in exchange for a full and accurate disclosure of any tax irregularities.
This is the contractual disclosure facility.
The CDF follows a prescribed format and can only be issued by an authorised officer at HMRC, usually a member of the Fraud Investigations Unit.
The opening letter from HMRC will notify the taxpayer of their suspicion of tax fraud and enclose a copy of the Code of Practice 9 (COP9).
The taxpayer will then have 60 days from HMRC’s initial letter to respond and will be given only two choices; either to accept HMRC’s offer of a CDF (and in doing so admitting deliberate tax evasion) or decline the offer.
If no response is filed or received after 60 days, then HMRC will automatically assume the offer to take part in the CDF has been rejected.
Declining the offer will then trigger an investigation by HMRC, which will consider whether to investigate the suspected tax fraud under a civil route or under a criminal investigation.
Proof of tax evasion
On all occasions, the circumstances of any tax underpayment must be closely reviewed by an experienced specialist who is skilled in tax investigations and tax resolutions work, and well-versed in CDF work.
While the potential threat of criminal prosecution should be taken seriously, receiving a CDF is not quite all it seems.
- A CDF can offer immunity from prosecution for tax offences
- The facility does not always mean tax authorities meet the required standard of proof
- COP9 is a way to collect tax from perceived or actual tax evaders
Firstly, it may mean the quality of any evidence held by the tax authorities does not meet the required standard of proof (beyond all reasonable doubt) to mount a successful criminal prosecution.
Secondly, HMRC’s use of this facility is not what it was 25 years ago when a client in receipt of such an offer might reasonably be advised that this was serious and that the offer would not have been made lightly.
In more recent years the CDF has been used more frequently to elicit confessions from those who have participated in unpalatable tax schemes with a logic little stronger than, ‘They must have known better’.
While dodgy tax schemes should not be condoned, many individuals who have historically participated in tax schemes will have done so under ‘professional’ advice.
Reliance on professional advisers, ignorance of the law or simple stupidity are not ingredients of tax evasion, which by its very nature requires a deliberate intent to evade taxes.
Reasons to reject CDF offer
In practice, there are many good reasons to advise clients not to accept the offer of the CDF.
- An individual may not have done anything wrong with a deliberate intention to evade tax (‘mens rea’ or guilty mind).
- An admission of tax fraud will immediately condemn an individual to large monetary penalties of a minimum 20 per cent of the tax lost, 35 per cent if they are approached first by HMRC, and quite possibly 45 per cent, if irregularities go back more than three years. Maximum penalties can be as much as 100 per cent of the tax lost or 200 per cent of the tax lost for some omissions of overseas income.
- An admission will expose the past 20 years to tax scrutiny and assessment, rather than only six years if carelessness is in point, or four years if there is an innocent error.
- An individual may have been acting under the advice of a qualified professional (accountant, independent financial adviser, solicitor or barrister).
- Those working in a regulated sector will not want to be ‘named and shamed’ as a tax evader, since this could prevent them from working.
- Professionals admitting to tax fraud (even though you may not be guilty at all) may be under an obligation to report themselves to a professional body, which may render them liable to other punitive sanctions, including being struck off.
- ‘Innocent’ participation in a tax scheme does not equate to tax fraud.
- An individual’s business or company may have been the victim of a fraud, perpetrated by a third party, of which they were unaware.
- Information may have been maliciously disclosed to HMRC by third parties, which is not necessarily reliable or is capable of explanation.
- The costs of defending a CDF is likely to be many times more than simply reviewing precisely what may have happened.
- Admitting deliberate behaviour may mean an individual is included in HMRC’s Managing Deliberate Defaulters programme, with their affairs being monitored for years to come.
- If made public, an individual’s personal and business reputation could be seriously damaged.
Approaching HMRC at this stage for an honest and open exchange of information to give the adviser a ‘clue’ will in most cases yield nothing, with the officer usually asserting that it is for the (non-) taxpayer to make the disclosures being sought.