HMRC launches contractual disclosure facility for tax fraud

Practical Law UK Legal Update 0-517-2289 (Approx. 10 pages)

HMRC launches contractual disclosure facility for tax fraud

by PLC Tax

Background

HMRC is empowered to investigate suspected fraud across all taxes. It may conduct either a criminal or civil investigation, but criminal investigation is reserved for cases where only a criminal sanction is appropriate or where HMRC considers that it needs to send a strong deterrent message. If HMRC considers that the case does not merit criminal investigation, it will apply its civil investigation of fraud (CIF) procedure. This procedure is set out in Code of Practice 9 (COP 9).

On 20 July 2011, HMRC published a discussion document seeking views on improvements to its CIF procedure. In particular, HMRC sought views on a proposal to introduce a "contractual disclosure facility" (CDF). This would involve taxpayers agreeing to make an outline disclosure (OD) within a short prescribed period (the document suggested 60 days). A more detailed disclosure and payment of the outstanding tax, interest and penalties would then follow. In return, HMRC would agree not to pursue a criminal investigation provided the taxpayer adhered to the agreement. It was proposed that either HMRC or the taxpayer could initiate the CDF. For more detail on the July 2011 consultation, see Legal update, Civil investigation of fraud: HMRC publishes consultation on contractual disclosure facility.

On 8 December 2011, HMRC published a summary of responses to the July 2011 consultation and an outline of how HMRC intended to proceed. There was clear acceptance by respondents of the need to improve the CIF procedure and HMRC planned to go ahead with the CDF. For more detail, see Legal update, Contractual disclosure facility: HMRC publishes next steps.

Contractual disclosure facility (CDF)

On 10 January 2012, HMRC published details of the CDF. The CDF opens on 31 January 2012 and applies to all taxes administered by HMRC, regardless of when liability arose.

The guidance on HMRC's website contains a link to, among other things, a CDF1 voluntary disclosure form and a revised COP 9 (dated 9 November 2011) with guidance on the CDF and CDF1. COP 9 includes a decision tree in Appendix 1.

The CDF largely follows the proposals in the July 2011 discussion document, as subsequently amended and explained in the December 2011 summary of responses (see Legal updates, Civil investigation of fraud: HMRC publishes consultation on contractual disclosure facility: Contractual disclosure facility (CDF) and Contractual disclosure facility: HMRC publishes next steps: Next steps and consultation responses). However, the following aspects of the CDF and the guidance are noteworthy.

CDF steps

If HMRC suspects that a taxpayer has committed tax fraud (see Admission of fraud kept), it will offer him a CDF contract and send him an acceptance letter, a denial letter and a copy of COP 9. HMRC will not usually tell the taxpayer what HMRC's suspicions are and it is up to the taxpayer to decide to make a disclosure (section 1.1, COP 9).

The taxpayer has 60 calendar days (see 60-day time limit) in which to do one of the following:

Admit to committing fraud (see CDF route).
Decide not to admit committing fraud (see Denial route).

Alternatively, the taxpayer can do nothing (see Non-cooperation route). HMRC states that it is unable to begin any discussion about the taxpayer's affairs until either he has notified HMRC of how he wishes to proceed or the 60-day response period has expired (section 2.8, COP 9).

CDF route

It is important to note that HMRC states that a valid CDF arrangement can only be made by the taxpayer accepting HMRC's standard offer and that HMRC will not make an offer on any other terms (section 2.4, COP 9). In other words, the terms are not negotiable.

If the taxpayer wishes to admit to committing fraud under the CDF terms, he must:

Sign and return the acceptance letter.
Make the OD within 60 days of receiving HMRC's letter (see Outline disclosure).

If the taxpayer wishes to admit to committing fraud on other terms, the decision tree states that he can do nothing in response to HMRC's letter, in which case he will have taken the non-cooperation route (see Non-cooperation route).

By accepting the CDF terms, the taxpayer agrees to:

Tell HMRC about all the tax he has deliberately evaded, with no exceptions.
Give HMRC details, in the OD, of all the tax he has evaded within 60 days of being offered the contract (see Outline disclosure).
Sign a statement to say that he has provided accurate and complete details of the tax fraud (see Formal disclosure).
Pay all taxes, duties, interest and penalties due.
Stop any fraud immediately.

In return, HMRC agrees not to criminally investigate and prosecute him over the fraud that he discloses.

Denial route

If the taxpayer decides against admitting to fraud, he can sign and return to HMRC the denial letter within the 60-day time limit. HMRC states that:

Signing the denial letter means that a taxpayer may still work with HMRC to ensure his taxes are correct and up to date.
It will consider any explanations or documents in support of the denial but the denial letter is still needed if the taxpayer wishes HMRC to consider his case to be a denial route investigation.
It can begin a criminal investigation into his tax affairs at any time and without informing him.
The letter he has signed can be used in court as evidence of his intention to deliberately mislead HMRC.

If HMRC checks and accepts his denial, it will issue confirmation that it no longer suspects him of tax fraud. The guidance provides that a taxpayer should only choose the denial route if he genuinely believes that he has not committed any tax fraud. Further, denying tax fraud that he is later found to have been involved in may result in a criminal investigation with a view to prosecution, or significantly higher civil financial penalties, and the potential publication of his details (see Practice note, Tax penalties: consolidated regime for culpable penalties: Publishing details of deliberate tax defaulters). (Section 2.7, COP 9.)

If the taxpayer decides against admitting to fraud but does not wish to engage with HMRC, he can do nothing within the 60 days, in which case he will have taken the non-cooperation route (see Non-cooperation route).

Non-cooperation route

HMRC states that if it does not hear anything from the taxpayer within the 60 days then it will consider that he has chosen not to cooperate. HMRC will then begin either a civil or a criminal investigation into the tax fraud it suspects he has committed.

If HMRC begins a civil investigation and uncovers further evidence of tax fraud, the civil investigator may pass the new evidence to the criminal investigation team for review so the taxpayer's affairs may ultimately be the subject of a criminal investigation (section 2.8, COP 9).

Voluntary disclosure

The December 2011 document stated that further consideration would be given to how voluntary disclosures (in other words, where a taxpayer completes a CDF1 and asks HMRC to consider him for a CDF contract, rather than HMRC offering him a contract) would be handled and guidance would be included in the revised CDF documentation.

The only guidance on voluntary disclosure is that HMRC's website states that:

HMRC does not have to offer the taxpayer a contract, and will not be able to, if he is already involved in a criminal investigation or another law enforcement department is dealing with him.
If he is already discussing tax issues with HMRC, he should talk to the officer dealing with his case.

The COP 9 decision tree does not refer to the CDF1 process. Logically, though, if HMRC offers a CDF contract to the taxpayer following his filing a CDF1, the usual decision tree steps should follow, including the taxpayer having to decide whether to admit to fraud on the CDF terms (see CDF route).

60-day time limit

In the December 2011 document, HMRC stated that it:

Would use Royal Mail's "Recorded Signed For" delivery service for delivery of the opening CDF letter.
Would accept receipt of the OD by fax, e-mail or post, provided the OD contained the taxpayer's signature (scanned if necessary).
May extend the 60 days by a further short period in exceptional circumstances.

None of these appear in COP 9 or on HMRC's website but it is not clear whether taxpayers can read COP 9 and HMRC's website (which would be the natural home for such guidance) with the December 2011 consultation document. The third confirmation is particularly critical but it is not clear whether it forms part of the guidance or what constitutes "exceptional circumstances".

Outline disclosure

HMRC will send an OD form with the CDF offer letter. The taxpayer must complete the whole form in accordance with the guidance to ensure it is valid (section 4, COP 9). The guidance states that if the taxpayer fails to make a valid OD then HMRC will not be bound to observe its side of the contract and may commence a criminal investigation into any suspected tax frauds (section 3.2, COP 9).

The OD need not contain precise details if they cannot reasonably be obtained within the 60 days. It must, however, be an honest description of the tax fraud that the taxpayer is disclosing (see Admission of fraud kept), made in good faith and to the best of his recollection with the help of any readily available documents. (Section 4, COP 9.)

The OD must contain:

A description of each tax fraud.
The identity of entities or people involved, the taxpayer's relationship to them, the control he has (or had) over them and in what capacity he acted (for example as director, shareholder, beneficiary, trustee, executor, co-executor or administrator of an estate, or nominee).
It is important to note that, as the CDF is a contract between HMRC and the taxpayer, HMRC is not bound to give its undertaking (see CDF route) for any other individual named or implicated in the OD.
The period of the fraud(s).
Any other relevant information. Examples include tax amounts understated, a description of any records that were created, adapted, modified or destroyed, and what records he holds (or can access) to support his disclosure.
HMRC will see this as a sign of the taxpayer's engaging with the investigation. It would take a more serious view when considering any penalties if it later emerged that there was relevant information available that he could have included but chose not to.

(Sections 4.1-4.4, COP 9.)

If the OD does not disclose all the tax frauds that HMRC suspects he might have been involved in then it may commence a criminal or civil investigation into the frauds that he has not disclosed (but not into those he has disclosed) (sections 3.3 and 5.1, COP 9).

If the taxpayer makes a valid OD then he proceeds to formal disclosure (see Formal disclosure).

Admission of fraud kept

In the December 2011 document, HMRC stated that the CDF would require taxpayers to admit to deliberate conduct that HMRC suspects may be fraudulent, rather than fraudulent behaviour. However, it appears from the wording of COP 9 that the taxpayer must admit to fraudulent behaviour. For example, the OD needs to be an

"honest description of the tax fraud you are disclosing". (Emphasis added.)

(Section 4, COP 9.)

"Tax fraud" means any offence for which HMRC has administrative responsibility and could commence a criminal investigation as part of its functions (section 8.1, COP 9). Similarly, it states that the description

"must give enough information to identify the fraudulent conduct. Merely stating that you have committed tax fraud will not be acceptable." (Emphasis added.)

(Section 4.1, COP 9.)

It is unclear how describing the taxpayer's offence or simply stating that the taxpayer has committed an offence is not, in itself, an admission of fraudulent behaviour. A possible explanation for this discrepancy is that the version of COP 9 to which HMRC links from the CDF pages may not yet have been updated to reflect the December 2011 document. We are currently seeking clarification on this issue from HMRC.

Formal disclosure

Simple cases

In more straightforward fraud cases, if the OD confirms what HMRC suspected and HMRC considers that no extra information is needed then HMRC will:

Try to agree the additional tax, interest and any penalty that is due.
Ask the taxpayer to certify that he has made a full and complete disclosure of all the tax irregularities in which he has been involved by providing HMRC standard form certificates of the following:
- his worldwide assets and liabilities;
- the bank accounts operated;
- the credit cards operated; and
- full disclosure (a signed and witnessed statement that he has provided accurate and complete details of the tax fraud) (see Certificate of full disclosure).
Invite the taxpayer to make a financial offer to cover the tax, interest and any penalties to settle the investigation.

(Section 5.2.1, COP 9.)

Complex cases

In complex cases, where more work or additional information is needed to complete the investigation, the taxpayer must prepare a disclosure report. The nature of the report will depend on the facts of the case but HMRC expects the taxpayer to agree the scope of the report with it (possibly at a meeting with the taxpayer, its adviser or both) before the work starts. (Section 5.2.2, COP 9.)

If the final report will be based on assumptions, the taxpayer should highlight and discuss them with HMRC at the earliest opportunity. Where the report is likely to vary from HMRC's known view on the treatment of an issue, this should be raised with HMRC for discussion as soon as possible. (Section 6.3, COP 9.)

The disclosure report will typically contain:

A brief business history.
A description of all tax irregularities, "[including any innocent or careless errors]" (sic), and how any fraud was carried out.
Quantification of all the irregularities and an explanation of the taxpayer's methodology. (See also Other irregularities.)
Summaries of tax, interest and penalties due. (For an overview of the tax penalties regime, see Practice note, Tax penalties: overview.)

A reconciliation of the irregularities figure with the summary of tax.
A certified statement of his worldwide assets and liabilities.
Certificates of bank accounts and credit cards operated.

The taxpayer will also have to certify that he has adopted the report as correct and complete. (Section 6.1, COP 9.)

HMRC will discuss and agree the timetable for preparing the report with the taxpayer and his adviser at the initial meeting. The time needed will depend on the circumstances of the case and will vary according to, for example, the complexity and amount of the work required, and how easy it is to access the details required. (Section 6.2, COP 9.)

While the taxpayer prepares the report, he must keep HMRC informed of his progress. This means attending progress meetings with HMRC if asked to and giving HMRC any relevant documents that it requests so that it can check that the report is progressing as agreed. (Section 6.3, COP 9.) (See also Meetings.)

If HMRC is not happy with the level of progress, it may take over the investigation using formal information powers, approaches to third parties and other protective measures (set out in section 7.5 of COP 9: see HMRC's protective sanctions).

Other irregularities

The guidance states that the formal disclosure should cover all irregularities in the taxpayer's tax affairs but that any non-fraudulent irregularities disclosed should be distinguished from the fraudulent errors. The report should cover how these irregularities occurred and the taxpayer's view of what level of penalty they should attract. (Section 6.7, COP 9.)

This comment is interesting. While the CDF is stated to be only suitable for tax fraud cases (including carousel or MTIC fraud and excise fraud) and not for people wishing to disclose only careless errors, mistakes or avoidance arrangements (see, for example, section 2.3 of COP 9), HMRC still wants to know about other, non-fraudulent irregularities. The fact that HMRC seeks the taxpayer's view of the penalty for these irregularities may suggest that HMRC wishes to use to CDF to settle non-fraudulent irregularities or the penalty element at least.

Certificate of full disclosure

According to the guidance, this is one of the four mandatory requirements for the formal disclosure stage of the CDF. The HMRC template must be used and cannot be amended.

The taxpayer must provide a witnessed and dated signature when submitting his final disclosure. By signing the certificate of full disclosure, he acknowledges that he has made a full, accurate and complete disclosure of all irregularities, to the best of his knowledge and belief.

A false certificate made as part of a CDF disclosure is likely to result in criminal investigation with a view to prosecution in respect of submitting a false document. HMRC may also consider separate criminal investigation of the tax frauds not disclosed in his certified CDF disclosure. The certificate may be used in subsequent criminal proceedings on the false disclosure or submission of false documents.

(Section 6.5, COP 9.)

Ending the CDF process

The taxpayer should tell HMRC if he considers that HMRC should stop the investigation and explain why. If HMRC does not agree, it will explain why. The taxpayer may then be able to ask the First-tier Tribunal to decide whether HMRC should stop. (See Practice note, Tax appeals: taking an appeal to the First-tier Tribunal.)

Further, if he considers that there is nothing more that he can provide then, at any stage, he can make a formal disclosure by completing the four certificates set out in section 5.2.1 of COP 9 (see Simple cases).

HMRC suggests that the taxpayer obtain advice before doing so because providing certificates that are later shown to be false or misleading may result in a criminal investigation in respect of submitting a false document. HMRC may also consider a separate criminal investigation of any tax frauds that the taxpayer has not disclosed. Taking this course will not stop HMRC from making further enquiries if it believes that it needs more information before it can conclude the investigation. (Section 9.4, COP 9.)

Meetings

Once the taxpayer has filed his OD or denial letter, or done nothing within the 60 days, HMRC may ask him to attend a meeting.

HMRC views attendance and full co-operation at these meetings as a strong indication of the taxpayer's engagement with the process, which will help reduce the level of any penalty that may be due. HMRC may use what the taxpayer says or any information he provides at a meeting in assessing liability to tax or penalties. HMRC may also seek to give evidence of this in any appeal proceedings or disclose the information to other organisations where appropriate and lawful. (Section 7.1, COP 9.)

HMRC's protective sanctions

IF HMRC decides to carry out its own civil investigation, as well as using information and penalty powers (see Practice notes, HMRC information powers: overview and Tax penalties: overview), if the taxpayer tries to avoid paying his liabilities or if he tries to dissipate his assets, HMRC will consider using insolvency action (including bankruptcy proceedings, appointing interim receivers or provisional liquidators, and obtaining civil freezing orders over his bank accounts) to ensure that it can collect the money that is due.

HMRC may also seek to impose or increase an amount of security which he must pay before it makes any VAT repayment or, if he or his company is an employer, if there is a serious risk to PAYE, NICs or both. (Section 7.5, COP 9.)

Comment

The guidance on the CDF largely follows the proposals in the July 2011 discussion document, as subsequently amended and explained in the December 2011 summary of responses. However, the guidance does not contain some of the expected wording and clarifications set out in the December 2011 document.

Neither the new COP 9 nor HMRC's website contains the December 2011 document's confirmation that, in exceptional circumstances, HMRC may extend the 60 days by a further short period, to give a significant example (see 60-day time limit). Similarly, in the December 2011 document, HMRC stated that the CDF would require taxpayers to admit to deliberate conduct that HMRC suspects may be fraudulent, rather than fraudulent behaviour itself. However, it appears from the wording of COP 9 that the taxpayer must admit to fraudulent behaviour. (See Admission of fraud kept.)

It is not clear whether taxpayers can, or should, treat the December 2011 document as one with the guidance because, clearly, they are different documents with different purposes. It is critical that this is clarified or that the guidance is amended because both of the changes that the December 2011 document proposes are to the taxpayer's advantage.

(We have seen this before with HMRC's informal tax clearance procedure for non-business taxpayers (CAP 1). There, a number of clarifications given by HMRC during the consultation were not incorporated into CAP 1 itself, leaving taxpayers and their advisers having to refer to both CAP 1 and the consultation documents to gain a complete understanding of the scope and operation of the new procedure. See Legal update, Informal tax clearance procedure for non-business taxpayers: HMRC publishes CAP 1.)

Perhaps the answer is that the revised COP 9 published on 10 January 2012 is a draft. Although the COP 9 does not say that it is a draft, it is dated 9 November 2011 (so it pre-dates the December 2011 document) and, somewhat surprisingly, it contains some text in square brackets (see Complex cases). We are clarifying this with HMRC.

The exact scope of the CDF also needs clarifying. While it is stated to be only suitable for tax fraud cases, HMRC still wants to know about other, non-fraudulent irregularities as part of the formal disclosure process (see Other irregularities). The fact HMRC seeks the taxpayer's view of the penalty for these irregularities may suggest that HMRC wishes to use to CDF to settle non-fraudulent irregularities or the penalty element at least.

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HMRC launches contractual disclosure facility for tax fraud | Practical Law