New procedure for investigating tax fraud

HMRC is planning to introduce the Contractual Disclosure Facility (CDF) on 31 January 2012 to replace the existing Code of Practice 9 (Cop 9) procedure for investigating tax fraud.

The main reason for the introduction of the new procedure is to enable HMRC to identify from the outset those who wish to participate and those who do not.  HMRC will no longer guarantee immunity from prosecution unless a full outline disclosure is made within the prescribed time frame.

Under the CDF HMRC will write to the individual stating that they have 60 days to accept (in the form of a contract) that they knowingly evaded tax, outline what income or gains were not disclosed and the tax owed.

If HMRC does not receive the contract then the case will be considered for Criminal Investigation or HMRC will undertake its own enquiry.  If the individual confirms that they deliberately understated their tax liabilities but does not make an outline disclosure or makes a false disclosure HMRC will again consider a Criminal Investigation.

Once the outline disclosure is made HMRC will agree with the individual’s representative how to proceed with the investigation and whether a formal report is required. 

Under the existing CoP 9 procedure the individual is asked to meet with HMRC to disclose any tax liabilities and commission a report to confirm the tax owed; however there is no need to accept or deny that tax was deliberately evaded. Under the CDF procedure, the individual has to confirm from the outset that they either accept or deny that they were involved in tax evasion.

Furthermore, HMRC will consider the CDF procedure in all cases where it suspects that tax is at risk.  There are no de minimus limits and any decision will be based on the suspected behaviour of the individual concerned.

Advisers need to be aware that the introduction of the CDF will radically alter the process of representing clients suspected of tax fraud, as you need to identify at the beginning of the process whether the client deliberately understated their income or gains.  If the client suggests that it was not deliberate and a denial is made there is a real risk that the client could be Criminally Investigated.

To find out more about the new CDF procedure and how this will work in practice please telephone the TaxDesk on 0845 4900 509 and ask for John Hood