Code of Practice 9 investigations are taken very seriously. COP 9 is a commonly used abbreviation for HMRC investigations conducted through the civil disclosure of fraud (CDF) process and the Fraud Investigation Services (FIS) division. Despite its critics, it appears as though the COP 9 process is here to stay. Sarah Stenton and Lisa Vanderheide give advisors with actionable insights.
To report suspected tax fraud to HMRC, taxpayers can follow the Code of Practice 9 (COP 9) process. With this approach, HMRC and taxpayers may rest easy knowing that tax fraud cases will be resolved. However, this procedure is frequently mismanaged, and in some situations, it is even misused. Several critical practical tips include the following: properly briefing clients for the initial meeting with HMRC to avoid surprises; working with HMRC cooperatively and courteously by holding scoping meetings; assuring that the COP 9 report produced is in line with its intended scope and keeping HMRC updated on developments. For those who are under suspicion of tax fraud or who have voluntarily disclosed their activities, the Conference of the Parties (COP 9) remains an important process.
There is a COP 9 investigation opened by HMRC when there is a suspicion of fraud and HMRC is willing to settle the tax liability civilly instead of illegally. People under investigation via COP 9 have the “advantage” of knowing they will not be punished for tax fraud if the COP 9 process is followed and full transparency is provided.
When someone receives a letter outlining the COP 9 method for reporting tax fraud, it marks the beginning of what may be a long process. As a result of our experience working on several COP 9/CDF inquiries, we’ve written an essay explaining the nine procedures necessary to successfully resolve a COP 9 inquiry.
Committing to tax fraud?
The COP 9 procedure requires that the subject of the investigation admit to committing tax fraud upfront. Since HMRC modified the COP 9 process in 2012, tax fraud has been acknowledged from the beginning. There was a time before 2012 when people would engage the COP 9 process without admitting to tax fraud but still expect (and get) protection from prosecution.
An initial “outline disclosure” is required as part of the Conference of the Parties (COP) 9 process, and this is done to guarantee that all tax irregularities, both personal and company-related, are disclosed from the outset. A 60-day deadline has been set for submitting the outline disclosure to HMRC after receiving notice of the COP 9 inquiry in the mail.
The outline disclosure form distinguishes between deliberate (i.e. fraudulent) tax irregularities and non-deliberate (i.e. negligent) tax irregularities. As there can be no doubt about what happens, admitting fraud can be a tough step for many people to take. Either fraudulent/deliberate activity has occurred, or it has not, and that distinction must be established right away.
A ‘denial’ is considered a failure to admit fraud at this level. After that, HMRC has the option of conducting its own investigation or of returning the case to the criminal prosecution team for further investigation. This does not excuse anyone from refusing to confront the truth when faced with it. It’s important to consider why HMRC believes there’s fraud going on and to address that in the preliminary disclosure.
Some people (or their advisors) may be tempted to admit tax wrongdoing in the outline declaration in order to win immunity from prosecution and then seek to “water it down” in the final report as carelessness. HMRC disapproves of such a strategy and may reject the report and withdraw from the COP 9 process as a result.
The COP 9 process is normally confirmed by HMRC by sending a letter after the outline disclosure has been filed (and, ideally, all of its early concerns have been addressed). This letter will recommend an initial meeting. The purpose of the meeting is to discuss the outline disclosure’s content and to acquire further background information. Despite the fact that formal Hansard questions are no longer asked, HMRC has been known to do so on sometimes.
Even though individuals are expected to attend these meetings, they are not required to do so. They can be time-consuming and upsetting for everyone involved. People may choose not to attend for a variety of reasons, including being elderly or ill, or because of sensitive concerns, they may not want to bring up in front of HMRC.
Customers that attend must be properly informed about HMRC’s expected approach and the specific nature of its queries because any surprises can be difficult to manage for both the customer and the adviser. During an HMRC meeting, for example, a client insisted they had modest outgoings and lived frugally. When HMRC enquired about their assets subsequently, their credibility was tarnished since they had to reveal that they owned three high-end sports cars.
Outright lies entail tremendous risks, thus the client must be truthful. If a client is unclear of how to respond to an inquiry, we advise that they just say nothing and promise to get back to HMRC with a written response as soon as possible. These sessions are difficult, and HMRC normally supports a person who abstains from answering some questions, as long as this is handled properly. HMRC knows This means that when clients ask questions, advisors should not be afraid to step in and answer them. Nothing said is preferable to anything said later and regretted. There was an instance when the customer in a state of panic answered the questions by saying “no” when the required response was “yes”. When it became clear that he had lied, we worked with HMRC to make things right.
In the past, the opening meeting and the scoping meeting were held separately, but currently, they are frequently held together.
The majority of COP 9 investigations aren’t resolved until a comprehensive report detailing all tax infractions is completed. It’s clear from the name of the conference that its purpose is to discuss and agree on the report’s whole scope with HMRC. HMRC’s request to include certain issues in the report is likely to reveal the nature of the company’s worries about offering the CDF process if that wasn’t previously obvious from the earlier meeting questions (albeit HMRC cannot formally disclose its concerns at this stage).
In order to agree with HMRC on what is reasonable in terms of the report’s work, the adviser will need to engage in extensive bargaining during the scoping conversation. With a COP 9 report, HMRC may, for example, request thorough bank account reconciliation work covering the entire period of the tax irregularities. As a rule of thumb, we say that a few sample years should be sufficient if the reconciliation reveals any surprises.
When a customer has a wide range of business interests, it’s critical to have a scoping discussion upfront. The extensive evaluation of the companies should be eliminated from the report prepared when the tax risk is low (for example, a major audited corporate entity). It will, however, be determined by the specifics of the situation. As long as HMRC’s worries stem from the running of a firm like this, it’s possible that their investigation will touch on both the individual and the corporate entity.
However, it’s also an excellent chance to establish cordial ties with HMRC inspectors at the scoping meeting. Discussing timelines, continuous liaison, and updates should be the focus of the conversation. Making HMRC your enemy will not help your case if you are dealing with a COP 9 investigation.
It’s not just a writing exercise. It’s much more than that.
Everyone feels relieved when the first HMRC meeting is over, but the real work now begins for everyone.
Not only must the appropriate reviews be conducted, the tax violations quantified, and a written report prepared in the coming months; the relationship with HMRC must also be managed throughout this time. Regular monthly phone updates to HMRC are part of our standard operating procedure. These updates include a description of the work completed to date, any anticipated delays, and any anticipated shifts in deadlines. While compiling information from clients and other parties and resolving difficulties discovered during COP 9 analytical work may seem simple at first, few COP 9 reports actually are. If you keep HMRC informed, it’s likely that it will be understanding.
However well-intentioned, things can pop out when working on the COP 9 report that wasn’t previously disclosed in the outline disclosure (for example, in cases when the proper technical processing of a tax transaction has been questioned but not previously highlighted by advisers). HMRC should be alerted right away if such a problem emerges.
If the HMRC connection isn’t properly managed or HMRC isn’t kept up to date on progress, there are several concerns. Since the client hasn’t been cooperating, HMRC might conclude that they aren’t cooperating with COP 9. For HMRC to be exempt from prosecution, it must undertake its own investigations, and immunity from prosecution is thus lost. HMRC is likely to issue intrusive information demands to third parties, including banks, employers, and in some situations, professional advisers, when conducting its own inquiry.
Do what you say you will do
In order to meet HMRC’s requirements, a report must be submitted that is consistent with the scope agreed upon in a scoping meeting and with the subsequent regular updates. In the report, you should include information on the work you did, the sample years you agreed to use, and any explanations you need to give for your findings. A breakdown of the additional tax due should be included.
To expedite the COP 9 process, advisers have agreed to the report’s scope just to get it over the finish line. In the end, however, they submitted to COP 9 a report that had no relation to the agreed scope, included fictitious assertions, and even declared that there was no fraud. Because HMRC had put their faith in the customer and adviser to complete the report according to scope (and waited 12 months for it), they were understandably angry and responded accordingly. After failing to react in a timely manner, HMRC was compelled to establish the client’s tax liability on its own. For the client, this was a costly error, as HMRC’s tax assessment substantially exceeded the genuine tax position, and the client had limited options for challenging HMRC’s assessment. We were hired by the client and were successful in re-establishing contact with HMRC and coming to an amicable agreement.
The ‘Full Monty
For HMRC to provide immunity from prosecution, the client must make complete disclosure as previously specified. The nature of the tax irregularity and the scope agreed upon with HMRC will determine the content of a COP 9 report. Full disclosure, on the other hand, calls for a few key reviews to be performed regularly. A means test is a way to find out how much money a client has available for living expenditures, and it’s an easy approach to see if the income the client claims to have and their manner of life is deficient in any way.
Analyses of bank and credit card accounts can reveal where money has come from and gone to, as well as how much has been spent. Determining earned income as well as untaxed investment income and capital gains requires such assessments. There should be an investigative approach to all evaluations; whenever something does not appear right, or if you suspect an additional tax liability, inquire why.
Counting the cost
The financial costs, including taxes, interest, and penalties, are at the center of each COP 9 investigation.
HMRC’s perspective may not always be valid for determining the correct tax amount. For instance, HMRC’s estimation of how long it has to collect tax may be off. In cases of fraud, HMRC has the power to go back 20 years and assess underpaid taxes. If a tax irregularity arises from a simple “error,” it can only be assessed for four years; if it arises from a failure to take reasonable care, it can be assessed for six years. Those are the only two time frames that apply. The amount of tax, interest, and penalties payable can be significantly impacted by determining and clearly reporting the circumstances surrounding the tax irregularity.
For HMRC, interest is a statutory fee that makes up for the time it took to receive the money. There are just a few conditions under which HMRC will allow interest to be mitigated. However, in cases where HMRC has been tardy in processing your claim, mitigation may be justified. Additionally, HMRC frequently makes mistakes when computing interest, especially when late payment and payback interest are both present. In order to succeed, double-check your interest calculations. Make certain, in particular, that all applicable credits are given and that the correct dates are utilized to determine when the underlying tax was due.
HMRC constantly considers imposing penalties when discovering an unpaid tax balance. In cases where offshore elements are present, penalties can range from zero percent to 200 percent of the tax, and they can be significantly more in other cases (such as when an asset-based penalty charge is applied for an overseas issue). As a result, it’s critical that any fines and penalties are taken into account as soon as possible during COP 9. It is critical for advisors to make sure that their clients are made aware of the likelihood of fines as well as the steps that can be taken to minimize those penalties. This can be accomplished by taking a strategic approach to the way tax irregularities are brought to HMRC (with full disclosure, of course) and the degree of assistance provided to HMRC. In addition, keep in mind that numerous elements might be taken into account to reduce ‘maximum’ penalties for the applicable infraction in addition to ensuring that the tax irregularity is accurately classified. With regard to HMRC’s starting point, our experience has shown that they always start ‘high.’ However, there should be vigorous negotiation and some concession on HMRC’s part so as to reduce the penalty sought or even negate the penalty totally.
Lastly, keep in mind that clients who have paid penalties for a willful tax irregularity may be included in HMRC’s “deliberate tax defaulters” program. This allows HMRC to post on their website the client’s name, address, default period, total tax due, total penalties incurred, and other pertinent information. HMRC can be persuaded not to publish some details in certain instances, and this should always be discussed with HMRC.
As part of the COP 9 disclosure procedure, a variety of forms must be completed and submitted, including:
- Documents attesting to the use of bank and credit card services
- All the documents showing the assets and liabilities
- A certificate of full disclosure.
Each form comes with the health warning described previously regarding the risk of not disclosing complete information, since incorrect statements can and do lead to criminal investigations, as these forms are anecdotally known as HMRC’s “insurance policy.” As a result, ‘testing’ the forms before submitting them to HMRC is critical. HMRC will look for abnormalities on the forms and cross-reference the forms with the information they hold.
One of the most famous criminal prosecutions of all time was the one against Lester Piggott. It was reported in 1987 that champion jockey Lester Piggott used many aliases and pseudonyms to hide his riding money in secret bank accounts in Switzerland, the Bahamas, Singapore, and the Cayman Islands. Piggott was notably convicted of an alleged £3 million tax fraud in 1987. As well as making fraudulent declarations to HMRC, the jockey paid his tax debts with a bank account that wasn’t disclosed on his certificate of bank and credit card accounts. This lapse in judgment was the trigger for his criminal trial (though Piggott himself said this was a myth).
‘Don’t do it again!’
What if, after a COP 9 investigation has been completed, more tax irregularities are discovered? This is obviously a bad idea] (remember, the COP 9 protection from prosecution relies on full disclosure). On the other hand, it does happen on occasion, either accidentally or on purpose.
Disclosing and approaching HMRC after discovering a tax issue that pertains to years already covered in a closed COP 9 investigation needs to be handled with care. If you find yourself in this situation, you should get professional help right away. It’s critical to figure out if the omission was on purpose or an accident and to communicate effectively with HMRC. The extent of HMRC’s investigation will be determined by the omission’s gravity.
However, people who have previously been investigated under COP 9 have been found to have omitted information from their ‘full disclosure’ on occasion. There is a substantial possibility of a criminal inquiry in these circumstances, and it is important to get assistance as soon as possible.
Many people have criticized the COP 9 procedure, including HMRC inspectors with high positions of authority. To date, there have been no indications that HMRC has any concrete plans to alter its current approach to situations where fraud is suspected.
Between 2016/17 and 2018/19, the number of FIS-opened COP 9 cases decreased by 10% annually. Several factors will influence these figures, including the fact that several experienced inspectors have been transferred to HMRC’s Counter Avoidance Directorate (CAD) and others have been seconded to aid with Brexit preparations.
Because of this, the figures should not be interpreted as showing that HMRC is ceasing to conduct COP 9 inquiries. There will be an increase in COP 9 inquiries in the coming years as HMRC becomes more familiar with the information it receives through the common reporting standard and other systems for exchanging information. A small number of FIS offices (mostly in Scotland) also participate in joint task forces with other government agencies to look into cases where criminal activity may have occurred (ranging from tax fraud to illegal immigration). More COP 9 inquiries are inevitable as these task groups fine-tune their operations.
People who desire to make a voluntary disclosure to HMRC can do so through the COP 9 method. Instead of waiting for HMRC to come knocking, an adviser can approach HMRC and ask for the protection of COP 9. Some of these voluntary methods may have been influenced by the specter of CRS.
Regardless of what critics think, COP 9 is a process that will continue for some time. People who are under investigation for tax fraud or have made a voluntary disclosure might benefit from the process in a variety of ways. However, clients must realize that in order to get the most out of COP 9, they must be open and honest from the start. Clients who have the stomach for it will have nothing to fear from COP 9.
Originally published in Tax Journal on January 21, 2020, the original version of this article is available behind a paywall here.