On 20 July 2011, HMRC published a discussion document entitled: Civil Investigation of Fraud – Contractual Disclosure Facility. HMRC are seeking comments on proposed changes to their Civil Investigation of Fraud (‘CIF’) procedure, which is set out in Code of Practice 9 (commonly known as COP 9). In particular, HMRC seek views on a proposal to introduce a Contractual Disclosure Facility (‘CDF’). The main drivers for change appears to be the NAO’s recommendation for a more credible deterrent to non-cooperation by taxpayers and HMRC’s inability to commence a criminal investigation during the CIF process where taxpayers do not make a disclosure (as opposed to disclosing materially false statements or documents). The consultation period expires on 20 September 2011.
The existing CIF procedure
As readers will be aware, HMRC are empowered to investigate suspected tax fraud. They may conduct either a criminal or civil investigation, but criminal investigations are reserved for cases where only a criminal sanction is appropriate or where they are of the view that they need to send a strong deterrent message to the wider taxpaying public.
The existing CIF procedure offers taxpayers an opportunity to make a full and complete disclosure of irregularities in their tax affairs. In exchange for such disclosure, HMRC will not pursue criminal charges in relation to the tax fraud under investigation. In addition, HMRC may also reduce penalties to reflect cooperation on the part of the taxpayer. If, however, ‘materially false statements are made or materially false documents are provided with intent to deceive’ during the course of the CIF, then HMRC may conduct a criminal investigation with a view to commencing criminal proceedings against the taxpayer concerned. Subject to this exception, once HMRC has decided to conduct an investigation under the CIF procedure it cannot commence a criminal investigation.
HMRC are concerned that some taxpayers who participate in the CIF procedure and obtain the benefit of the removal of the possibility of prosecution provided there is no materially false disclosure, have no intention of cooperating with HMRC and paying any tax that has been fraudulently withheld from the Exchequer. HMRC suspect that such taxpayers may be deliberately playing for time in order to place their operations and assets beyond HMRC’s reach. HMRC’s stated intention is to: ‘reduce the operational time spent dealing with cases of serious tax fraud by speeding and improving the identification of those who are not honestly engaged with the system’.
HMRC’s proposal – a new CDF
Under the proposal, where HMRC suspect a taxpayer of fraud but have decided to pursue the matter civilly (either on the grounds of cost or public interest), they will write to the taxpayer concerned informing him that he is suspected of tax fraud and offering him the opportunity to enter into a CDF in exchange for certainty that HMRC will not carry out a criminal investigation. The contract would require the taxpayer to make an outline disclosure of all known irregularities within a relatively short period of time (60 days is suggested in the discussion document), covering a general description of the fraud, the length of time the fraud has been perpetrated and an indication of the amounts involved. The intention being that such a period would allow the taxpayer the opportunity to seek advice to determine whether the irregularities were fraudulent. Once the outline disclosure had been made, HMRC would then seek to agree with the taxpayer the best way forward to make full disclosure and to pay any outstanding tax, interest and any penalties.
It is significant that under the proposal, taxpayers themselves will be able to make a ‘spontaneous offer’ to HMRC to enter into a contract to disclose. This process would work in the same way as the CDF except that the offer of the contract would come from the taxpayer rather than HMRC. Such disclosure will be possible regardless of the size of the fraud. HMRC hope that this will encourage more taxpayers to disclose fraud.
A key feature of the proposal is that there would be a prescribed timetable for accepting the contract process and making an initial outline disclosure. This would, according to HMRC, speed up the time currently lost waiting for initial meetings and disclosure reports under the existing CIF procedure. Active management of progress after the initial terms of the contract had been fulfilled would continue, as it does under the existing regime, with HMRC scrutinising disclosures made by taxpayers and conducting their own investigation using their information powers when considered necessary.
One can see why HMRC would wish to reduce the length of time it takes to deal with cases where the taxpayer is misusing the CIF process and has no intention of making a disclosure. From HMRC’s perspective, the proposal has the advantage of making it easier for them to identify and ‘tackle’ such taxpayers at an early stage in the process. The downside for taxpayers is that they will have a much shorter period of time in which to disclose details of any tax fraud in which they may have been involved and will face the possibility of a criminal investigation if they do not make a full disclosure.
Taxpayers who enter into a CDF, will need to be fully aware that if they fail to comply with the contract, for example, by delaying matters without good reason, they will face possible cancellation of the agreement and criminal proceedings.