On 1st July 2014, HMRC reformed its Contractual Disclosure Facility (CDF) to remove from those suspected of fraud the option of “denial”, a route which allows engagement and cooperation. What remains is the stark choice between on the one hand admitting fraud, and on the other refusing cooperation and inviting prosecution.
The Code of Practice (“COP9”) procedure allows that, in certain cases, those suspected of tax fraud are notified by HMRC that they are under suspicion and offered the opportunity to make full disclosure of any deliberate conduct under a CDF. The offer expires after 60 days. The most significant advantage to the suspected party of agreeing to participate is that in return for full and frank disclosure, HMRC will undertake not to prosecute any fraud admitted. Instead, there will be a financial sanction made up of the tax avoided, interest and a penalty (which is reduced from the usual, non-CDF level) . In addition to immunity from prosecution and reduced penalties, a successful participant in a CDF may avoid other sanctions such as insolvency and reputational harm through adverse publicity. However, it is important to bear in mind that complying with the terms of a CDF is an admission of fraud, something which itself may have serious consequences (for example for those in regulated professions or for those who may seek to borrow large sums in the future).
Those who do not wish to enter a contractual agreement with HMRC had - until now - the options of non-cooperation or “denial”. The latter, despite its name, involved the suspected party providing an explanation to HMRC and thereafter engaging with any investigation with the aim of allaying suspicion. In circumstances where suspicions are based on a misunderstanding or a mistake – sadly not unusual – the denial route allowed the innocent taxpayer the opportunity to cooperate with HMRC to achieve a satisfactory outcome. Now, refusal to participate in a CDF makes a criminal investigation – and all that comes with it (interviews under caution and so on) – all but inevitable. Even if that investigation does not lead to a prosecution, the subject will have had the stress of a potentially lengthy investigation and have incurred significant legal and professional fees.
While HMRC maintains that anyone who declines a CDF may still provide an explanation, the COP9 process no longer includes a formal line of communication; during the 60 day offer period HMRC will not communicate with the suspected party, or divulge any information about their investigation. This may not pose difficulties in circumstances where the basis and focus of the suspicion are obvious, but where they are not the taxpayer has no means to set the record straight.
It is hard to avoid the conclusion that HMRC is becoming more aggressive and gearing up for more prosecutions (or higher penalties in the alternative). It is a real concern that a trend will develop of unwarranted investigations/prosecutions that would not even have started if the denial option had been available.