Out-Law / Your Daily Need-To-Know

The Contractual Disclosure Facility (CDF) is part of a drive in recent years by HM Revenue & Customs (HMRC) to 'crack down' on tax evaders and "close the tax gap".  The CDF is the newest incarnation of Code of Practice 9 - a process which is used by HMRC to reach civil settlements in cases of tax fraud.

This guide was last updated in February 2015

The CDF process is designed to ensure that HMRC is able to take to Court taxpayers who initially co-operated with HMRC's investigation but subsequently ceased doing so.

Other significant tenets of the new regime are the 'Naming and Shaming' and 'Managing Deliberate Defaulters' programmes.

Taking part

There are two main ways in which taxpayers can become involved in the CDF process.

Firstly, those who HMRC believes have committed tax fraud will have their tax affairs reviewed to determine whether they should be subjected to a criminal investigation. Where it is decided that such an intervention is inappropriate, taxpayers will be offered the chance to participate in the CDF.

Alternatively, taxpayers who wish to voluntarily disclose that they have deliberately under-declared their tax liabilities can request permission to enter the CDF.

The process - outline disclosure

Initially taxpayers are sent a letter enclosing a form which asks the individual to confirm or deny whether he has committed tax fraud. If he responds in the affirmative he also has to submit an outline disclosure form giving details of the fraud, the period over which it took place and an estimate of the amounts involved. Both of these forms must be submitted to HMRC within 60 days of the issue of HMRC's letter. It is only the items which are included in the outline disclosure in respect of which the taxpayer gets immunity from prosecution. If HMRC identifies further frauds which are not included in this document there is a risk that the taxpayer will be prosecuted for those frauds.

The process - denial

If the taxpayer denies fraud or fails to reply to the opening letter, HMRC is likely to commence its own investigation. In certain situations this may lead to prosecution and will almost certainly involve demands for information to third parties connected with the taxpayer or his business.

The process - detailed reporting

HMRC compares the outline disclosure with the records it already holds to determine whether the taxpayer has disclosed all the frauds of which HMRC is aware. As long as HMRC is satisfied that the disclosure is complete the CDF process continues, usually along traditional Code of Practice 9 lines with the taxpayer being interviewed by HMRC and the subsequent preparation by an experienced adviser of a detailed report explaining the sequence of events and the tax due. Any assumptions that have to be made in compiling the report will be set out clearly to enable the adviser to propose an appropriate tax treatment. Interest in relation to the tax due is computed and there will normally be negotiations over the level of penalty to be imposed.

Following submission of the report, HMRC may seek clarification of some of the issues and it is common for there to be meetings and correspondence between the tax adviser and HMRC in an attempt to reach an agreement over technical issues.

The process - negotiation and settlement

Tax is payable for a period of up to 20 years (with the exception of Inheritance Tax where there is no time limit for the assessment of deliberately undeclared tax) so it is necessary to reach agreement on the technical issues affecting the tax payable for the whole of that period or the duration of the fraud, whichever is the shorter. Once the amount of tax payable is established, the amount of tax geared penalty is negotiated and agreed. The penalty can be up to 100% of the tax at stake for tax relating to UK issues and up to 200% for tax in relation to offshore issues depending on the offshore jurisdiction involved. When all these issues have been agreed, the taxpayer is asked to sign a contract settlement with HMRC agreeing to pay the tax, interest and penalty due.

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