HMRC to withdraw 'denial' option for taxpayers that receive a Code of Practice 9 investigation letter

Out-Law News | 27 Jun 2014 | 11:51 am | 2 min. read

Taxpayers under investigation by HM Revenue and Customs (HMRC) for suspected tax fraud will lose the option to cooperate with the investigation while denying the fraud from the end of this month.

The 'denial route' is currently one of three options available to taxpayers using HMRC's contractual disclosure facility (CDF) in response to an investigation under Code of Practice 9 (CoP 9) (12-page / 390KB PDF). Since CoP 9 was recast in 2012, the CDF has become HMRC's preferred route when pursuing a civil fraud investigation outside one of the specific disclosure facilities available, such as the Liechtenstein Disclosure Facility (LDF).

"A feature has been taxpayers receiving an 'out of the blue' letter from HMRC telling them they are under a CoP 9 investigation and offering the CDF," said tax expert James Bullock of Pinsent Masons, the law firm behind Out-Law.com. "Many taxpayers have had no previous warning that they were even under investigation when they have received such a notification."

"Whilst the 'denial route' did not afford a taxpayer immunity from prosecution, it did enable a taxpayer who was genuinely confounded by the receipt of CoP 9 an opportunity to engage with HMRC – and, in many cases, to reach resolution short of an admission of fraud. Anyone in a regulated profession and, increasingly, anyone looking to borrow significant sums of money for example, can be seriously impacted by having made an admission of fraud - which is what the CDF amounts to. Any taxpayer receiving a CoP 9 letter should now take urgent legal advice," he said.

Once a taxpayer receives a CoP 9 letter with an offer to use the CDF, that person has 60 days to reflect on whether or not their tax returns are correct. During this period, HMRC will not communicate further with the taxpayer or their adviser. At the end of the 60-day period, the taxpayer has traditionally had three options: using the CDF, denial or non-cooperation. If the taxpayer does not respond within that period, or responds but refuses or fails to cooperate, HMRC retains the option to prosecute the taxpayer for any tax fraud that has not been disclosed.

Using the CDF allows a taxpayer to admit to fraud and agree to cooperate with HMRC. In return, the taxpayer secures immunity from prosecution in respect of any fraud disclosed. A penalty will be chargeable in addition to the tax and interest due. The taxpayer can alternatively deny the fraud and refuse to cooperate; however, this significantly raises the risk of a full-blown criminal investigation or significantly higher penalties as a result of civil action.

"The 'denial route' currently allows a taxpayer to deny fraud, but agree to cooperate with HMRC in its investigation," Bullock said. "Immunity from prosecution is not secured, but this route has significant benefits for a taxpayer who accepted irregularities but not fraud."

"In essence, with effect from 1 July, any taxpayer receiving a letter from HMRC informing them that they are subject to CoP 9 will be faced with the option of either going down the CDF route, with all its ramifications, or being barred from offering any cooperation. This will lead to considerable uncertainty, an absolute lack of any control of – or potentially even lack of any engagement with – HMRC's investigation, the inevitability of significantly higher penalties and a much greater likelihood of criminal prosecution," he said.