HMRC Civil Investigation of Fraud (CIF) Code of Practice 9 Investigations - Practical Advice for Professional Advisors

Introduction

We support professional advisors on all types of HMRC investigation or dispute. The notes which follow are a few practical tips for professional advisors handling Code of Practice 9 (COP9) cases.  They are based on our years of experience, but are of necessity brief and by no means exhaustive.

To discuss your particular needs please call us on 0845 643 5450 for a no-obligation informal discussion or click here to contact us.

Tip 1: The importance of the advisor in COP9 cases

There are few tax situations where the role of the advisor is so important or demanding as in a COP9 investigation.  The advisor is central to the process, with both clients and HMRC depending upon the advisor to make the whole thing work.  The amount of work required of the advisor is usually very large and usually has to be done to a very tight timescale. Also, HMRC expect high standards and will be testing the advisor’s work rigorously. 

The following quotes from HMRC’s published advice illustrate the point:

• “We expect high standards from professional advisors”  [HMRC Code of Practice 9 leaflet]

• “It is in everyone’s interest however that this work is undertaken by someone who is competent and who has the capacity to complete the matter within an acceptable timescale.”  [HMRC Special Civil Investigations Guidance Manual 05650]

• “The extent to which the Disclosure Report is examined depends on a number of factors:

• The known level of experience of the advisor”  [HMRC Special Civil Investigations Guidance Manual 10360]

Incomplete or inadequate disclosures, or overruns on the time taken to produce the report, may result in reduced penalty discounts for your client, which could amount to very substantial sums.  These are just some of the issues the advisor has to deal with.

If you do not have previous experience in handling COP9 cases we strongly recommend that you work in connection with an experienced specialist.  It does not necessarily mean that the whole case should be handed over to the specialist; we can help you with whatever level of support you need, from strategic advice through to the detailed forensic work.

Tip 2: Money Laundering disclosure obligations and client confidentiality

Many advisors are unsure of their reporting obligations under the Money Laundering Regulations.  This is a complex area where most professional bodies recommend that practitioners should take legal advice.  However, the simple explanation of the current law is that if you have a professional relationship with your client (ie you have a letter of engagement, or you are having initial discussions with a view to forming such a relationship ) and the purpose of your advice concerns how the client can put their tax affairs in order, then the relationship is protected by privilege and the advisor is not obliged to make any reports under the Money Laundering Regulations.  In fact, it would actually be illegal for the advisor  to make such a report.

This goes some way to providing the necessary reassurance that both clients and advisors need in this difficult area.  

If you would like to discuss this further, please call us on 0845 643 5450 and ask for Steve Botham. Steve lectures to professional bodies in respect of money laundering specifically related to taxation matters. Steve is also our MLRO, so he knows exactly how it feels at the sharp end. If you want a free copy of the slides from his latest presentation just email Steve at steve.botham@covertax.co.uk

Tip 3: Resources and workloads

A typical COP9 investigation consumes a vast amount of the advisor’s resources. This will usually include:

• Meetings with HMRC and the client

• Helping the client to obtain relevant information from third parties

• Forensic accounting work

• Writing the disclosure report

These different aspects call for different skills.  They can also be very time consuming and the total resources required will usually be measured in man-weeks, not man-days. Also, the deadlines which HMRC expect are very tight.  The COP9 leaflet states that HMRC expect the report within six months of the opening meeting in most cases, and “considerably sooner” in more straightforward cases.  Six months may sound like a lot of time, but in fact it is very little for the amount of work that has to be done.  Just ask yourself how long the average minor local enquiry takes to settle.

The nature of the process tends to lead to a very intensive phase at the back end and this is likely to monopolise your resources, potentially leaving you unable to service other clients properly. My rule of thumb is: when you think you are 90% there, you have probably actually done 50% of the necessary work. This situation needs to be anticipated and planned for at the outset.

Tip 4: The art of a great disclosure report

At the heart of the COP9 process is the disclosure report. This is the client’s full and final disclosure of irregularities.  Although the advisor will have prepared the report, the client must certify it and accept full responsibility for its accuracy and completeness. 

A well prepared report will bring the investigation to a quick end and will earn maximum penalty discounts, saving your client considerable amounts of money.  An inadequate report will lead to protracted further investigations by HMRC, and, in the worst case, to criminal investigation by HMRC if they feel that there has been deliberate material misstatement in the report.

A great report does two things:

1. Disclosure.  Firstly, the report must disclose the irregularities that have taken place and  quantify them clearly and convincingly. Vague or unconvincing disclosures will only lead to further investigation by HMRC or a weak negotiating position.

1. Persuade.   Secondly, the report must persuade HMRC that nothing further is likely to have gone wrong beyond those matters disclosed.  This must include addressing any concerns raised by HMRC but for which no irregularity is being disclosed. Demonstrating that nothing else is likely to have gone wrong can be very difficult because it involves proving a negative – a bit like proving that there isn’t a needle in the haystack! But get this part right and the investigation will proceed to settlement very quickly.

Tip 5: The advantages of a standard methodology

The amount of work that can go into a report is potentially vast, leading to massive professional charges (or under-recoveries).  Having a standardised methodology keeps you focussed in your approach to the work and reduces the likelihood of time being wasted on unnecessary areas.

Over the years of dealing with COP9 reports we have developed a standard approach to planning, executing, and reporting the work so don’t have to reinvent the wheel on each job.  Whilst every client is an individual, the COP9 process is highly ritualised. By working with us you can benefit from our experience and the techniques we have evolve

Tip 6: The accountant under the microscope

We have already seen that the first factor which HMRC consider when deciding the extent to which the report needs to be examined is ‘the known level and experience of the advisor’.

In addition to this, HMRC will always be looking to see if the advisor could have been in any way complicit in the irregularities themselves, or whether the problems are indicative of inadequate professional competence on the part of the accountant.  If they form such a suspicion, they will usually want to check that no other clients of the advisor are similarly affected.

Depending upon the nature of the irregularities disclosed, HMRC will often want to examine the accountant’s working papers.  This can lead to a very uncomfortable position for the accountant who is caught between the opposing forces of wanting to demonstrate full co-operation, but at the same time not wanting HMRC crawling all over his papers. Using an experienced COP9 specialist can resolve this dilemma.  As trusted COP9 specialists, our practice at Covertax is, with the accountant’s consent, to review the accountant’s working papers as part of our reporting work.  This is usually sufficient to satisfy HMRC and is far more acceptable to the accountant and client.

Tip 7: Report working papers

We would recommend that the disclosure report concentrates on quality not quantity, ie it should be confined to narrative and essential schedules or appendices.  All other working papers should be kept separately and will be inspected by HMRC.

It is essential that the working papers files are orderly and well kept.  It is normal for a large volume of working papers to be generated (not counting the business records or the accountant’s files).  These need to be clearly navigable and also show any work carried out or conclusions drawn that are not shown in the report.  Part of the process of persuading HMRC that there is nothing else to worry about is to give them access to a set of well kept, methodical working papers.  This shows an orderly approach to the job and demonstrates high quality work. A great set of working papers will help you to deal with the case efficiently and will send a powerful message to HMRC when they examine them, that a thorough job has been done.

On the subject of working papers examination, we would recommend that this is done at the advisor’s offices rather than sending the files to HMRC.  In our experience this always gets the job done quicker, and the advisor will be available to deal with queries there and then.

Again, this is an aspect of the process which benefits from a standard methodology.

Tip 8: The importance of an all-taxes technical approach

Most CIF investigations focus around facts rather than tax technicalities. However, the disclosure process cuts both ways, and one should always be on the lookout for things that could legitimately reduce the tax liability. For example, capital allowances, R&D Tax Credits, domicile and residence issues, etc.

Also, the nature of the irregularities may involve more than one tax.  Takings diverted from a UK company and placed in offshore trust might generate liabilities to Corporation Tax, VAT, S419 ICTA 1988, S175 ITEPA 2003, IHT, and Income tax, subject to domicile and remittance basis considerations.

You need to be sure that either you, or your specialist advisor have the technical expertise to cover all the issues which are likely to arise on the particular case.

Tip 9:  Make sure you secure maximum penalty discounts

COP9 cases usually involve large amounts of tax, and the attaching tax-geared penalties are by definition potentially equally large. Whether it be under the old or new rules, the behaviour of the taxpayer in putting things right is the major factor in arriving at the discount available - at least 60% under the old rules and 100% under the new. 

Managing the case to achieve maximum penalty discounts is a vitally important role of the advisor in COP9 cases.  It has to be done actively from Day One through to the day when the adjustments are finally agreed.  If your client does not fully disclose,  if the report is late or inadequate, if payments on account are not made when they could have been, there will be a heavy price to pay in the final penalty negotiations. It is too late to remedy such failings when sitting around the negotiating table.

The good news is that, because so much of the available discounts are in the taxpayer’s power, a well planned and well delivered COP9 disclosure will save massively on the penalties – very often more than enough to cover the advisor’s fee.

Tip 10:  The importance of the human factor

There are many specialist skills which must be possessed by advisor’s dealing with COP9 investigations.  But from the client’s point of view the most important skill is probably not technical at all, but the ability to understand and help with the worry and stress.

Most clients who become subject to COP9 are not hardened criminals, but successful business people who have made mistakes which they now bitterly regret.  Many feel ashamed, and the majority feel highly stressed by the whole situation.

It is hard to overestimate the benefit, in human terms, to the client of being able to sit down at the outset with someone who has seen it all dozens of times before and can calmly talk them through what is to come and show them a light at the end of the tunnel. From the client’s perspective, this is the first tangible benefit of using the right expert.

More tips and advice...

We hope you found these tips useful.  We have a lifetime’s experience of dealing with tax investigations, so, as you will appreciate, we have plenty more to offer.

If you would like to discuss how we can help you and your client to survive your COP9 investigation please call us on 0845 643 5450 and ask for Tony Borman for a confidential, free discussion or click here to contact us.