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

Introduction

We support clients on all types of HMRC investigation or dispute. The notes which follow are a few practical tips for clients facing 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: You only get one chance

COP 9 investigations are like first impressions – you only get one chance to get it right. Throughout the process the onus is on you, the taxpayer, to make the key decisions (eg whether to co-operate, the extent and quality of any disclosure report, etc).  There is no going back and no second chances.  Mistakes can be very costly. So, to suffer the least damage from the process it pays to take advice from someone who has experience. This is one situation where you definitely do not want to be learning on the job by trial and error. Civil Investigation of Fraud is a specialised procedure and a rare experience for most accountants, so your regular accountant may not have much, if any, exposure to this type of work.  If your accountant is not an expert in this area, it makes sense to take specialist advice at the outset in order to get the case on to the best possible footing right from the start.  It doesn’t have to cost the earth, and in the long run will save you considerably in time, money, and stress.

Tip 2:  Invest in understanding the process

The CIF process is very specialised and very different from general tax enquiries or other types of legal process.  The system has many built in rewards and advantages for those who fully co-operate and many risks and punishments for those who do not or who are not competent to deliver its requirements. So you should always take time at the outset to understand what the process is all about.  Reading HMRC booklets is not exactly fun at the best of times, but in the stress and worry of the initial letter from HMRC, it is common for clients to not be able to focus on the COP 9 booklet enclosed with it.  Many clients who come to us have not actually read the COP 9 booklet issued to them.  Even clients who have read the booklet, usually do not fully understood the process or the alternatives open to them. Time spent on understanding how the process works will pay for itself many times over, enabling you to work more effectively with your advisor and to maximise your opportunities to reduce the ultimate tax bill.

Covertax offers a fixed price COP 9 Briefing and Strategy meeting which will take you through everything you need to know.  You do not have to use us for the rest of the process, but if you do the cost of the meeting is fully rebated against our future charges.

Tip 3:  Choose the right advisor

 COP 9 investigations usually require a large amount of work to be done by the advisor and to a high standard.  The following extracts from HMRC’s publications illustrate the importance of the advisor in the process:

• “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]

The consequences of an incomplete or substandard disclosure report can be very serious, leading to higher taxes, increased penalties, additional professional costs associated with the inevitable extra investigation carried out by HMRC, and in the worst case, criminal proceedings. Also, the amount of work required to be done by the advisor is usually very large.  So it is vital that your advisor has both the expertise and the resources to do the job to the requisite standard within the time available.

Tip 4:  Disclose fully or not at all

Under Code of Practice 9, HMRC will invite you to co-operate with their investigation and to make a full disclosure of any irregularities if these have occurred.  But you have the right to decline to co-operate, in which case HMRC will continue with their investigation using formal powers. Any tax found to be due will then be subject to higher penalties than if you had co-operated.  The decision whether to co-operate or not is a vitally important one and must be made with full commitment either way.  The worst possible course of action is to make a half-hearted or incomplete disclosure as this will, at the very least, lead to additional penalties and, at the worst, may result in criminal proceedings.

Tip 5:  Get the most out of the initial meeting

If you decide to co-operate with HMRC’s investigation, (which most people do), you will be asked to attend an initial meeting with HMRC.  This meeting is regarded by HMRC as a very important part of the process. It deals with the all-important disclosure questions and also gives HMRC the opportunity to discuss the circumstances of any irregularities with you.  It is natural for clients to feel apprehensive about meeting with HMRC under such circumstances, but when you are properly represented by an experienced advisor, such fears are unfounded. Your advisor will be able to brief you on exactly what will happen and will ensure that you are not put under any pressure or duress. In our experience, the tax inspectors are invariably courteous and the meeting can be surprisingly civilised. 

But the point is that the benefits of the meeting are not just one-sided. It also gives you an opportunity to apply some positive momentum to the investigation. Experts tell us that the vast majority of human communication is non-verbal, ie it comes from body language, demeanour etc. A meeting is an invaluable way for you to make a favourable impression on the tax inspectors, to demonstrate to them, in a way that correspondence alone never can, that you are committed to a full disclosure.  This in turn will influence their attitude to the disclosure report and the concluding negotiations. You don’t have to grovel to the taxman or ritually humiliate yourself; you just have to discuss the relevant issues in a helpful way. 
There is a range of opinion amongst advisors on this topic.  Some refuse to attend meetings, others restrict the meeting simply to the formal questions with no discussion.  In our view both of these positions fail to exploit the benefit that flows to the client from a well handled first meeting.

If you are not sure whether or not to attend a meeting with HMRC call Tony Borman on 0845 643 5450 to discuss your options.

Tip 6:  The importance of teamwork

However experienced your accountant or advisor, they will need active help from you to put together a robust disclosure report which will stand up to rigorous examination by HMRC.  All parties  need to work together as a team in order to get the job done on time and as cost-effectively as possible.  Any experienced COP 9 specialist will tell you that HMRC’s standard target of a maximum of 6 months for preparation of the report is very demanding, and a considerable proportion of that time can be eaten up just by chasing information. So don’t take a back seat - provide as much information as you can, and try to avoid delays.  Effective teamworking can reduce delays, enabling your advisor to concentrate their efforts on the specialist work you need them to do, rather than chasing bank statements. Meeting your deadlines will also certainly lead to savings on penalties, as explained below.

Tip 7:  Use the Data Protection Act to save money

It is likely that you will need to request copies of bank statements and other financial documents. Banks can quote anything from £5 - £20 per sheet for such statements.  If you use the provisions of the Data Protection Act, you can usually get 6 years statements for just £10.  Contact us for assistance.

Tip 8:  The art of a great report

At the heart of the COP9 process is the disclosure report. This is your full and final disclosure of irregularities.  You have to certify it and accept all 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 you 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 its readers (ie sceptical tax inspectors) 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.

To get the right blend of these ingredients is what you pay a specialist for.  When choosing a specialist, ask them to explain their approach to the report and to talk you through what a typical report would entail in your circumstances.

Tip 9:  Maximise the penalty discounts in your power 

Where additional tax is due for any reason other than an innocent mistake by a person taking reasonable care, a penalty will also arise on top of the tax.  The penalty can be up to 100% of the tax underpaid, but is discounted to take account of the circumstances of the underpayment and the taxpayer’s conduct towards HMRC in putting things right.  The rules for calculating penalties changed on 1 April 2009, so any irregularity which spans that date will involve calculation of the penalty under both the old and new rules. However, under both the old and 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.  This could typically amount to £6,000 for every £10,000 of tax underpaid.  So, for example, if you owe £100,000 tax, there could be a potential additional penalty of £100,000 on top of that tax. But discounts of more than £60,000 off the penalty are entirely in your power, depending on how your disclosure is conducted. This is where you and your advisor’s conduct in dealing with the investigation will either save or cost you thousands.  You need to get this right from the start.  For example, if the report did not contain a full disclosure, or was late in being submitted, it is too late to rectify these shortcomings when negotiating penalty discounts at the end of the enquiry.

Tip 10:  Make payments on account

As far as HMRC is concerned, there is no more concrete way to demonstrate co-operation than to make payments on account of any tax known to be underpaid.  Timely payments on account will help to earn the maximum penalty discounts discussed above.  So, if you know that you will definitely owe a certain amount of tax, and can afford to pay it, you should always make a payment on account.  One cautionary note though – do not leave yourself with inadequate working capital for your business or with no funds to pay your professional advisor. You may find it difficult to borrow funds whilst under the shadow of a COP 9 investigation, so you should always leave yourself some leeway.  HMRC do not expect you to pay unrealistic amounts on account if that would leave you exposed.

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 to survive your COP9 investigation please call us on 0845 643 5450 and ask for Tony Borman for a confidential, free discussion. We offer a free initial meeting on all COP9 cases.