Contractual Disclosure Facility – a serious situation

The Contractual Disclosure Facility (CDF) is reserved for cases where HMRC suspects serious tax fraud. Don’t panic: you’re not likely to lose your liberty. But act quickly!

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Conducted under HM Revenue and Custom’s (HMRC) Code of Practice 9 (CoP9), The CDF is HMRC’s most powerful weapon short of prosecution. The good news for a taxpayer is that if they are selected for the CDF process, it is a clear indication that HMRC does not intend or desire to prosecute them.

If you have been notified by HMRC that you are under suspicion of serious tax fraud and are considering the CDF, it’s vital to act straight away. Contact one of our specialist advisors, in full confidence, now.

Contractual Disclosure Facility – How can we help?

inTAX advisors include ex-HMRC (formerly Inland Revenue) tax inspectors, with many years’ experience of dealing with tax investigations, tax problems, tax enquiries, voluntary disclosures and the CDF. It’s what we do.

We can guide you through the process and act as your representative and agent, ensuring you have minimum contact with HMRC and safeguarding your best interests. We aim to settle any tax investigation with a timescale that suits you and on the best terms available.

CDF – What you need to know

inTAX advisors include ex-HMRC (formerly Inland Revenue) tax inspectors, with many years’ experience of dealing with tax investigations, tax problems, tax enquiries, voluntary disclosures and the CDF. It’s what we do.

We can guide you through the process and act as your representative and agent, ensuring you have minimum contact with HMRC and safeguarding your best interests. We aim to settle any tax investigation with a timescale that suits you and on the best terms available.

A brief history of Code of Practice 9 (CoP9) tax investigations

Prior to 31 January 2012, cases of suspected serious tax fraud were dealt with under the Civil Investigation of Fraud process by specialist offices of HMRC. This process, once started provided an absolute guarantee that the person under investigation would not be prosecuted for the original tax offences.

Over the years, HMRC felt that this process was not always being taken seriously by those under investigation and their advisors and was not being afforded the level of co-operation it deserved. Out of this sense of frustration the CDF was born.

So what’s different with the CDF?

The CDF is simply a contract between the person under investigation and HMRC. The taxpayer’s side of the bargain is that they offer their full co-operation and undertake to disclose all tax irregularities within an agreed time scale. For HMRC’s part it agrees not to prosecute the original tax offences if the taxpayer adheres to the terms of the contract. However, HMRC reserves the right to prosecute if the taxpayer breaches the contract.

A tax investigation under the CDF process is conducted by what is regarded as HMRC’s elite and specially trained tax fraud investigation teams.

How does it work?

HMRC will write to a taxpayer advising that they are suspected of serious tax fraud and provide them a Code of Practice 9 booklet which explains how the CDF works. It will also provide the initial paperwork to allow the taxpayer to decide if taking part in the CDF process is right for them. Anyone receiving such a letter from HMRC should seek specialist advice at this early stage to ensure they know the implications of the contract HMRC is offering.

At this point HMRC will not reveal what it believes the taxpayer has been up to; this is to encourage full disclosure rather than a partial admission that HMRC believes a taxpayer might otherwise to tempted to make.

If a taxpayer decides to accept HMRC’s offer to participate the CDF, which provided they don’t breach the contract, offers a guarantee of no prosecution, they will first need to make an ‘outline disclosure’ setting out a brief description of:

  • The conduct giving rise to tax being underpaid
  • Details of the entities involved
  • An indication of the amounts involved and the period covered
  • A summary of the records available

Although full details are not required at this early stage, it needs to be borne in mind that it will only be matters covered in the outline disclosure that will be excluded from prosecution if, at a later stage, HMRC believes the contract has been breached. It is therefore vital that specialist advice is sought at the earliest possible opportunity to ensure the outline disclosure achieves its objective.

If HMRC believes an outline disclosure is incomplete or inaccurate it will withdraw its invitation to partake of the CDF and revert to use of its formal powers including at worst, prosecution or at the very least, assessments, statutory information and inspection powers and third party enquiries.

In most cases, once an outline disclosure has been acknowledged and accepted by HMRC the taxpayer will be asked to attend a meeting. It is vital that an experienced tax investigation specialist accompanies the taxpayer to the meeting to ensure the discussions are conducted appropriately.

Unless, exceptionally, the matters can be concluded based on the outcome of the meeting, a taxpayer will be asked to commission a report to set out the detail of their disclosure, what happened, when it happened and why it happened as well as the tax consequences. Wherever possible, a report will need to contain documentary evidence in support of its findings. A number of certified statements are required to accompany the report.

HMRC will test the report to ensure it is complete and accurate, and, if satisfied that it is, will look to settle the investigation by inviting the taxpayer to make a monetary offer in settlement of the tax disclosed in the report, plus interest and financial penalties.

Does a taxpayer have to co-operate with HMRC?

No. The client can either accept the invitation to participate in the CDF confirming that deliberate behaviour has taken place which has brought about a loss of tax, and which HMRC would consider to be fraud, or they can reject the invitation.

This is an extremely important decision to make, and one that should only be taken with specialist advice, particularly as only the first option will guarantee that HMRC will not prosecute.

What happens if a taxpayer declines to participate?

HMRC will conduct its own investigation and will consider prosecution if it establishes tax fraud has occurred.

If HMRC continues to conduct the investigation on a civil basis, the financial penalties imposed on underpaid tax will be will be up to 200% of the tax, depending on the country the unpaid tax arises from.

How does HMRC investigate?

HMRC has a wealth of powers it can use to obtain information about a taxpayer’s financial affairs. This includes being able to obtain information directly from third parties including (but not limited to):

  • Banks and building societies
  • Other financial institutions
  • Business customers
  • Business suppliers
  • Councils
  • Solicitors and lawyers (as long as the information is not privileged)
  • Trade Associations such as Gas Safe, the British Medical Association, the Association of British Bookmakers, etc
  • DVLA and Land Registry

HMRC also has the power to obtain information from many foreign jurisdictions using its exchange of information powers and recent Taxpayer Information Exchange Agreements (TIEAs).

As part of the tax investigation, HMRC may raise formal assessments and tax demands, which unless appealed, will be collected from the taxpayer either by the Debt Management Unit or using other formal powers such as bankruptcy proceedings.

Any lack of co-operation by the taxpayer will adversely affect the level of penalties that can be charged, and in the case of ‘deliberate defaulters’, may result in their names appearing on HMRC’s website under the ‘name and shame’ regime.

I have a tax problem which HMRC will think is dishonest, what should I do?

Firstly, you should contact a specialist advisor, such as inTAX. There are a number of options that might be available for you to make a voluntary disclosure, including the Liechtenstein Disclosure Facility (LDF) or the Isle of Man (Manx) Disclosure Facility (MDF). These offer some beneficial terms, and your tax advisor should be able to give you some in depth advice on this.

If however, the available voluntary disclosure facilities are unsuitable, you can make a voluntary disclosure under the CDF and go through the same process as set out above. It is only suitable for cases where HMRC would regard the conduct of the taxpayer as dishonest or deliberate.

Should I get specialist advice?

HMRC’s Code of Practice 9 leaflet specifically suggests that you engage an independent specialist advisor. Even if your current advisor is well versed in the CDF or other tax investigations, it is advised to take a step back and look at the case with fresh eyes. This will also help maintain your relationship with your current advisor.

The CDF is very serious investigation and it is imperative you get the best advice to ensure that the matter proceeds down a civil route and to ensure that financial penalties are kept to a minimum.

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