Case study: How to respond to the offer of the Contractual Disclosure Facility

Situation

We were asked to represent a professional that had been offered the opportunity to make a full disclosure under the terms of the Contractual Disclosure Facility (CDF), which covers cases of suspected tax evasion. The recipient is given two options – accept the offer to disclose any unpaid tax due to deliberate and non-deliberate (careless) behaviour. In return HMRC undertake not to criminally investigate the matters disclosed. The alternative is to reject the offer with the risk that HMRC will investigate the matter and may undertake a criminal investigation.

We worked with the professional to review the historical tax position and the companies to which they were connected. We critically analysed the explanations provided to see whether HMRC may consider that the client had been involved in deliberate behaviour and why.

The professional was understandably concerned at minimising their exposure and cautious about how they should respond to the allegation that they had been involved in tax evasion. Our client presented a number of technical arguments as to why HMRC may have considered that they owed tax and why they had not reported the liabilities. We explored the background to the issues with them and critically analysed their arguments and how HMRC would view the matter. We understand that HMRC expects a higher level of care from professionals and we worked carefully with our client to ensure that the disclosure accurately reflected what happened. Ultimately the decision to accept/reject the offer of CDF rests with the client and we considered that our client had not acted deliberately to evade tax.

It is important to understand that the implications of getting the disclosure wrong are severe with the real risk of a criminal investigation if HMRC were to discover that a full disclosure had not been made. The situation is more complex with professionals, who are not only concerned with the historical situation but the impact on their ongoing ability to practice. There is a fine balance between fully cooperating with HMRC and accepting that tax was evaded. Some advisers have suggested that it may be appropriate to accept a minor issue was deliberate simply to participate in CDF and avoid the risk of a criminal investigation. In our view, this misses the point that HMRC only undertakes not to criminally investigate issues accepted to be deliberate. Admitting a minor error was deliberate will not have the desired effect and still leaves the client exposed.

Seeking specialist advice at the earliest opportunity is key to minimising the risks and disruption of being investigated under Code of Practice 9 or CDF. Our client was able to resolve the enquiry on a civil basis and HMRC accepted that there was no deliberate behaviour.

How to respond to the Contractual Disclosure Facility (CDF)

The Contractual Disclosure Facility (CDF) is offered to taxpayers that HMRC suspect have been involved in tax evasion or deliberate behaviour. It is only used by the Fraud Investigation Service (FIS) office of HMRC, which is responsible for complex tax investigations on both a civil and criminal basis. This type of investigation is commonly referred to as Code of Practice 9 or Cop9.

Taxpayers are offered CDF by HMRC, which in return for making a full disclosure offers the participant protection from a criminal investigation. However, it is critical that the disclosure is materially complete and correct, as any issues not covered by the disclosure may still be subject to criminal investigation and recently HMRC has made it clear that it will take a dim view of participants that either try to exploit the offer of CDF or do not cooperate throughout the investigation.

HMRC can go back up to 20 years to recover unpaid tax, VAT and duties, as well as charge interest on tax paid late and significantly higher tax-geared penalties. In case involving overseas assets or transfers the penalties can be as high as 200% or be based on the value of the assets.

HMRC has been tasked with increasing the number of prosecutions for tax fraud by boosting the number of charging decisions from 500 to 600 per annum by 2029-30. Furthermore, HMRC has also made it clear that where it considers that taxpayers either mislead them or don’t cooperate where CDF has been offered that they reserve the right to criminally investigate the tax fraud.

If you have any questions or consider that you may be affected by this issues covered please get in touch with John Hood on 020 4582 1440 or via email on jhood@mks.co.uk.