It was interesting to learn that the number of CoP9 cases has fallen consistently year on year since 2016/2017 down from 549 cases to 438. Yet the amount of tax, interest and penalties has increased to £34.1bn in 2018/2019.
What does this mean?
Code of Practice 9 (CoP9) are cases where HMRC suspects fraud and evasion as opposed to tax avoidance. CoP9 is an investigation that is conducted on a civil basis rather than a criminal basis. Many CoP9 cases can focus on undeclared income deposited in an account hidden often offshore.
HMRC consider this be a deliberate act and thereby fraud. This suggests that HMRC have been selecting cases to be investigated under CoP9 correctly and thereby resulting in larger settlements of tax, interest and penalties.
So HMRC are getting their targeting of tax evaders right then?
Not every time. Taxpayers are left guessing what HMRC are on about.
When HMRC offer the Contractual Disclosure Facility (CDF) and issue CoP9 taxpayers are urged to take specialist advice. When HMRC “get it wrong” taxpayers still have to go through the same stressful time as those who are “guilty” of tax evasion because HMRC will not enter into a dialogue with the taxpayer (or their adviser) until after the taxpayer has either accepted or rejected the CDF.
This leaves taxpayers thinking the worst and racking their memories for up to 60 days. Bearing in mind that the CDF process can go back 20 tax years (beyond the current tax year), many might have happened that have been forgotten about.
Moreover, such facts can be misunderstood by HMRC or fail to give the full picture. Once all the relevant facts are known, HMRC may accept that there is nothing to be disclosed.
So how can this misunderstanding be avoided?
HMRC could issue Code of Practice 8 which is used whenever tax fraud is not suspected. Whilst CoP8 may be seen as a “fishing exercise” by some tax specialists, it is often not as stressful as being accused of tax evasion.
CoP8 allows all parties to enter into a meaningful dialogue and seek a resolution without any time delay.
So what’s the moral of this story?
Taxpayers and their advisers need to be clear and ensure that if a challenge is to be expected by HMRC, everyone should endeavor to communicate all the relevant facts. This will enable HMRC to take the correct course of action from the outset.
Where a taxpayer may consider themselves to be falsely accused of tax fraud and no evidence of tax fraud can be found, taxpayers should not be afraid of rejecting the CDF process..
Taxpayers should be able to recall when they have done something deliberately wrong that in hindsight may be considered to be tax fraud even if it was 20 years ago.
However, if a taxpayer has done nothing wrong then they should reject the CDF no matter how much of a high risk strategy this may appear to be.