Depending on the circumstances, those found guilty of tax evasion or tax fraud in the United Kingdom face legal consequences ranging from a £5,000 fine and six years in jail to an unlimited fine and seven years in prison, not to mention the anxiety, asset freezing, and seizure of assets, not to mention legal fees, that can seriously harm the reputation of the company or individual under investigation. In light of this, it is imperative that you get the advice of a professional tax adviser if you are involved in any tax evasion case.
In this piece, I’ll focus on one form of tax avoidance: the contractual disclosure facility (CDF).
The Origins
Prior to January 2012, HMRC’s fraud investigation service was responsible for investigating major cases of alleged tax evasion (FIS). The taxpayer was therefore completely protected from any legal action. This procedure, however, was fraught with problems and ultimately led to the development of the CDF.
The Facility for Contractual Disclosure
A contract between a person suspected of tax fraud and the HMRC is all that the contractual disclosure facility actually is.
HMRC is not renowned for being lenient, but in special cases it may utilise the CDF facility to give immunity from prosecution in exchange for a complete revelation of tax problems.
The format for CDF
Any authorised HMRC employee in the Fraud Investigations Unit can issue the CDF, which follows a standard format. However, it is only provided in extreme circumstances of suspected tax evasion where HMRC has insufficient evidence to proceed with criminal prosecution.
When HMRC suspects a tax evader, they will send them a letter with a copy of the Code of Practice 9 (COP9), which outlines the conditions of the CDF, but will not provide any other information about the case.
The suspect has 60 days to choose between two responses:
- Comply with the CDF offer from HMRC and submit the associated disclosure form to admit to intentional tax evasion.
- Reject the CDF offer and the HMRC’s tax evasion accusations.
In most cases, the taxpayer would benefit greatly from getting professional help at this time.
If FIS does not hear back from the suspect within 60 days, it will assume that he has rejected the CDF offer and will go through with either a civil or criminal prosecution.
Evidence of tax evasion under CDF and the Not Guilty outcome
There are three reasons why getting a CDF letter is not the end of the world:
- The COP9 is nothing more than a means for the FIS to recoup unpaid taxes from actual or perceived evaders.
- This doesn’t necessarily imply the IRS has enough evidence to prosecute criminals
- As such, it provides a potential defence against prosecution for tax offences.
An “outline disclosure” explaining the following items is required if the taxpayer chooses to accept the CDF offer:
- Why was it that taxes were not fully paid?
- Participant information
- This includes both the total amount and the time frame in which it was underpaid.
- Evidence of unpaid taxes
The next step that HMRC takes depends on the information provided in the outline disclosure. If the information provided in the disclosure is sufficient for FIS to reach a decision, the taxpayer, generally accompanied by a CDF investigation specialist, will be asked to a meeting to resolve the situation.
If you voluntarily request a report detailing your tax disclosures and provide supporting documentation, HMRC will not conduct a criminal investigation into your business. HMRC verifies the veracity of the information provided and closes the inquiry after the taxpayer pays the whole tax liability, including interest and penalties, stated in the report.
When a taxpayer accepts a CDF offer but then breaks the contract, the disclosure may be the only item that is protected from legal action.
Investigation Into, and Outcome Regarding “Deliberate Defaulters”
If HMRC determines the disclosure is inaccurate or the suspected tax evader declines the CDF offer, and sufficient evidence of deliberate tax avoidance can be acquired, HMRC will initiate a formal investigation that may involve evaluations, third-party investigations, audits, and, in the worst possible scenario, legal action will be taken. Through its robust ‘Connect’ database, HMRC may access sources (over 20bn according to the most recent disclosure) to collect evidence and pertinent information, such as:
- Financial institutions and banks
- In the case of companies, clients and suppliers
- Councils
- Land registry and building societies
- legal bodies
- Trade associations
- DVLA
- TIEA-compliant nations overseas are those that share tax data with each other
- The British Border Agency
If the inquiry is conducted in a civil court, the FIS may impose a fine of up to 200% of the amount of tax that was not paid due to an offender’s presence overseas. The Debt Management Unit or a court-appointed trustee will typically handle the collection. The HMRC website also lists certain individuals as “deliberate defaulters.”
