- What is the Contract Disclosure Facility?
- provide justifications for rejecting the CDF offer.
- Explanation of what transpires once a CDF offer is accepted
The generosity of HM Revenue & Customs is well known.
However, if the department discovers evidence of possible tax evasion, it may provide protection from legal action in return for a complete and correct disclosure of any tax problems.
This is the capability for contractual disclosure.
The CDF is only given by an authorised officer at HMRC, often a member of the Fraud Investigations Unit, and it must adhere to a certain structure.
HMRC will inform the taxpayer of their suspicion of tax fraud in the introductory letter and send a copy of the Code of Practice 9. (COP9).
The taxpayer will only have two options: accept HMRC’s offer of a CDF (and so confess willful tax evasion) or refuse the offer. The taxpayer will have 60 days from the date of HMRC’s original letter to respond.
After 60 days, if no answer is sent or received, HMRC will automatically infer that the offer to participate in the CDF has been turned down.
If the offer is rejected, HMRC will launch an inquiry and decide whether to pursue a civil or criminal probe into the alleged tax evasion.
Evidence of tax fraud
Every time a tax underpayment occurs, a seasoned professional with expertise in CDF work, tax investigations, and tax remedies must carefully examine the facts.
Receiving a CDF is not exactly what it looks like, despite the seriousness of the possibility of criminal prosecution.
Main Points:
- A CDF may grant protection from legal action for tax offences.
- The facility does not necessarily imply that tax officials have provided sufficient evidence.
- COP9 is a method of collecting taxes from alleged or confirmed tax evaders.
This might signify a few different things. Firstly, the quality of the evidence held by the tax authorities may not be sufficient (beyond all reasonable doubt) to bring about a successful criminal prosecution.
Second, HMRC does not utilise this resource as frequently as it did 25 years ago when a client receiving such an offer would have good cause to believe that it was not made in jest.
A weaker argument than “They must have known better” has been used increasingly frequently in recent years to use the CDF to get people to admit to being involved in unsavoury tax schemes.
Even while illegal tax schemes are never acceptable, many people who have taken part in them in the past did so because they were advised to by so-called experts.
By its basic definition, tax evasion does not include relying on expert advice, being unaware of the law, or being just foolish.
Motives for rejecting CDF offer
In actuality, there are very compelling arguments against recommending that customers take advantage of the CDF.
A person may not have done anything unlawful with the specific aim to avoid paying taxes (the legal concept of “men’s rea” or “guilty mind”).
If a person confesses to tax fraud, they will face severe financial penalties of at least 20% of the tax lost, up to 35% if they are approached initially by HMRC, and even up to 45% if the anomalies date back more than three years. Certain omissions of foreign-earned income can result in fines of up to 200 per cent of the tax that would have been collected.
Instead of simply being subject to tax scrutiny and assessment for the previous six years if carelessness is at issue, or four years if there is an innocent error, an admission will expose the previous twenty years.
A certified professional accountant, independent financial adviser, lawyer, or barrister might have been the source of the advice that guided the action taken by the individual.
Being “identified and humiliated” as a tax evader might be disastrous for someone with a job in a regulated industry.
If you are a professional and you admit to tax fraud (even if you are innocent), you may have to report yourself to your professional organisation and face disciplinary action up to and including expulsion.
An individual’s ‘innocent’ involvement in a tax scheme does not negate their responsibility for committing tax fraud. Somebody else may have committed fraud against a person’s corporation or business without their knowing about it.
Unreliable or unexplainable information may have been maliciously given to HMRC from other parties.
Defending a CDF will most certainly cost a lot more money than it would take to investigate what happened.
An individual’s affairs may be followed for years after they admit to purposeful behaviour as part of HMRC’s Managing Deliberate Defaulters programme.
One’s professional and personal reputation may take a major hit if such information became public knowledge.
There is little use in approaching HMRC at this level in the hopes of having an open and honest exchange of information to provide the adviser a ‘clue,’ since the officer would typically respond by saying that it is the responsibility of the (non-)taxpayer to make the disclosures being requested.
The situation is analogous to a game of poker in which the officer stubbornly conceals the strength of his hand.
Case study
The HMRC contacted Mr C and Mrs D to offer them the chance to make a CDF declaration in one instance.
Given that the letter had come from one of HMRC’s FIS teams, their High Street accountant was understandably alarmed and encouraged them to plead tax fraud and accept the offer.
In reviewing the couple’s situation, we at Gannons found no indication of misconduct or willful effort to cheat taxes.
Turns out they were building on a multi-million-pound property plot that had “misleading” press publicity.
Personal input was little in comparison to the amount borrowed from the bank to fund the construction.
HMRC had added two and two to reach five. There were concerns regarding personal tax residence, but there was absolutely no proof of any wrongdoing, whether intentional or not.
After turning down the CDF offer, all parties worked together to examine the situation and settle on a nominal sum of money.
In that case, the outcome could have been quite different, and the couple may have been subjected to a far more stressful and prolonged inquiry based on false information, had the CDF been accepted.
There would have been a financial penalty as well as an emotional one, at least in the form of unnecessary additional professional expenses.
By agreeing to the CDF
No one should take advantage of the CDF offer, but for the dishonest criminal who has truly avoided paying taxes, it is a chance that must not be missed.
After asking a series of pointed questions, an experienced expert may quickly ascertain whether or not an individual’s actions were motivated by malice.
In addition to being made available by HMRC, the CDF protection can be negotiated on an individual’s behalf by a competent expert.
While HMRC appreciates voluntary initiatives, there are some exceptions, such as where the provision has already been given.
There is typically only one chance for an individual to convey a message to the rest of the tax-paying population through prosecution by HMRC, and that is if they are an accountant, solicitor, or former Inspector of Taxes (where better behaviour is expected) or a celebrity.
The issuance of the COP9 protocol with the provision of the facility should be seen as a silver bullet for dire situations.
Tax fraud and evasion can have serious consequences, therefore it’s important to resolve the matter amicably (by writing a check) whenever possible to protect the accused person’s freedom.
In such situations, the CDF is not to be mocked and will not be the mythical white horse (Trojan or otherwise).
Outlook
COP9 has shown to be an efficient and low-cost method for HMRC to recover unpaid taxes from tax evaders.
A request for admission is made, the “suspect” is interrogated, and a report is requested from an expert advisor.
HMRC’s involvement here is minimal; in a straightforward situation, an officer will simply review the report’s data and counterargue if necessary; otherwise, no further staff will be needed.
The CDF was (and still is) a cash cow for the government coffers.
Overusing the CDF might have the unintended consequence of weakening a very effective weapon for HMRC.
What was once a dreaded (and respected) process is now at risk of losing both legitimacy and practical utility.
While the CDF was originally intended for situations of actual tax cheating, HMRC has reduced the standard such that it is now provided in many cases involving tax avoidance. Although HMRC’s Connect computer system should not be undervalued, investigation checks may be less meticulous than in past years, and the quality of evidence may vary widely depending on the source.
Approximately 20 billion data points from a vast array of sources were stored in the system as of the most recent announcement.
The list includes the National Crime Agency, domestic and international banks, real estate agencies, the Valuation Office Agency, the UK Border Agency, and HM Land Registry (including suspicious activity reports from UK accountants, solicitors, bankers and other regulated professionals).
In addition, it stores data from the Common Reporting Standard, an international data exchange involving more than a hundred countries that reveal information about financial assets located in places like Jersey, Guernsey, the Isle of Man, Gibraltar, the British Virgin Islands, Singapore, Switzerland, Liechtenstein, and many others.
