Key Information - Civil Investigation of Fraud - Code of Practice 9 (2009)

This Code of Practice covers cases where HMRC suspect serious fraud and gives the taxpayer under investigation the opportunity to disclose fully all irregularities in relation to their tax affairs.

Introduction

HMRC will investigate any situation where they suspect serious tax fraud. The investigation will be undertaken with or without the taxpayer's voluntary co-operation. If the taxpayer co- operates, the investigation is most likely to proceed more quickly, efficiently and advantageously for all parties.

Code of Practice (2009) covers direct taxes, including income taxes, corporation tax, capital gains tax and National Insurance contributions and indirect taxes including Value Added Tax and Excise and Customs duties.

Civil investigation of fraud - HMRC statement

The practice of HM Revenue & Customs (HMRC) in cases of suspected serious tax fraud is as follows.

• The Commissioners reserve complete discretion to pursue a criminal investigation with a view to prosecution where they consider it necessary and appropriate.
• Where a criminal investigation is not considered necessary or appropriate, the Commissioners may decide to investigate using the Civil Investigation of Fraud procedure.
• Where the Commissioners decide to investigate using the Civil Investigation of Fraud procedure they will not seek a prosecution for the tax fraud which is the subject of that investigation. The taxpayer will be given an opportunity to make a full and complete disclosure of all irregularities in their tax affairs.
• However, where materially false statements are made or materially false documents are provided with intent to deceive in the course of a civil investigation, the Commissioners may conduct a criminal investigation with a view to a prosecution of that conduct.
• If the Commissioners decide to investigate using the Civil Investigation of Fraud procedure the taxpayer will be given a copy of this statement by an authorised officer.

Opening

The taxpayer will have received a letter, including Code of Practice 9 inviting them to attend a meeting. The HMRC letter and Code of Practice will have been issued because HMRC have grounds to suspect that there are irregularities in the taxpayer's affairs.

The investigation will be conducted with a view to the imposition of a civil penalty for fraudulent conduct, if our suspicions are confirmed. The investigation will not be conducted with a view to criminal prosecution for tax fraud.

The aim of the investigation will be to uncover the full facts, determine the tax liabilities arising and collect these together with interest and, where appropriate, civil penalties for fraudulent conduct.

HMRC will ask the taxpayer to attend a meeting and invite him/her to make a full disclosure of all tax irregularities. This will be the taxpayer's only opportunity to secure the maximum benefit from making a full and complete disclosure of all irregularities in their tax affairs.

It is a matter for the taxpayer to decide whether or not to respond or indeed attend the meeting.

If the taxpayer decides attend the meeting they will be asked to explain the full facts and prepare a report detailing the nature, extent and reason for those tax irregularities, together with supporting evidence.

HMRC will then test that disclosure, before seeking an agreement with the taxpayer as to the amount of additional tax, interest and penalties and make arrangements for payment.

The taxpayer will be encouraged to make payments on account during the investigation.

If the taxpayer chooses not to respond or attend, HMRC will conduct a thorough investigation of his or her tax affairs and take into account the conduct displayed during the course of the investigation when determining the level of any penalties due.

Professional Representation

HMRC encourage taxpayers approached under COP 9 to appoint a professional adviser to represent them during the investigation, although this is a matter entirely at the taxpayer's discretion.

Taxpayers under investigation should give their professional adviser all the facts because it is the taxpayer who remains personally responsible for their own affairs and for the accuracy of any information supplied to HMRC. The taxpayer is responsible for ensuring that his or her adviser complies with any timetable or deadlines set.

The Meeting

The meeting may be held at the taxpayer's home or place of business, at an HMRC office or at the offices of the taxpayer's professional representative.

At the start of the meeting, the HMRC officers will explain the purpose of the meeting and outline HMRC's approach to the civil investigation of serious fraud. HMRC will not reveal the type or source of information held that has given rise to any concerns. This is because the aim of an investigation under this Code of Practice is to give the taxpayer the opportunity to make a full and complete disclosure of all irregularities. The opportunity to make a disclosure extends to all aspects of the taxpayers tax affairs and encompasses any involvement with any partnerships, companies, trusts or other entities.

The HMRC officers will then ask the following standard questions which the taxpayer will be expected to answer honestly and to the best of their knowledge and belief.

Direct Taxes

1. Have any transactions been omitted from or incorrectly recorded in the books of any business with which you are or have been concerned whether as a director, partner or sole proprietor to the best of your knowledge or belief?
2. Are the accounts sent to the H M Revenue & Customs for each and every business with which you are or have been concerned whether as a director, partner or sole proprietor, correct and complete to the best of your knowledge and belief?
3. Are all the tax returns of each and every business with which you are or have been concerned whether as a director, partner or sole proprietor correct and complete to the best of your knowledge and belief?
4. Are all your personal tax returns correct and complete to the best of your knowledge and belief?
5. Will you allow an examination of all business books, business and private bank statements and any other business and private records in order that HM Revenue & Customs may be satisfied that your answers to the first four questions are correct?

Indirect Taxes (VAT)

1. Have any transactions been omitted from, or incorrectly recorded, in the books and records of (name of legal entity) for which you are (responsible status)?
2. Are the books and records you are required to keep by HM Revenue & Customs for (name of legal entity) for which you are (responsible status), correct and complete to the best of your knowledge and belief?
3. Are all the VAT returns of the (name of legal entity) for which you are (responsible status) correct and complete to the best of your knowledge and belief?
4. Were you aware that any of the VAT returns were incorrect or incomplete at the time they were submitted?

False statements may result in a criminal investigation with a view to prosecution.

Exceptionally, these questions may be modified to fit the particular circumstances of the case. The taxpayer should consider the answers to these questions carefully (in consultation with their tax/legal adviser) before attending the meeting.

Disclosure Report

If there are irregularities that need to be disclosed, HMRC will invite the taxpayer to provide a Disclosure Report, the nature of which will depend on the individual circumstances of the case. Areas to be covered in the report will be:

• a brief business history;
• the nature of the irregularities and how they came about;
• the extent of the irregularities:
• steps taken to verify amounts with supporting documentation and any assumptions made;
• a detailed schedule of the irregularities for each period involved for each tax.

HMRC will agree a timetable for producing this report at the meeting. In most cases HMRC would expect the disclosure report to be submitted within six months of the opening meeting. The timetable will vary according to the complexity of the case and volume of work required, for example in more straightforward cases the report could be submitted considerably sooner.

HMRC will invite you to make payments on account towards any tax arrears, both at the initial meeting, and throughout the enquiry. Payments on account will reduce any interest charges.

HMRC will then send a summary of the main issues discussed at the meeting for the taxpayer to either agree or amend. The taxpayer will be asked to return a signed copy once the notes are agreed.

It is absolutely vital that the taxpayer stops any irregularities immediately. The disclosure report and any subsequent returns must reflect the correct tax position. If HMRC discover that the irregularities have continued during the course of the investigation, this may be reflected in the level of penalties.

Failure to make a disclosure

If the taxpayer chooses not to make a disclosure HMRC will undertake their own investigation, using statutory information powers (including to third parties) if necessary. If HMRC discover irregularities they will issue formal assessments and pursue collection of any unpaid tax with interest.

Penalties are likely to be significantly higher due to a reduction in the level of mitigation, reflecting the fact that the taxpayer did not take the opportunity given to disclose the irregularities.

After the meeting

HMRC will discuss the Disclosure Report with the taxpayer and their advisers. HMRC will monitor closely preparation of the Disclosure Report to ensure it is progressing to the agreed timetable. This will usually involve regular meetings with the taxpayer's professional representatives. HMRC will suspend their enquiries until they receive the Disclosure Report, if they remain satisfied that matters are progressing towards a full disclosure of tax irregularities within a reasonable period of time.

HMRC reserve the right to take over the investigation themselves if they become dissatisfied with progress. If this happens it will be reflected in the level of any penalties charged.

It is the taxpayer's responsibility to ensure the Disclosure Report is accurate and complete to the best of his/her knowledge and belief.

If the taxpayer is satisfied that the finished report is a complete account, it should be signed by the taxpayer as representing a full disclosure of all irregularities, and submitted within the agreed timescale. HMRC will ask the taxpayer to certify that this is the case and will not accept the report otherwise.

The taxpayer may be asked for other certified documents such as a statement of assets and liabilities and of bank and other accounts including debit and credit cards operated.

Once the signed report has been received, HMRC will test the information supplied to satisfy themselves that it is correct and complete. In doing so HMRC may need to exercise their legal powers to obtain information. Sometimes the law will allow HMRC to do this without the taxpayer's knowledge or approval.

If HMRC disagree with or need to clarify any aspect of the report, it may be necessary to have a further meeting, at which time they will make every effort to resolve these issues and reach an agreement with the taxpayer and his/her professional adviser.

Providing information

HMRC will ask for the information and documents that they need and will give the taxpayer a reasonable amount of time to comply.

HMRC should be notified straightaway if there is likely to be any difficulty in obtaining the information or documents requested.

The taxpayer should ensure that any information provided is correct. If the taxpayer is unsure it is important to say so quickly. It is vital that the taxpayer discloses all of the relevant facts even if he/she is unsure of the tax consequences.

Record Keeping

The taxpayer should ensure that he/she retains all existing records, including those held on computer, during the investigation whether or not he/she is required to do so by law. HMRC may ask to examine your business and private financial records. By arrangement this examination can take place at the taxpayers home or business premises. If necessary HMRC may ask to retain original records or copies.

There may be occasions where HMRC exercise their statutory powers and remove certain records from the taxpayer who is under investigation. In such circumstances a receipt will be provided for any documents taken away. HMRC will also provide copies of any documents removed and return the originals at the end of the investigation.

Reaching an agreement

If the HMRC investigation finds nothing wrong with the taxpayers affairs they will notify the he or she in writing, confirming that the investigation has finished.

Once the nature and extent of any irregularities are agreed, the procedures for concluding the investigation and paying amounts due are slightly different for direct and indirect taxes.

Direct Taxes - HMRC will try and reach an agreed figure with the taxpayer and his/her professional representative covering the amount of tax, interest and penalties due. HMRC will only suggest adjustments that they consider to be reasonable in the light of the information either supplied or held. HMRC will then invite the taxpayer to sign a letter offering to pay the specified sum, and if agreed, will shortly thereafter issue a letter of acceptance. This exchange of letters is a legal contract between HMRC and the taxpayer and both are bound by its terms.

Indirect Taxes (VAT) - HMRC will write to the taxpayer informing them of the amount of tax, interest and any penalty due. If the taxpayer does not agree with the contents of the letter HMRC should be notified immediately.

If the taxpayer agrees, they will be asked to sign and return a copy of the letter. Once HMRC have received this signed letter, they will write to the taxpayer formally notifying them of the assessment for tax, interest and any penalty. HMRC will then also ask for payment, less any amounts paid on account. Whilst tax subject to interest charges remains unpaid, interest charges will continue to accrue.

Failure to reach agreement

If agreement cannot be reached HMRC may seek to formally determine the tax, interest and penalties they consider appropriate. They will use information or documents provided during the investigation in any proceedings to determine the taxpayer's liability to tax, interest and penalties

Interest and Penalties

Interest is calculated on any tax paid late. In some cases HMRC may also levy a surcharge.

Penalty rules depend on which periods are affected, as follows:

• Income Tax, Corporation Tax, Capital Gains Tax and VAT periods beginning on or after 1 April 2008, and for which the return is due on or after 1 April 2009, come under the Penalty for Inaccuracies rules
• for other taxes and duties, tax periods beginning on or after 1 April 2009, and for which the return is due on or after 1 April 2010, the Penalty for Inaccuracies rules apply
• all other periods - 'old rules'

The taxpayer may therefore be liable for penalties under the old rules for some periods, and under the Penalty for Inaccuracy rules for other periods. If this is the case, the different penalties will be calculated separately, under the different rules.

Penalties - 'old rules'

The maximum penalty for both direct and indirect tax is an amount equal to 100 per cent of the tax understated. The level of penalty can be significantly reduced in certain circumstances.

For direct taxes HMRC can charge a penalty for an incorrect tax return if it was delivered fraudulently or negligently or if the taxpayer finds that it is incorrect and fails to correct the error within a reasonable time.

For indirect taxes, if HMRC identify irregularities due to dishonest conduct, a civil evasion penalty will normally be applied.

How 'old rules' penalties can be reduced

It is for the taxpayer to decide whether or not to co-operate and make a full disclosure. It should be made clear that for both direct and indirect taxes there are arrangements to reduce penalties where the taxpayer chooses to co-operate and disclose.

Direct taxes

When calculating any penalty HMRC will take into account:

• Disclosure - a reduction of up to 20 per cent (30 per cent for full voluntary disclosure where there was no fear of early discovery by us). This reflects the extent of any voluntary disclosure of irregularities made.
• Co-operation - a reduction of up to 40 per cent. If the taxpayer supplies information quickly, attend interviews, answer questions honestly and accurately, give all the relevant facts including full written disclosure and pays tax on account when it becomes possible to estimate the amount due, then get the maximum reduction will be given.
• Seriousness - a reduction of up to 40 per cent. This reflects the seriousness of any errors or omissions made.

Indirect taxes

The maximum penalty of 100 per cent tax evaded is reduced by an amount which depends on whether the taxpayer has disclosed full details of the true VAT liability, and by the extent of the co-operation displayed during the whole enquiry.

Reductions from the 100 per cent penalty figure will normally be made, to the maximum percentages specified, as follows:

• up to 40 per cent - early and truthful explanation as to why the arrears arose and the true extent of them
• up to 40 per cent - fully embracing and meeting responsibilities under this procedure by, for example, supplying information promptly, including full written disclosure, attending meetings and answering questions

In most cases, therefore, the maximum reduction obtainable will be 80 per cent of the culpable tax. In exceptional circumstances however, consideration will be given to a further reduction, for example, where you a full and unprompted voluntary disclosure has been made.

Penalties - Penalties for Inaccuracies

The new rules apply in the same way to all taxes and duties affected by them. Where the Penalties for Inaccuracies apply, a person may be charged a penalty where they give HMRC an inaccurate document and the inaccurate document either amounts to or leads to:

• an understatement of the person's liability to tax
• a false or inflated statement of a loss by the person
• a false or inflated claim to repayment of tax

and the inaccuracy was:

• careless
• deliberate
• or deliberate and concealed

If our suspicions of serious fraud turn out to be justified, HMRC will expect to charge penalties for deliberate inaccuracies, or for deliberate and concealed inaccuracies, depending on the facts. Penalties for careless inaccuracies may also be charged where appropriate.

A penalty for a deliberate inaccuracy will normally apply where the taxpayer deliberately:

• understates the tax owed
• chooses to misrepresent his or her liability
• overstate a claim

A penalty for a deliberate and concealed inaccuracy will normally apply where the taxpayer takes active steps to cover up a deliberate inaccuracy.

The normal maximum and minimum penalty for each inaccuracy depends on the behaviour that caused it as follows:

• inaccuracy despite taking reasonable care - no penalty
• careless inaccuracy - between 15 per cent and 30 per cent
• deliberate inaccuracy - between 35 per cent and 70 per cent
• deliberate and concealed inaccuracy - between 50 per cent and 100 per cent

The figures are percentages of the tax lost.

If the taxpayer makes an unprompted disclosure of the inaccuracy, that is, HMRC are informed about it before the taxpayer has any reason to believe that they have discovered or are about to discover it, then the minimum penalty is further reduced in each case as follows:

• careless inaccuracy to nil
• deliberate inaccuracy to 20 per cent
• deliberate inaccuracy with concealment to 30 per cent

Reductions under Penalties for Inaccuracies rules

The minimum penalty for deliberate error will normally be 35 per cent and the maximum penalty 70 per cent.

The minimum penalty for deliberate and concealed error will normally be 50 per cent and the maximum penalty 100 per cent.

The penalty may be set at any level between the maximum and the minimum and in calculating this HMRC will normally give the following reductions:

• up to 30 per cent for 'telling' - the extent to which the taxpayer admits the inaccuracy, tell HMRC promptly about its full extent and explains how it arose
• up to 40 per cent for 'helping' - the extent to which the taxpayer helps HMRC to quantify the inaccuracy, gives positive assistance, actively engages and volunteers information
• up to 30 per cent for 'giving access' - the extent to which the taxpayer responds positively to requests for information and documents, give access to business and other records and explains their function and significance

If the taxpayer makes an unprompted disclosure of the inaccuracy the minimum penalty may be set at 20 per cent for deliberate error and at 30 per cent for deliberate and concealed error. An unprompted disclosure is one where the taxpayer informs HMRC of the irregularity before they had any reason to believe that HMRC have discovered it or are about to discover it.

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