What has changed?
HMRC has updated the civil investigation of fraud (COP 9) guidance following a relatively low key announcement that revisions to the contractual disclosure facility (CDF) procedure apply from 30 June 2014. The amended CDF contains two quite fundamental changes, namely:
This latest COP 9 refresh demonstrates the department’s continuing appetite to toughen its stance on avoidance and evasion, but may have far reaching consequences for taxpayers.
Why has HMRC made the change?
HMRC claims the changes clarify the terminology used during a civil fraud investigation, by replacing the admission of fraud with the arguably less contentious phrase ‘loss of tax brought about by your deliberate conduct’ which in itself sounds innocuous enough. The rationale is to ‘ensure all CDF products have accurate definitions of terminology that accord with tribunal decisions’ and to ‘make it clearer and fairer for all customers.’
However, it is not yet clear how aligning the process with the civil penalty regime, as opposed to the traditional criminal procedure will make things fairer, nor have HMRC explained why the previous terminology was causing confusion. HMRC’s compliance reform forum minutes dated 21 January 2014 show a post-implementation review of CDF was carried out and a workshop took place in November 2013. Figures on the department’s civil and criminal investigation of fraud were not available and the review findings and recommendations were not placed in the public domain. The review was also noted to be qualitative, not quantitative.
Admission of deliberate behaviour sounds much less serious than admitting to fraud. How is that a bad thing?
Dropping the bar for entry into the CDF club from ‘fraudulent’ behaviour to ‘deliberate’ behaviour may be semantics that make it easier to encourage taxpayers to sign up, but it also means HMRC could potentially widen the scope of who they issue the COP9 to in the first place. The Hansard statement confirms COP 9 is only appropriate for cases of serious fraud, but we are seeing cases where HMRC are issuing COP 9 to some avoidance scheme users. HMRC obviously consider these schemes to be fraudulent, to justify the issuing of the COP9 in the first place. Whether they are in fact fraudulent schemes remains to be seen.
The recipient of the COP 9 now has to admit to the arguably lesser, deliberate behaviour to obtain CDF assurance that he will not be criminally investigated, but deliberate behaviour includes wider ‘offences’ than those with fraudulent intent. So under old CDF rules, he may be confident the scheme was not ‘fraudulent’ so does not need to be put on the outline disclosure form as HMRC could not successfully prosecute the scheme where there was no intent to defraud. Under new CDF rules however, we need to look at HMRC’s guidance on what they consider is ‘deliberate’. HMRC’s guidance (CH53700) states that ‘a person who sends us a document containing a deliberate inaccuracy may assert that they did not intend to cause a loss of tax. For the purposes of assessing that loss of tax, the person will be treated as having deliberately brought about the loss of tax which resulted from the inaccuracy, whether or not it was their intention’.
How does this affect clients receiving new CDF?
The change from fraudulent admission to deliberate admission means the outline disclosure needs to include all aspects of deliberate conduct to be considered a complete disclosure. The document is only supposed to provide certainty that HMRC will not prosecute the offences detailed on the form. To prosecute fraud, HMRC must successfully show both the fraudulent act and intent beyond all reasonable doubt. The bar to criminally prosecute the actual offence has not changed. But HMRC can prosecute where a disclosure is considered to be incomplete. Leaving a deliberate act that brought about a loss of tax off the disclosure is potentially, a separate prosecutable offence. And that will fundamentally change the advice we give to clients who receive a COP 9 and have participated in a marketed avoidance scheme.
So is the COP 9 becoming an anti-avoidance tool?
That does not appear to be the intention, but the fact that avoidance is considered deliberate, means it now has a clear cross-over with the new CDF. HMRC’s penalty manual (Compliance Handbook CH81151) was updated on 17 February 2014 to include an avoidance scheme illustration. In the example, the purchaser of the scheme is considered to have acted deliberately if he is aware that the scheme has not been properly implemented.
COP 9 is obviously not an anti-avoidance tool, but HMRC have not yet issued guidance on how the COP 9 interacts with the anti-avoidance tools they already have. The Code of Practice 8 (COP 8) was designed for avoidance work, and bolstering COP 8’s effectiveness may have restored it to HMRC’s most effective investigative tool to investigate and deter avoidance.
Using COP 9 for avoidance would be a change in the COP 9 policy, arguably significant enough to warrant changes of this nature being circulated for proper consultation to all stakeholders potentially affected. There is also worryingly no evidence published to support the need for this change, nor evidence that new safeguards have been put in place to ensure HMRC’s use of COP 9 is restricted to those cases they could reasonably criminally investigate, in accordance with the COP 9 Hansard Statement. Fraud is emotive, but serious. A loss of tax brought about by deliberate conduct does not have the same connotation.
How does the removal of DWC change the CDF?
The second change appears to be a curious move away from HMRC’s behaviour-based methodology. The three options previously available to the recipients of the COP 9 have been simplified to two. The process can now be summarised as: ‘Did you do it? Yes or No?’ This is undoubtedly simplified, but has this simplification been implemented at the expense of an important safeguard designed into the original CDF process?
The original DWC was added as part of the CDF summer 2011 consultation process to give the profession confidence that amongst other things, HMRC could politely withdraw from the cases where they had picked up the wrong end of the stick.
The original CDF consultation stakeholders felt this safeguard was needed based on HMRC’s now infamous reputation for getting it wrong, and for issuing COP 9 where there was insufficient evidence to proceed with a criminal investigation. HMRC themselves acknowledged in the July 2011 consultation document that ‘It is possible that HMRC could suspect a taxpayer of fraud but no fraud has in fact been committed’ (section 1.11)
Case selection procedure should arguably have formed part of the post-implementation review, and we have not yet had access to the statistics to support the need to withdraw the DWC route. It would be interesting to know how many COP 9 investigations HMRC were initiated where no ‘deliberate’ behaviour was ultimately established, and how many successful prosecutions have originated from COP 9, post CDF.
The NAO originally recommended that HMRC needed to create a credible deterrent for non-cooperation and certainty for those who want to work with HMRC. HMRC has not yet clearly explained why the DWC route compromises the delivery of those policy objectives.
How will the changes be implemented by HMRC?
The lack of proper consultation and evidence to support the need for the changes to CDF will come as no surprise in the current climate. Controversial measures designed to enable HMRC to be more efficient at tackling avoidance, with an apparent lack of appropriate safeguards built in, are becoming the norm.
It remains to be seen how the new CDF will be implemented, but on recent trends, it is not unreasonable to predict that this may be beyond the scope of the original Hansard statement which limited COP 9 to cases of serious fraud. Clients who have purchased schemes where HMRC has challenged the implementation may potentially end up caught by the new potentially wider-reaching CDF.
There is now one opportunity to get the CDF assurance. Moving to a one strike policy could force admissions of deliberate conduct on receipt of the COP 9, just to obtain the certainty that they will not be criminally investigated for participating in an avoidance scheme.
