My client participated in a marketed avoidance scheme and has received a COP9 notice. He maintains there are no irregularities in his return, and an online accounting forum indicates that a number of participators in the same scheme have also received COP9 notices. He cannot see how the scheme could be ‘fraud’ and wants to take the CDF denial route; though he is happy to cooperate with the investigation. However, he is concerned about the impact of one or all of the other scheme users opting for the CDF acceptance route. Is my client more likely to be prosecuted in this scenario?
The issue of COP9 to groups of scheme users reinforces the speculation that HMRC is adapting existing tools to tackle marketed avoidance. The treatment of some marketed avoidance schemes as fraudulent at user level is unsurprising when viewed in the context of the current taxscape.
Public opinion that tax avoidance is unacceptable, coupled with the perception that HMRC is ineffective at dealing with those who utilise schemes, perhaps justifies HMRC’s increasingly aggressive approach, in which traditional avoidance is reclassified as evasion. From the perspective of a user, though, is participation in a scheme really capable of being fraudulent evasion of tax?
Regardless of whether HMRC would be successful at convincing a jury beyond all reasonable doubt that a taxpayer’s actions amount to fraud, there is a considerably lower bar to justify the escalation of a civil fraud investigation to a criminal investigation. Since your client has received a COP9 notice, it is clear that HMRC already suspects fraud; and the proposal to issue COP 9 has been considered and approved on the basis that its suspicion is reasonable.
It is, therefore, critical to consider the potential for escalation from ‘civil fraud’ to criminal investigation in the taxpayer’s individual circumstances.
Holistic approach
Keep the client’s mind focused on the fact that there is a chance that his scheme involvement may not be the (only) reason that HMRC issued the COP9. While scheme participation may have originally put your client on HMRC’s radar, it may also have obtained information on aspects of tax returns unrelated to the scheme.
There are significant risks to a strategy based on second guessing what HMRC knows or suspects. A detailed consideration of the potential problems is without doubt a more productive exercise. If your client is at all unsure about whether there are other irregularities in his tax returns, now is the time for him to tell you.
Mens rea
Many taxpayers believe that the term ‘fraud’ is confined to a deliberate act to deprive HMRC of money to which it is entitled. In fact, there are levels of culpability and an omission would suffice. The blanket issue of COP9s to scheme users indicates HMRC’s belief that recklessness is sufficient culpability for fraud. This is where the level of due diligence the taxpayer carried out on the scheme may have a significant impact on whether he should accept or reject the offer of the contractual disclosure facility (CDF).
HMRC’s view of the scheme
HMRC’s website gives updates on schemes under investigation, and litigated and available settlement opportunities. Identifying similar schemes may give an indication of the current thinking, but will not give the complete picture. HMRC’s criminal investigations are excluded, and the information provided on promoter newsletters and public domain forums is often little more than propaganda issued by those with their own interests to protect.
Even if your client does not think the scheme could be considered fraudulent, he should consider whether his opinion is based on independent legal advice or on the marketing material (and possibly counsel’s opinion) provided by the scheme’s promoters.
If he wishes to reject the offer of the CDF, it may be advisable to explain why he thought that the use of the scheme was efficacious tax planning, rather than fraud. Any such explanation should be submitted with the CDF rejection letter, so that that information is available when the case is resubmitted to be considered for criminal investigation suitability. (The removal of the cooperation route for denials does not prevent you from making it clear that your client intends to cooperate and provide supporting information voluntarily. Early submission of relevant information also has a positive impact on penalty mitigation, but bear in mind that any documents submitted may be used by HMRC’s criminal investigators.)
It is the individual facts of the taxpayer’s case and his behaviours that influence the likelihood of prosecution, rather than how everybody else who took part in the scheme responds to the offer of CDF.
Procedural prosecution within COP9
Nonetheless, it is worth reminding your client that the contractual nature of the CDF means that there is a clear audit trail, and therefore documents for HMRC to rely on in a subsequent prosecution. The documents submitted by the recipient may be used in court.
According to the COP9 booklet, the declaration to deny fraud creates a simple document to prosecute in its own right. Equally, failing to disclose a fraud on the disclosure form leaves that offence open to criminal investigation.
Factors beyond your client’s control
HMRC obtains documents from various sources, including other taxpayers. The admissibility of documents obtained under a civil fraud regime in a subsequent criminal prosecution is a matter for the judge. For CDF, this is a relatively untested area of law.
HMRC contends that information obtained from one scheme user can be used against another, so a challenge on the admissibility of information may be an effective strategy. Where the promoters have been under criminal investigation themselves, legal advice on HMRC’s use and admissibility of documents obtained from the promoter may also be advisable.
Whilst it is important to ensure that your client fully understands these issues, the potential impact of what other scheme users do should always be a secondary consideration to the COP9 strategy.
One final aside: You should also consider your own involvement in your client’s decision to purchase the scheme and critically assess your and your firm’s liability. A criminal investigation into the client may result in your premises being subject to warrant, so consider obtaining legal advice if you have any concerns over risk of exposure, reputational damage or a potential conflict of interest.
