TAX: CONTENTIOUS: An Introduction

In the last year, HMRC has continued to suffer from long-term after effects of the pandemic. In particular, the latest Public Accounts Committee report has revealed that tax revenue attributable to compliance work fell from an average of 5.2% pre-covid, to 4.2% in the year 2021 to 2022, which is the lowest level for over a decade, and amounts to a loss of GBP9 billion in the past two years. The chair of the PAC has commented that HMRC’s ability to bring in tax has been “seriously compromised by the pandemic”.

In this context therefore, it is understandable that HMRC appears to be adopting a two-pronged attack involving recruitment, together with more effective utilisation of existing tools. With regard to the former, more than 3,000 compliance staff have been introduced, including more than 500 Fraud Investigation Service tax inspectors. It is thought that this drive ought to result in an increase in investigations and ultimately revenue. The swathe of new inspectors will also be able to rely on enhancements to pre-existing powers, most notably the recent changes to Code of Practice 9 (COP9).

The essence of COP9 is that an individual is told they are suspected of fraud, but is not told anything about the nature of the fraud that is suspected or the grounds for suspicion. The individual is then invited to “own up” to their “deliberate conduct” within 60 days – in return for which HMRC will not pursue a criminal investigation into that conduct. This “opportunity” is known as the Contractual Disclosure Facility (CDF). If the individual makes a disclosure of fraudulent conduct, they cannot therefore be criminally investigated in relation to that conduct. They are, however, vulnerable to criminal investigation in relation to tax irregularities – disclosed or otherwise – which they do not admit to be deliberate.

The current iteration of COP9 has been used by HMRC for several years, however, several changes have been introduced which are seen by many as an attempt to rely on COP9 as the primary method of targeting fraud and increasing revenue. The changes include the following.

– In order to take advantage of the CDF, taxpayers have always been required to demonstrate co-operation. However, co-operation is now defined so as to require attendance by the taxpayer at meetings with HMRC.

– Previously, taxpayers were immune from prosecution upon acceptance by HMRC that they had made a full disclosure. Now, there is an additional requirement that they also pay outstanding tax liabilities within a specific time period, and also for payments on account to be made.

– The definition of tax fraud has been amended. Fraud was previously defined as “dishonest behaviour that led to or was intended to lead to a loss of tax”. The new definition includes not just a tax loss, but “a risk of loss of tax”. The taxpayer does not have to have made any gain whatsoever; the definition includes the commission of a tax fraud in respect of tax owed by third parties.

– HMRC has provided further clarification as to when a COP9 investigation can be escalated to a criminal investigation. In particular, it is made clear that if a taxpayer rescinds any admission of deliberate behaviour, a criminal investigation may follow, and any material disclosed up to that point may be used in that investigation.

On the face of it, although these changes appear to be minor and uncontroversial, many practitioners are concerned that the impact may be more substantial. The requirement for taxpayers to attend meetings is particularly problematic. On a practical level, attending meetings with HMRC can be tremendously stressful and difficult for clients, particularly those who may be vulnerable or unwell. However, more significantly, it is unclear what harm the change is intended to cure. If an individual wishes to avail themselves of the CDF, they must sign a certificate of full disclosure attesting to the accuracy of its contents. HMRC therefore already has a safeguard against any incorrect or misleading information provided to it. The insistence on taxpayers attending meetings is seen by many as a desire not just to stress test explanations provided, but to allow inspectors to assess first hand the integrity of the taxpayer, in the manner of a criminal investigator conducting an interview.

The use by HMRC of taxpayer meetings as quasi criminal interviews is problematic. Code of Practice C of the Police and Criminal Evidence Act 1984 (PACE) states that individuals who are suspected of an offence must be cautioned before being questioned. Indeed, the case of R v Gill in 2004 resulted in the precursor to COP9 being suspended and replaced with a new iteration under which cautions were issued at all COP9 meetings, which also had to be tape recorded. When the new version of COP9 was introduced in 2005, the so-called “criminal underpin” was removed, which meant that prosecution for the predicate tax offence was no longer available, and the caution and tape recording of interviews was not required. However, in 2012 the CDF commenced, which reintroduced the possibility of prosecution. Accordingly, the criminal underpin was effectively reinstated. However, the right to be cautioned did not follow.

Since 2012, this has always been an uncomfortable reality, but one that has (for reasons of expediency) been conveniently ignored. However, the absolute requirement for taxpayers to attend meetings which are not protected by the rights enshrined under PACE throws a spotlight on the issue. There have been recent high-profile examples of taxpayers making representations to inspectors during COP9 meetings which have been used as the basis for prosecutions for fraud. Given the very real danger posed by attending meetings and answering questions without the rights afforded to others suspected of criminal conduct, taxpayers may well be reticent to enter into COP9 given the lack of protection which they ought to be entitled to.

Similarly, the requirement that taxpayers must be capable of paying tax liabilities may also disincentivise individuals from entering into the CDF. In the past, it was possible to obtain immunity upon making a disclosure of deliberate behaviour. If a liability was incurred as a result, a debt would be owed which would be treated like any other financial obligation. However, the repercussion of failing to satisfy all tax owed may now include the immunity from prosecution being withdrawn. Given the fact that it is not always possible to calculate all potential financial exposure at the outset, the requirement to pay is a difficult and onerous obstacle to navigate.

Given the fact that HMRC has (as outlined above) expanded the definition of fraud, and also emphasised the potential for escalation from the civil to the criminal track, practitioners will need to be aware of the implications of entering into COP9. In particular, practitioners should advise of the potential exposure to criminal investigation or prosecution. There is a feeling that the landscape of COP9 is changing. Some advisers have historically felt comfortable providing clients with a near guarantee of immunity following admission into the CDF, based on previous experience and longstanding personal relationships with decision-makers within HMRC. However, despite what many might say, it is no longer possible to provide taxpayers with any cast-iron assurance that applying for CDF will result in immunity from prosecution. Taxpayers will need to have their eyes opened to that fact, and make their decisions accordingly.