Filing tax returns is often seen as a tedious inevitability and a mundane task that does not evoke much pleasure, but tax administration, and in particular tax avoidance schemes, have recently been at the forefront of the news, particularly due to the leak of the Paradise Papers in November 2017. The papers are said to contain the names of more than 120,000 individuals and companies who own offshore companies including Facebook, Nike, Disney, Prince Charles and even H.M. The Queen.
Earlier this year, Her Majesty’s Revenue and Customs (HMRC) offered a settlement scheme with respect to offshore schemes, in particular disguised remuneration loan schemes. Individuals who had sent funds offshore could come forward to settle any outstanding liabilities under the Disguised Remuneration Settlement Scheme (DRSS). The advantage of entering the scheme was to avoid the significant penalties that are due to come into play in April 2019.
The opportunity to register for the DRSS has closed, but what happens if you may have tax irregularities within the U.K.? HMRC can deal with problems different ways, but the best thing to do, whether you are an individual or a company, is to be proactive and take positive steps to remedy any irregularities.
The two main civil tax investigations are explained below, and both routes can be instigated either by HMRC or by an individual/business with outstanding tax liabilities they wish to settle. The third option is the more draconian route of a criminal investigation.
Code of Practice 8 (COP8) Investigations
COP8 investigations will be triggered if HMRC suspect that large amounts of tax have not been paid or suspect that an individual has used a scheme or device that reduces their tax liability. This can include any form of taxation and can be in respect of individuals or companies. COP8 investigations do not involve an allegation of fraud, however, if suspicions of fraudulent activity are uncovered, the investigation could move to a COP9 (outlined below) or become a criminal investigation. Should the investigation remain in the COP8 sphere, the result will be for outstanding taxes to be repaid along with interest and penalties. The level of penalties is dependent on numerous factors, it is therefore important to engage a specialist tax advisor to minimize this.
Code of Practice 9 (COP9) Investigations
For a COP9 investigation to be triggered, HMRC must suspect that you have fraudulently evaded paying tax. Provided the matter is not deemed to be so serious as to warrant a criminal prosecution, HMRC can make an offer referred to as a Contractual Disclosure Facility (CDF). Once an offer is made, you will have 60 days to provide HMRC with an Outline Disclosure (OD) that identifies the tax irregularities. HMRC will also invite you to a meeting with them in order to progress matters, attendance is not a prerequisite to obtain a COP9 but it shows a willing to engage in the process. Should you decide not to reply to the CDF it will be deemed by HMRC that you are rejecting their offer, and this will provoke further investigations by HMRC without your involvement or input.
The information required by the CDF includes details of your business history, details of tax irregularities including figures, parties involved and the dates the irregularities cover. You will also need to outline what records you have available that deal with the fraudulent behavior.
A COP9 will only be offered when individuals have been completely open and honest. Should HMRC discover that this is not the case and discover material omissions in the OD, the COP9 will be terminated and the case will likely be referred to the criminal arm of HMRC.
Should a COP9 be issued, you will be immune from prosecution for the relevant tax offences, but the immunity will only extend to areas covered in the OD. Like the COP8, the outstanding tax, interest and penalties will be payable. The scope of the penalties can be wide ranging, so it is vital to have a practitioner involved to ensure appropriate information is divulged and an appropriate level of penalties is reached.
Criminal Investigations Commenced by HMRC
Of the options available to HMRC, the most serious is commencing a criminal investigation. They are likely to do this if they suspect you have deliberately failed to declare and pay the correct amount of tax.
If you have received a letter from HMRC informing you that a criminal investigation into your tax affairs has commenced and inviting you to attend an interview, under caution you should seek legal advice from a specialist firm immediately. It is possible for interview dates to be rescheduled to enable time to consider any documentation in advance of an interview. This will provide advisors with vital information to be able to determine the best approach for the interview and the criminal investigation.
Alternatively, HMRC have powers to issue search warrants and seize relevant items. Should this occur you are likely to be arrested and taken to the police station for questioning. Again, it is important that you request specialist legal representation.
While this is a serious step for HMRC to take, it is possible in certain cases, for the matter to be referred back to the civil department of HMRC. This would result in interest and potentially significant penalties being applied in addition to the outstanding tax. However, this would avoid a criminal prosecution and potential prison sentence.
HMRC can decide which form of investigation they choose to undertake. HMRC’s Criminal Investigation Policy states that they should “deal with fraud by use of the cost effective civil fraud investigation procedures under Code of Practice 9 wherever appropriate. Criminal investigation will be reserved for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate.”
Because it is possible for a civil investigation to become criminal and vice versa, it is imperative to seek advice from an expert at an early stage.
Ilana Baines is a criminal and regulatory lawyer in London at specialist fraud firm Byrne and Partners LLP. She has experience defending allegations of complex fraud including corruption, money laundering, tax evasion, insider dealing, fraud by abuse of position, fraudulently selling tickets and land banking.