COP9 and the CDF Offer: Should you accept or reject?

Received a COP9 Letter? The first 60 days matter.

Receiving a Code of Practice 9 (COP9) letter from HMRC can be daunting. The letter notifies recipients that HMRC suspects there are errors in their tax affairs that have arisen through their deliberate conduct. In the eyes of HMRC and the Courts, deliberate tax errors are tantamount to tax fraud – a criminal offence.

The COP9 opening letter offers a one-time opportunity for taxpayers to enter the Contractual Disclosure Facility (CDF). The CDF offer is a contractual arrangement between the taxpayer and HMRC whereby HMRC will agree not to conduct a criminal investigation with a view to prosecution, in exchange for a full and accurate disclosure. For this contract to be enforceable, taxpayers are required to:

1. Formally accept the CDF offer; and

2. Submit a valid Outline Disclosure.

Where both of these steps are taken HMRC will agree not to pursue a criminal investigation. Instead, its investigation will be continued on a civil basis with HMRC looking to recover tax, interest and financial penalties.

The decision whether to accept or reject the CDF offer is one of the most important decisions a taxpayer will make.  While accepting the offer can secure HMRC’s commitment not to conduct a criminal investigation into the disclosed tax fraud, it exposes the taxpayer to potentially significant financial penalties. The minimum penalty for deliberate irregularities is 35% and, in many instances, even higher. Consequently, the CDF offer should only be accepted by those truly requiring immunity from prosecution.

What does HMRC already know?

HMRC’s COP9 investigations are conducted by its elite investigation officers within the Fraud Investigation Service (FIS). HMRC FIS does not commence COP9 investigations lightly. Before the opening letter is issued, FIS officers will have undertaken extensive research and considered the information available to them through HMRC’s CONNECT system. Therefore, if a COP9 opening letter has been received, HMRC will have issued it with a strong belief that it has identified tax irregularities and that those irregularities were deliberate.

Notwithstanding HMRC’s beliefs and understand, the CDF offer should only be accepted in two circumstances:

1. Where deliberate behaviour exists; and

2. Where the taxpayer may struggle to defend allegations of deliberate behaviour and/or there is material risk that HMRC could persuade a court that such conduct occurred.

Should you accept the CDF offer?

In the simplest possible terms, tax fraud occurs when a person knowingly and intentionally delivers an incorrect tax position (or fails to deliver one at all) to HMRC. The only person who really knows whether there are deliberate irregularities in their tax affairs is the recipient of the COP9 opening letter. Accordingly, it is only the taxpayer who knows whether their actions or inactions were deliberate. If they were, accepting the CDF offer is likely to be a wise decision.

That said, there are circumstances where even if the taxpayer does not accept that their behaviour was deliberate, accepting the CDF offer should be seriously considered.

To demonstrate this, it is worth considering what is likely to happen in the event that the CDF offer is rejected, there is a risk that HMRC may commence a criminal investigation with a view to prosecution.

At the conclusion of HMRC’s investigation, if HMRC proceeds with a criminal investigation and considers there is sufficient evidence, the matter may ultimately be referred for criminal prosecution.  Accordingly, HMRC will be required to convince the judiciary that ‘beyond reasonable doubt’ the taxpayer had ‘cheated the public revenue’.

Consequently, in addition to asking themselves whether they knew that their tax affairs contained irregularities, recipients of COP9 opening letters should also ask themselves whether a Court would find that, beyond reasonable doubt, the taxpayer had knowingly and intentionally misreported their exposure to tax?

Specialist advice

The decision of whether to accept or reject the CDF offer is probably the most significant decision a person can make in the context of tax. A wrong decision can lead to substantial unnecessary penalties or, alternatively, prosecution. Regrettably, it is a decision that simply has to be made. Failure to respond within 60 days will automatically be treated as a ‘rejection’ of the offer.

Given the importance of the decision, we would strongly advise that recipients of a COP9 opening letter obtain specialist advice. COP9 investigations are unique and very few tax professionals possess the necessary expertise and experience to guide clients through it successfully. Our Tax Disputes team includes former senior HMRC FIS officers with extensive experience of handling COP9 investigations from both sides of the fence. We can help taxpayers to decide whether or not to accept the CDF offer and, no matter their decision, guide them through the next phases of the investigation.

For a free, confidential, no obligation discussion with one of our experts, please contact us today. You can also explore our wider COP9 information along with our full range of tax disputes insights and services.