Imagine a letter drops through your letterbox, bearing the official logo of HM Revenue and Customs (HMRC). But this is not just a small enquiry or about a small mistake or a late payment. It’s something much more serious: HMRC Code of Practice 9 (COP9).
This is not a polite request for clarification. It’s a direct accusation by HMRC’s Fraud Investigation Service (FIS). They suspect you of tax fraud, a deliberate act of dishonesty to avoid paying the tax you owe. Understanding COP9 is crucial for anyone facing such an investigation or those wishing to understand how the UK tax system deals with fraud when it "gets personal."
This article explores the nature of COP9, how HMRC uses it to tackle tax fraud, and the investigative process involved.
What is COP9 and Why is it so Serious?
HMRC’s COP9 is not a routine tax enquiry. It’s a specialised procedure used by HMRC’s FIS when they have strong reasons to suspect you have committed tax fraud. This is not about making a mistake on your tax return; it’s about deliberate actions, lies, or dishonest behaviour intended to hide income, increase expenses or otherwise reduce your tax liabilities.
In many cases where HMRC suspects fraud, it carries out criminal investigations with a view to prosecution which could lead to prison sentences and unlimited fines. However, with COP9, HMRC offers a critical choice known as Contractual Disclosure Facility.
Contractual Disclosure Facility
When HMRC issues a COP9 letter, they offer the taxpayer an opportunity to enter into a contract called the Contractual Disclosure Facility (CDF). This contract requires the taxpayer to make a full, accurate, open, and honest disclosure of all deliberate tax fraud and other irregularities in their tax affairs. In return, HMRC agrees not to pursue a criminal prosecution as long as the disclosure is complete and the taxpayer cooperates fully throughout the investigation The CDF is essentially a contact between the suspected entity and HMRC which is offered by HMRC as a choice to the suspected entity. The CDF gives you the opportunity to either
- Admit and disclose any deliberate actions you took that led to loss of tax to HMRC, and reveal any other issues or inaccuracies in your tax affairs, or
- Deny that you have caused any deliberate action to do such tax fraud.
- The CDF does not apply if you want to disclose careless errors or mistakes.
Understanding COP9 Investigation Process
Upon receiving the COP9 letter, you have 60 days to either accept or decline the offer of CDF. You must select one of these options. If you do not make a choice, or if you fail to complete the CDF acceptance process correctly and in full, this will be treated as your decision to decline the offer. In such cases, HMRC may proceed with an investigation which may include a criminal investigation. The investigation process depends on whether you accept or reject the offer of CDF.
If You Accept the Offer of CDF
This is your opportunity to come clean. You can acknowledge deliberate wrongdoing and agree to provide a comprehensive disclosure of all your past tax issues. In return, HMRC agrees not to pursue a criminal prosecution. However, you will still be liable for all the unpaid tax, interest, and substantial penalties.
Your level of cooperation will be considered when accessing any penalties due; the more you would cooperate, the lower the penalty will be.
Acceptance and Outline Disclosure
After accepting the CDF, you need to send back a signed Acceptance Letter along with an Outline Disclosure. Acceptance Letter is a certified statement that you have made a full, complete and accurate disclosure of all tax irregularities together with certified statements of your assets and liabilities, and of all bank accounts and credit cards you have operated, (Formal Disclosure)
This Outline Disclosure is a detailed and honest statement explaining all the deliberate actions you took that caused tax losses. You must clearly describe:
- What you did: The specific acts of fraud.
- How you did it: The methods employed.
- Who else was involved: Anyone else who supported you.
- The timeframe: The period over which these actions occurred
You also need to mention any non-deliberate behaviour or irregularities separately, but if your disclosure only includes non-deliberate behaviour without deliberate behaviour causing loss, it will be invalid.
You have 60 days to submit this disclosure, and it should be based on your best recollection and any readily available documents.
The details do not have to be precise within the 60 days period. Precision can come later if the details are not reasonably obtainable within that period.
Outcome
After you make your Outline Disclosure under the CDF with HMRC, several outcomes are possible depending on the completeness and quality of your disclosure:
If HMRC Suspects your Outline Disclosure is Incomplete
HMRC may begin a criminal investigation into any frauds, you have not disclosed which HMRC had suspected. Alternatively, they may start a civil investigation, but this can escalate to a criminal one later.
If your Outline Disclosure is Valid and no Additional Information is Needed
HMRC will seek to agree the amount of additional tax, duty, interest, and any penalties you owe, with your cooperation.
You will then be invited to make a Formal Disclosure, certifying that your disclosure is complete, accurate, open, and honest by completing 4 mandatory documents including:
- A Certified Statement of Worldwide assets and liabilities.
- A Certificate and Schedule of all financial accounts operated
- A Certificate and Schedule of all financial cards operated
- A Certificate of Full disclosure-your signature on this document must be witnessed.
You will also be asked to make a financial offer to settle the investigation covering tax, interest, and penalties.
If your Outline Disclosure is Valid but More Information is Required
Generally, more work is needed before you can make your Formal Disclosure. You will be required to arrange for a Disclosure Report.
The Disclosure Report must list all underpaid taxes or incorrect HMRC payments, clearly separating deliberate from non-deliberate issues. It should briefly explain your business background, describe how the irregularities arose, and show how you calculated the amounts owed. You must also detail any deliberate actions you took in any role. Finally, the report must summarise total tax, interest, and penalties due, and you must confirm it’s complete before HMRC reviews it.
Note: You must keep HMRC informed about the progress of the report, and you might be asked to take some progress meetings.
Payment and Settlement
When making your Outline Disclosure, HMRC expects you to make a payment on account of the tax or duty owed and continue making payments on account during the investigation. This shows you are willing to settle and helps reduce interest.
Before completing your Formal Disclosure, you and HMRC will agree on the final amount of tax, duty, interest, and penalties due, which you must then pay or arrange to pay under a payment plan.
If you think you may be unable to pay, you must inform HMRC immediately so payment options can be considered.
If You Reject the Offer
If you believe you have not deliberately caused a loss of tax or duty, you can reject the CDF offer by signing and returning the rejection letter within 60 days. HMRC will consider any explanation or documents you provide and may confirm they no longer suspect fraud.
However, rejecting the CDF means HMRC will still investigate on their own which could either be criminal or civil investigation.
Appointing an Agent
Given the seriousness of COP 9 Investigations, we strongly recommend appointing a professional adviser to help simplify the process and avoid any further complications. At UK Property Accounts, we offer comprehensive support throughout the entire procedure and can guide you effectively at every stage.
You may appoint us as your authorised agent, allowing us to liaise directly with HMRC on your behalf. To do this, you will need to provide us with full authority to represent you by completing either Form 64-8 or Form COMP1.
Instances when HMRC Might Carry a Criminal Investigation
HMRC may commence a criminal investigation into suspected tax fraud under the COP9 and CDF in the following situations:
Interest and Penalties
HMRC charges statutory interest on any tax or duty paid late. Any penalty imposed will be calculated as a percentage of the tax or duty lost due to your actions. HMRC may reduce this penalty based on your cooperation and behaviour throughout the investigation.
Penalties can range from 0% for genuine errors made without prompting, to 100% or more for deliberate actions. In particularly serious offshore cases, penalties can reach 200%.
For more information regarding the penalties, please read our article "Overseas Income May Be Taxable".
Can you Appeal Against HMRC’s Decision?
If you are unhappy with HMRC's final decision or the proposed settlement, you have the right to appeal within 30 days of the decision. There are two main avenues:
- Internal Review: You can request an internal review by HMRC. This involves a different HMRC officer, independent of the original investigation, reviewing the decision. This process aims to provide a fresh perspective and can sometimes lead to a resolution without needing to proceed to a tribunal.
- Tax Tribunal: If the internal review does not yield a satisfactory outcome, or if you choose to bypass it, you can take your appeal to the First-tier Tax Tribunal. This is an independent judicial body that will hear your case and make a binding decision
Conclusion
Facing a COP9 investigation from HMRC is a serious matter that should never be taken lightly. The CDF offers a vital opportunity to avoid criminal prosecution provided you fully and honestly disclose all deliberate tax fraud. Whether you choose to accept or reject the offer, it’s essential to act quickly, cooperate fully, and seek professional advice.
By understanding the COP9 process and your rights and obligations, you can make informed decisions, minimise penalties, and resolve your tax affairs with HMRC as effectively as possible.
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