When HMRC suspects tax fraud it has a choice; it can either pursue a criminal investigation with a view to prosecution, or a civil investigation under Code of Practice 9 (COP 9). Even though targets for tax-related criminal prosecutions have increased, in recent years most cases involving suspected tax fraud are dealt with under COP 9. It is seen as a cost-effective way of recovering tax, interest and penalties whilst still keeping the threat of prosecution if a full disclosure of irregularities isn’t forthcoming.
The dilemma that faces a client who does not believe that they have committed tax fraud is that a denial does not remove the implicit threat of criminal prosecution. If a taxpayer knows there are problems with their tax compliance but believes that their actions are not fraudulent, the predicament is that an admission of deliberate behaviour will undoubtedly result in higher penalties and more tax years coming under consideration. Under COP 9 clients are given an initial opportunity to disclose the conduct that has led to irregularities in their tax affairs through what is known as the Contractual Disclosure Facility (CDF). This is a contractual arrangement whereby tax irregularities disclosed on the CDF outline disclosure form are in effect "immune" from criminal investigation because HMRC undertakes not to proceed criminally when full disclosure of irregularities is made. A disclosure under the CDF is an admission of fraud.
If HMRC suspects that a client has not fully disclosed (or has refused to co-operate) it reserves the right to start a criminal investigation with a view to prosecution. The process can be seen as one of carrot and stick. Historically dealing with most tax fraud cases in the civil arena has been valuable for recovering liabilities, cost effective (prosecution is expensive) and removes any uncertainty that putting a matter before a jury can bring.
Balancing the risks of knowing how to respond to a challenge under COP 9, or even using COP 9 proactively, requires a deep understanding of the ways in which HMRC work, their tactics and the underlying legal framework. It is a complex area on which expert advice should be sought.