Amit Puri looks at intrusive and in-depth tax investigations, and considers when jail time is likely.
Tax investigations and disputes specialists keep up-to-date with the latest investigative approaches being taken by HMRC’s most aggressive investigators. They are found in HMRC’s Fraud Investigation Service (FIS), where the approach to cases if large amounts of tax are believed to be at risk or suspicions of tax fraud are made, has not changed much at all.
We know routine enquiries or compliance checks can put pressure on entrepreneurs and businesses. The most serious civil tax investigations dig deeper and often rattle clients at some point, if not at the outset.
Why so serious?
These investigations are a lot more intensive and resource-hungry for HMRC, which is why FIS investigators typically run no more than ten at any time. Compare this to a caseload for HMRC officers in wealthy and mid-sized business compliance (WMBC) and in individuals and small business compliance (ISBC), where there can easily be 30 or 40+ sometimes.
For practitioners, more care, time and experience is required supporting their clients, or else they cannot fully protect their interests and provide some certainty. Remember, HMRC is looking for a financial recovery, i.e., taxes, statutory late payment interest thereon and typically large penalties for failing to submit correct tax returns or failing to notify HMRC that taxes were payable in the first instance. Allegations of having acted dishonestly (deliberately failing to meet obligations) are not usually far behind, so HMRC will seek to publicly name and shame clients, too: a non-financial weapon power.
COP9 investigations
HMRC’s Code of Practice 9 (COP9) is a civil investigation of suspected tax fraud, where clients are explicitly challenged from the outset as to having acted dishonestly or with fraudulent intent. They are given an opportunity to admit tax fraud within 60 days of the notice (at high level) in return for being able to disclose all the details in much more detail later. In practice, they must disclose all the background and reasons for the deliberate actions, compute the additional income, profits, gains, etc., payable, the late payment interest and penalties, all at their own cost.
HMRC allows and expects clients to commission appropriately comprehensive disclosure reports, usually prepared by seasoned, suitably experienced tax investigations specialists. In return, lengthy, in-depth and intrusive investigations by correspondence (and meetings) with HMRC (which can run on for many years) are avoided.
COP8 investigations
HMRC’s Code of Practice 8 (COP8) is a civil investigation of large amounts of tax at risk, but not necessarily due to tax fraud (but can include that).
It’s not unusual for these to be used against marketed avoidance schemes or arrangements and bespoke tax planning, where HMRC is likely to have made a discovery about historic tax risks or will do so as a result of uncovering new information. So, the investigators are well prepared to argue that they have made a ‘discovery’ and have even identified culpability, bringing penalties to the fore. They will almost certainly investigate from the outset and so there is little possibility of dissuading them in favour of a COP9-style disclosure report. These investigations also typically span several years due to their in-depth nature.
Compare and contrast
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To re-cap, serious COP9 and COP8 investigations are carried out by HMRC’s FIS. These are not routine compliance checks restricted to single tax years or accounting periods.
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Given FIS investigators are typically looking at several years or periods and habitually beyond the normal four years, additional complexities usually arise.
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They are often referred to as the ‘elite’ HMRC inspectors due to the amounts of tax involved in their cases, the number of periods under review, and often resistance to meetings and calls and closure notice applications they face. Not to forget the calibre and experience of the professional advisers representing the clients.
In practice, COP9 investigations send shivers down the spines of many clients, given the unambiguous allegations of suspected tax fraud. Experienced practitioners will recognise that where a client has not sought out the COP9 process voluntarily (to secure immunity from a criminal tax investigation and thus potential prosecution), after exploratory conversations with their advisers, they normally accept HMRC’s offer of confirming the tax frauds at high level and then commission a detailed disclosure report (at their own cost) to explain what happened (When? Why? How? With whom?), plus evidence and comprehensive figures. From experience, most clients tend to opt to make full disclosures to safeguard their positions and secure the lowest penalties – which is precisely what HMRC wants.
In practice, COP8 investigations are comparatively underrated because HMRC does not allege fraud immediately and sometimes they do not explain what their interest in the client is either. So, in many cases, they appear similar to routine enquiries at first, but as the cases progress, clients and their advisers realise that the FIS investigators are looking at transactions usually concerning periods that are several years old, and they are ready to use formal information notices to gather the facts and evidence.
They confidently warn of their entitlement to and do, in fact, approach third parties with minimal discourse. These investigators are generally well equipped to identify and challenge ‘careless’ and ‘deliberate’ actions (i.e., dishonesty or fraud). This, of course, supports their reason for looking at older periods and makes clear their intentions of raising assessments off the back of arguing they have made ‘discoveries’. Where their investigations are resisted on poor grounds or advisers reach an avoidable impasse, it’s common for them to be open about the powers at their disposal.
Experienced practitioners will recognise the clear differences between these two types of serious investigations, thus the approaches taken by HMRC’s FIS investigators.
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In a COP9, the client and their advisers can and most certainly should take control of the case by securing the disclosure process for tax fraud and other irregularities. That is, they agree to investigate all matters in detail themselves, including approaching third parties for information or records themselves (e.g., suppliers, customers, banks, etc.) if necessary. They should manage HMRC’s expectations regarding timeframes, material progress, and the making of payments of tax on account. Alternatively, where the client has not committed tax fraud and thus they reject HMRC’s offer of disclosing, HMRC will investigate their case, which in practice is managed in a similar way to a COP8 investigation.
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In a COP8, the client is the subject of an investigation from the outset, so HMRC is asking the questions and verifying information, to confirm the tax risks it has identified. It will seek evidence to support those risks. From experience, a COP8 is more difficult to manage due to the uncertainty: not always knowing what HMRC is primarily concerned about, doing, and why. Importantly, its ability and willingness to investigate using third parties directly can often cause the client distress (e.g., resulting in reputational damage for them).
Facts and figures
My firm has been writing to HMRC’s Freedom of Information office for many years to gather key COP9 and COP8 serious tax investigations statistics.
What do these statistics mean?
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New COP8 and COP9 cases opened were much higher in 2022/23, together doubling to 1,030 (previously: 517). This may have signified increased resources in FIS or newer ways of working, but then there is the huge decrease in both in 2023/24.
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HMRC’s focus appears to have been on COP8 in 2022/23. This may indicate it was not confident enough to allege tax fraud, so instead, it set out to investigate itself under COP8.
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Surprisingly, new COP8 investigations almost quadrupled to 669 in 2022/23 (previously: 176), but before drastically reducing in 2023/24! Clearly, there is a new strategy.
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There was some hurry to conclude many COP8 investigations in 2022/23 (doubling), perhaps due to the length of time they had been running.
Summary
Interestingly, despite 592 COP9 and 535 COP8 settlements in 2022/23, penalties charged in COP9 cases were almost quadruple at £29.7m compared to £13m! We were not surprised to see this because COP9 cases centre around tax fraud, whereas COP8 cases often focus on tax planning where a client might not be culpable.
HMRC said, “The total yield from COP9 delivery in 2023 to 2024 was significantly higher than in 2022 to 2023 as it includes a particularly large settlement being reached during the period.” You can easily identify that settlement online; it was HMRC’s largest at circa £652.6m – excluded from the £338.4m figure above.
Practical tip
We believe it’s in a client’s best interests to discuss and understand these serious investigations with an ‘independent specialist’ even if there are no discrepancies to disclose. The right help at the right time ensures that HMRC is effectively managed and its enquiries concluded expeditiously, including:
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utilising COP9 protections;
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masterful discovery arguments;
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identifying underlying behaviours or actions;
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avoiding criminal tax investigations;
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narrowing scope of investigation; and
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reducing severity of penalties.
