Explaining COP9, and when it is relevant to businesses

21 December 2022 Consultancy.uk 6 min. read
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While many companies are aware of the penalties they may face if they fail to disclose relevant information to tax authorities, the benefits of doing so are less well known. Matthew Watkins, a Director specialising in tax disputes and disclosures director at Menzies, walks through 10 key points of HMRC’s Code of Practice 9, what the process involves, and how adhering to it can help companies facing financial difficulties.

HMRC’s Code of Practice 9 (COP9) procedure is designed for use in situations where HMRC suspects, or the individual chooses to voluntarily disclose, that their deliberate action or inaction has led to an insufficient amount of tax being paid. But are the benefits of self-disclosure fully understood by taxpayers and their advisers?

Tax evasion is a criminal offence and examples include deliberately failing to report some or all taxable trading profits, submitting false invoices or artificially inflating the value of expenses. HMRC defines tax evasion as ‘tax fraud’ and stiff sanctions apply to those found to have misled HMRC by giving them false or incomplete information, whether knowingly or not. For example, if they are found guilty of a summary conviction then this could result in up to six months in prison or a fine of up to £5,000. Alternatively, if a taxpayer is found guilty by indictment, this could result in a maximum sentence of seven years in prison or an unlimited fine.

Matthew Watkins, Director, Menzies

The taxpayer may instead be charged with the more serious offence of “cheating the public revenue” which carries the harshest penalties of a maximum sentence to life in prison or an unlimited fine. Other criminal sanctions the taxpayer ought to be aware of include providing false documentation to HMRC which carries a maximum penalty of £20,000 or a six-month prison sentence. Furthermore, companies can now be held criminally liable under The Criminal Finances Act 2017 for the offence of failing to prevent the facilitations of tax evasion.

HMRC has a selective criminal prosecution policy, which means they can select cases where they want to commence criminal proceedings. This means that one form of tax evasion is no more likely to result in criminal proceedings being brought against the taxpayer than another. However, the groups of taxpayers more likely to be selected for prosecution are high-profile individuals; professionals such as solicitors, barristers, accountants or tax advisors, and those cases where HMRC is more likely to win, for example where the underlying matter has been going on for multiple years or the tax loss is particularly high. The rationale behind targeting these particular groups of taxpayers is that they are likely to send out the strongest deterrent to others.

The main benefit of COP9 for taxpayers is that, provided a full disclosure is made, HMRC will guarantee the individual concerned receives immunity from criminal prosecution. What does the COP9 process involve? There is a formal process to follow with strict deadlines, so it is important to seek the support of an experienced tax professional with experience of handling voluntary disclosures and managing disputes.

Most cases will proceed as follows:

1. Application to disclose submitted to HMRC (where a voluntarily disclosure is made)

HMRC form CDF1 is used to register the individual for COP9. On receipt of the application HMRC will complete some basic background checks on the taxpayer, including checking that the taxpayer is not already under criminal investigation.

2. Formal confirmation of acceptance into COP9 process

It normally takes around 2 weeks for HMRC to confirm an individual has been accepted into COP9 at which point they will be asked to provide a valid “outline disclosure” within the following 60 days.

3. 60 day “Outline Disclosure” period

During this time HMRC is not permitted to correspond with the taxpayer or their advisor with regards to the case. Along with completing the outline disclosure form, which provides a summary of the case, the taxpayer will either formally accept or reject the offer to use COP9. A taxpayer is unlikely to reject the offer where they voluntarily entered into the process, but if they have received an invitation to use COP9 by HMRC, they may choose to reject the offer if, for example, they do not accept any errors or omissions were a result of their deliberate behaviour.

4. HMRC confirm outline disclosure was valid

HMRC will normally respond to the submission of an outline disclosure within 4 weeks from submission. HMRC reserve the right to commence criminal proceedings on any matter not disclosed within the outline disclosure.

5. HMRC opening meeting

Once the taxpayer’s outline disclosure has been accepted they will then be in the COP9/CDF process. The next step is then typically to have a face-to-face meeting between the taxpayer, their advisor and the HMRC case officer assigned to the case. These meetings can be quite formal but the taxpayer is under no legal obligation to attend, though they may be encouraged to attend for other reasons. The meeting presents an opportunity for HMRC to ask further questions about the matters being disclosed and at the end of the meeting the taxpayer will be asked to prepare a disclosure report, or commission their advisor to do this on their behalf which most taxpayers would want to do. The scope of work to be included and considered in course of preparing the report will normally be agreed with HMRC at this stage too.

6. Preparation of disclosure report, computations and completion of standard HMRC forms

Given the nature of the work and the high risks involved if errors are made, only an advisor with experience in this area should be appointed to undertake this type of work. HMRC’s COP9 guidance states that “many people find it helpful to appoint a specialist adviser who is familiar with COP9”. The disclosure report must include a self-assessment of the tax liabilities and interest, giving a detailed explanation of how the figures were arrived at. HMRC may ask for progress meetings or calls with the appointed advisor during the period when the report is being prepared.

7. HMRC confirms agreement or raise follow up questions

Around 2 – 3 months following the submission of the disclosure report with supporting documentation, HMRC will respond to either confirm their agreement or ask follow up questions. Once the liabilities are agreed HMRC may request a final meeting with the taxpayer.

8. Penalty negotiations

It is good practice for the appointed advisor to be proactive and make representations on the penalty % to apply to the previously undisclosed tax liabilities. Although the legislation sets out specific range of penalty %’s that apply to various offences, an experienced advisor should be able to articulate why the minimum % ought to apply where the circumstances allow for this.

9. HMRC meeting

At the final meeting HMRC will use this as an opportunity to cover any final matters that may not yet be agreed and confirm the final penalty % that should apply.

10. Settlement by contract

Cases are typically settled by contract at the end of COP9 with the contract setting out the amount the taxpayer has agreed to pay HMRC. A contract settlement can incorporate payment terms if the taxpayer requires this.

COP9 is a process by which taxpayers can take responsibility for any deliberate omissions or provision of inaccurate information, which, if relevant to the specific case, could mean settling issues in a civil, as opposed to criminal, basis. For taxpayers who may be considering undertaking this process, it is vital to secure experienced advice as soon as possible, from a COP9 expert who can guide them through the process.