The Contractual Disclosure Facility for Tax Evasion
Tax evasion, more commonly known as tax fraud is a punishable offence under UK law with penalties ranging from a £5000 fine and six months in jail to unlimited fines and seven-years in prison along with stress, asset freezing and confiscation, not to mention legal fees – all of which can severely damage the reputation of the business or individual under investigation. Therefore, if you are facing any kind of tax evasion litigation, you must consult an experienced tax consultant.
In this article, I would like to discuss one such type of tax evasion called the contractual disclosure facility (CDF).
Before January 2012, serious cases of suspected tax evasion were investigated by specialist HM Revenue & Customs (HMRC) higher officers under the fraud investigation service (FIS) . This granted the taxpayer absolute immunity from prosecution. But the process was riddled with loopholes and soon gave rise to the CDF.
The Contractual Disclosure Facility
Technically speaking, the contractual disclosure facility is simply a contract between a tax fraud suspect and the HMRC.
Though HMRC is not known for showing leniency to tax offenders, under exceptional circumstances, it can use the CDF facility to offer a certain level of immunity if the offender makes full disclosure of the tax irregularities within a specified time frame.
The CDF Format
The CDF, usually in a defined format, is issued by an authorized HMRC officer belonging to the Fraud Investigations Unit. However, it is only offered in cases where the HMRC suspects a serious case of tax evasion, but the evidence is not strong enough for immediate prosecution.
A letter enclosing a copy of the Code of Practice 9 (COP9), which lays out the terms of the CDF, notifies the suspected tax evader of HMRC’s suspicion without going into the full details of the case.
The suspect is given 60 days to respond with one of the following two choices:
- Admit deliberate tax fraud by accepting the HMRC’s CDF offer and filling out the enclosed disclosure form
- Decline the CDF offer and reject the HMRC’s claim of tax evasion
It is usually in the best interests of the taxpayer to seek expert advice at this early stage.
If there is no response within 60 days, FIS automatically assumes the suspect’s rejection of the CDF offer and prepares to proceed with the investigation either under a civil or criminal route.
Proof of tax evasion under CDF and Outcome for the Not Guilty
Receiving a CDF letter is not the end of the world for three reasons:
- The COP9 is simply a way for the FIS to collect underpaid taxes from perceived or real evaders
- It doesn’t always mean tax authorities have substantial evidence for a criminal prosecution
- The facility can offer a way out of prosecution for tax offences
If the taxpayer decides to accept the CDF offer, they will have to make an ‘outline disclosure,’ with an explanation for:
- What led to the tax underpayment?
- Details of the parties involved
- The amounts and the period of underpayment
- Available records of the underpaid taxes
The importance of the outline disclosure lies in the fact that it is this that will decide HMRC’s next course of action. If FIS is satisfied with the information laid out in the disclosure, the taxpayer (usually accompanied by a CDF investigation specialist) is invited to a meeting to conclude the matter. A report is commissioned with the taxpayer’s permission providing full and frank disclosure of all taxes with supporting evidence. The terms of the contract will indicate that the taxpayer will not be investigated or prosecuted by HMRC as a result of their full cooperation and honesty. The report is evaluated by HMRC special unit for accuracy and verification of evidence. After the completion of HMRC’s investigation the taxpayer makes a monetary settlement (the disclosed tax amount with interest and financial penalties).
On the other hand, if the taxpayer accepts the CDF offer but breaches the contract, the potential offences outlined in the disclosure may be exempt from prosecution and may not be used against the taxpayer in proceedings.
The Investigation and Outcome for ‘Deliberate Defaulters’
If the disclosure is deemed inaccurate or the suspected tax evader decides to reject the CDF offer, HMRC proceeds with a formal investigation beginning with assessments, third-party enquiries, inspections, and in the worst case, ending in prosecution if it can establish a solid case of tax evasion with intent. HMRC can access sources (over 20bn according to the last declaration), through its powerful ‘Connect’ database, to obtain evidence and relevant information including:
- Banks and financial institutions
- Customers and suppliers (in the case of businesses)
- Building societies and Land registry
- Legal entities
- Trade associations
- Foreign jurisdictions (using the Taxpayer Information Exchange Agreements (TIEAs) clause for exchange of information)
- UK Border Agency
If the investigation takes a civil route, the FIS can levy a financial penalty of up to 200% for underpaid tax for overseas evasions. The collection is usually carried out by the Debt Management Unit or through formal bankruptcy proceedings. ‘Deliberate defaulters’ are also named on the HMRC website
Reasons to reject the CDF offer
Records show that in recent years, the CDF has been used by the HMRC to obtain confessions from people participating in dubious tax schemes rather than as a way to uncover a deliberate tax evasion intent.
Many tax experts tell their clients not to accept the CDF offer, the primary reasons being:
- They may not have attempted to evade tax or deliberately commit tax fraud; it may simply have been an unintentional or ‘innocent’ participation in a tax scheme without adequate knowledge
- Accepting the offer and admitting evasion in such a situation may lead the taxpayer to incur heavy financial penalties of a minimum
- 20% of tax lost if the taxpayer agrees first
- 35% of tax lost if the HMRC takes the first step
- 45% of tax lost if the irregularities span over 3 years
The maximum penalty can range from 100 to 200% of tax lost (underreporting of overseas income)
- Admitting to evasion will expose the taxpayer to intense scrutiny for taxes paid (or unpaid) over the past 20 years, in comparison to 6 years for careless and 4 years for innocent error
- The taxpayer may have been acting under the erroneous advice of a certified practitioner such as a financial advisor, accountant, or solicitor
- Admitting guilt might lead to the individual’s name being added to the HMRC’s Deliberate Defaulters list putting them under intense scrutiny and monitoring for years; it could also damage their personal and professional reputation
- People working in the regulated sector may want to keep their name out of the HMRC’s website as it might lead to devastating consequences in their career
- Guilty or not, people that admit to tax evasion under the CDF scheme may be obliged to report to a professional body leading to punitive measures
- A person or a business may have been the victim of fraud without being aware of it or maliciously framed by a third party
- Defending the CDF may lead the taxpayer to run into heavy and unnecessary costs
Who Should Accept the CDF?
Now that I’ve clarified who should not agree to the CDF offer from the HMRC, it’s time to discuss the ones for whom it can be a blessing in disguise.
For tax evaders who have deliberately committed fraud, the CDF can offer a chance to atone and can provide protection from prosecution. With the right tax expert by their side negotiating the terms of the offer, they can avoid serious consequences. Since HMRC appreciates voluntary disclosures, the offer of the CDF follows the issue of the COP9 protocol. In most such cases, both HMRC and the tax evader are united in their desire of achieving an amicable outcome.
The CDF in Action
The COP9 protocol underscored by the CDF has been successfully used by HMRC to collect tax from tax evaders, real or otherwise. On paper it seems to be a simple process of seeking admission of guilt, questioning the suspect, and preparing a report, but in reality, its role as a money-making tool cannot be denied. Additionally, HMRC, over the years, has lowered the bar for the CDF, offering it in cases of tax avoidance rather than real tax evasion leading to a loss of credibility in genuine cases.
However, the power of HMRC’s ‘Connect’ computer cannot be denied when it comes to unearthing underpayment or deliberate avoidance of taxes. Businesses and individuals would do well to be fully informed about their rights and responsibilities under the CDF and seek appropriate legal counsel should such an occasion ever arise.
If you are facing issues like the ones raised in this article or need expert tax guidance; drop me an email at firstname.lastname@example.org.