Being told that HMRC suspects tax fraud is a serious matter. One of the first questions is whether HMRC will deal with the suspected wrongdoing through a civil investigation or pursue a criminal investigation with a view to prosecution.
A civil investigation can result in additional tax, interest and substantial financial penalties. A criminal investigation can ultimately lead to prosecution, conviction and, in appropriate cases, imprisonment, as well as financial consequences, such as Confiscation proceedings.
It is important, however, not to think of the distinction as a single decision made at the start of a case. HMRC has a published policy setting out the circumstances in which it may consider criminal investigation, and the way an investigation develops can also be significant.
This article explains the difference between the civil and criminal routes, why HMRC may use civil procedures, what factors can lead to criminal investigation and how Code of Practice 9 (COP9) fits into the process.
What is the difference between a civil and criminal HMRC investigation?
A civil investigation is principally concerned with establishing and recovering the correct tax position. Depending on the circumstances, this can include additional tax, interest and financial penalties.
A criminal investigation is different. HMRC investigates suspected criminal offences with a view to possible prosecution. If a prosecution follows and results in conviction, the consequences can include a criminal record and imprisonment, as well as financial consequences.
The two routes are not simply different stages of the same process. A suspected tax fraud may be dealt with through HMRC’s civil fraud procedures, or HMRC may decide that criminal investigation is appropriate.
Why would HMRC deal with suspected fraud through civil procedures?
HMRC’s published policy states that it will use its civil fraud investigation procedures under COP9 where appropriate, reserving criminal investigation for cases where it considers a criminal sanction appropriate or a strong deterrent message is required.
A civil investigation can allow HMRC to establish whether there is tax loss, assess tax due, and penalties and seek payment without the case necessarily proceeding to a criminal prosecution.
This does not mean that civil treatment is necessarily straightforward or inexpensive. Civil fraud cases can involve detailed investigations, substantial tax liabilities and significant penalties. ‘Civil’ does not simply mean ‘minor’. An investigation may commence as a civil one, but may indeed be referred to HMRC’s criminal investigation team as a result of information obtained.
What can tip an HMRC case towards criminal investigation?
HMRC’s published policy identifies circumstances in which it will generally consider criminal rather than civil investigation. As an example, these could include organised criminal activity or systematic fraud threatening the tax base, abuse of a position of trust or responsibility, deliberate concealment or deception, false or forged documents, money laundering connected with wider criminality, repeated offending and links to other suspected criminality.
HMRC also identifies materially false statements or materially false documents provided during a civil investigation as circumstances in which criminal investigation may be considered.
These factors are not a checklist guaranteeing a criminal investigation. HMRC’s decision will depend on the circumstances of the particular case.
Does the amount of tax involved decide whether HMRC prosecutes?
Not by itself. The amount of tax at risk can be important, particularly where there is a serious threat to the tax base, but HMRC’s published policy identifies a range of other factors.
These include the nature of the conduct, whether it appears organised or systematic, the use of false documents, deliberate concealment, abuse of a position of trust, previous offending, money laundering and connections with wider criminality.
There is therefore no reliable financial threshold at which a suspected tax fraud automatically becomes a criminal case. The nature of the conduct and the wider circumstances can be just as important as the amount of tax involved.
What is COP9 and why does it matter?
Code of Practice 9 (COP9) is HMRC’s civil investigation procedure for selected cases where it suspects tax fraud. It operates through the Contractual Disclosure Facility (CDF).
Under the CDF, HMRC offers an individual the opportunity to make a complete, accurate, open and honest disclosure of deliberate behaviour and other irregularities. Where the contractual conditions are met, HMRC undertakes not to commence a criminal investigation into the fraud connected with the disclosed deliberate behaviour.
COP9 is therefore a civil procedure, but it sits close to the boundary between civil and criminal enforcement. The protection offered by the CDF is conditional and is not a general guarantee that criminal investigation can never arise.
What happens if I receive a COP9 or Contractual Disclosure Facility letter?
A COP9 letter should not be treated as an ordinary tax compliance enquiry. The Contractual Disclosure Facility creates a specific contractual framework for disclosure to HMRC.
HMRC’s guidance provides a timetable for responding to a CDF offer and requires the disclosure process to meet specified conditions. The consequences of accepting, rejecting or failing to comply with the facility can be significant.
HMRC itself advises recipients of a CDF offer to seek independent professional advice before responding.
Because COP9 involves suspected deliberate behaviour and can affect the future criminal-investigation position, it is important to understand the process and implications of the CDF before substantive representations or disclosures are made.
Can a COP9 case become criminal?
Yes. COP9 is a civil procedure, but HMRC expressly reserves the right to commence a criminal investigation in specified circumstances.
These can include rejecting the CDF offer without satisfactorily allaying HMRC’s suspicions, failing to make a valid disclosure, or making materially false or misleading statements or providing materially false documents during the investigation.
The contractual protection provided by the CDF is therefore conditional. Its scope depends on the terms of the facility and compliance with those terms.
What are the signs that an HMRC case may be moving towards criminal investigation?
There is no single event that guarantees a criminal prosecution. However, developments such as an interview under caution, the exercise of criminal investigation powers or searches under the relevant legal powers are materially different from an ordinary compliance enquiry.
A COP9 investigation can also become more serious if the conditions of the Contractual Disclosure Facility are not met or HMRC decides that criminal investigation is appropriate.
It is important not to assume that any one development means prosecution is inevitable. A criminal investigation is an investigation with a view to prosecution; it does not itself establish guilt or guarantee that a prosecution will follow.
Can what I do during a civil investigation affect the position?
Potentially. HMRC’s published policy identifies a complete and unprompted disclosure of offences as a factor it may consider when deciding whether a case should be dealt with through civil fraud procedures or criminal investigation.
HMRC also identifies materially false statements or materially false documents provided during a civil investigation as circumstances in which it may consider criminal investigation.
This is one reason why a civil fraud investigation should not be treated casually simply because it has not, at that point, become a criminal investigation. The information supplied to HMRC and the way in which the investigation develops can be significant.
Can a civil outcome be financially severe?
Yes. A civil outcome does not necessarily mean a small financial consequence. Depending on the tax involved, the nature of the behaviour and the applicable penalty regime, additional tax, interest and substantial penalties may arise.
Separate penalty regimes can apply to different types of conduct, including deliberate behaviour and certain offshore matters. The precise consequences depend on the facts and the legislation applying to the case.
A civil fraud investigation can have serious financial consequences even where criminal prosecution is not pursued.
What should I do if HMRC says it suspects tax fraud?
The appropriate response depends on the stage and nature of the investigation. A routine compliance check, a civil fraud investigation, a COP9 case and a criminal investigation are materially different situations.
If HMRC has raised concerns about deliberate behaviour, has issued a COP9 or Contractual Disclosure Facility letter, or has indicated that criminal investigation is being considered, it is important to understand the process and potential consequences before making substantive representations or disclosures.
This article explains the distinction between the different routes; it is not intended to recommend a particular response in any individual case.
How can Thompson Roderick help with an HMRC fraud investigation?
HMRC fraud investigations can involve significant tax liabilities, penalties, disclosure issues and, in some cases, the risk of criminal prosecution.
Thompson Roderick’s Tax team can assist individuals and businesses involved in HMRC investigations, including civil fraud investigations and COP9 matters. We can help you understand the process, the issues raised by HMRC, the potential consequences of the route being taken and indeed provide you with representation throughout.
If HMRC has contacted you about suspected tax fraud, or you have received a COP9 or Contractual Disclosure Facility letter, contact Thompson Roderick’s Tax team to discuss your circumstances.
Important information
This article is intended for general information only and does not constitute legal or tax advice. The appropriate response to an HMRC investigation depends on the circumstances of the individual case. If HMRC has raised concerns about suspected fraud, or has issued a COP9 or Contractual Disclosure Facility letter, you should obtain independent professional advice.
