CODE OF PRACTICE 9 investigations may no longer invoke images of Sweeney-style detectives pulling the suspect over the table and demanding the truth about their financial dealings. This does not mean that being subject to the COP9 process is any less serious than before. But it seems as though the general practitioner is becoming more inclined to take on COP9 cases themselves – at great risk to both their clients and themselves.
HM Revenue & Customs issues a COP9 when it suspects serious fraud. With full co-operation, the taxman will grant an immunity to prosecution. This use to be the domain of the tax investigation specialists, but they have unanimously said that fewer GP accountants are coming forward to get specialist advice when faced with a civil fraud investigation. Phil Berwick, tax investigations director at McGrigors, said that more firms are saying they are confident of taking the cases on themselves, and subsequently more firms are coming for help later on in the process – by which time the client’s situation is far worse than when the investigation was started.
Expertise is essential in preparing the case. For a start, many general practitioners will see only one COP9 case in their careers. The process is formulaic, says Frank Strachan, partner at Lass Salt Garvin solicitors. And if you do not stick to the formula, experience of which is borne through dealings with special HMRC inspectors, “their patience on this is notoriously short”, he adds.
It is not only experience of HMRC inspections that are essential – many accountants will not have come across deliberate defaulters. “It is not unusual to be told 60% of the truth at first, even as experts” says Sean Wakeman, tax investigations partner at Crowe Clark Whitehill. “But you have to be confident of getting 100% of the story by the time you meet the HMRC.”
Problems with relaying the importance of full disclosure and conducting a pre-investigation, to be sure the client is telling the whole truth, is amplified if this is a client of 20 years. Non-tax investigation specialists will often mistakenly take other considerations into account, such as how it will affect the clients’ financial affairs overall, how it will affect their income tax and corporation tax returns, belying the seriousness of the process. And it is only human nature that an accountant will be on the defensive themselves, having undertaken the tax returns.
Anything other than a full disclosure could have dangerous consequences. “I liken the investigators to snipers,” says Charlie Hall, of Hall Tax Service. “They don’t tend to shoot often, but when they do shoot, they kill. In comparison to local compliance officers, who could be likened to mad axe wielders, who do not often hit their targets.”
For the client, the immunity from criminal prosecution that comes with COP9 investigations can be removed if there is not a full disclosure. And even if HMRC decides against the route of criminal proceedings, any suggestion that the client is not fully co-operating would likely result in higher penalties.
The client will often look to mitigate significantly higher penalties. Tax barrister Daniel Feingold says he has been approached by clients who felt their COP9 disclosure had not been handled satisfactorily – meaning the general practitioner is in danger of litigation.
So why are those inexperienced with COP9s taking the risk? The economic downturn is a factor – when times are harder, sharing fees with specialists becomes less appealing.
But perhaps a greater issue is the loss of the fear factor when it comes to COP9 investigations. Previously, COP9 investigations were carried out by the Special Compliance Office, with headed letters that made plain that this was a serious issue. The creation of Civil Investigation of Fraud (CIF) teams in 2006 reduced this fear factor. They are affiliated to local compliance offices and “having local compliance on their letterheads, which sends out the wrong signals”, says Hall.
Following the Gill and Gill court case, the process was ruled as being a civil investigation. HMRC said that there is no intention to bring about criminal proceedings when undertaking a COP9 case. A consequence of this was that tape recorders were no longer required during questioning.
On the face of it, this should relax clients and their accountants. But this is to ignore the very real dangers that anything other than a full disclosure could lead to prosecution. The pitfalls of being the subject of COP9 investigations means that, far from facing touchy-feely community policing, clients still have a real possibility of being ordered to “put your trousers on – your nicked”.
COPPING THE PITFALLS
McGrigors’ Phil Berwick describes two cases he has faced recently.
An accountant approached McGrigors in relation to a COP 9 investigation. We offered to work with the accountant, but he decided to handle the case without our assistance or support. One year later, the accountant advised that the client had not co-operated, and that HMRC were seeking a penalty in excess of 80% (considerably higher than the 20% we would have expected had we been involved from the beginning). The estimated tax liability was in excess of £1m, representing an additional penalty of £600,000 for the client.
In a second case, McGrigors was approached by an accountant who had submitted his client’s disclosure report under the COP9 procedure. The client had lied to the accountant, and the report contained more than one material inaccuracy as a result of the client’s dishonesty. The inspector established that the taxpayer had been dishonest and was extremely lucky not be prosecuted. The accountant had failed to adequately explain the seriousness of the process to the client. Support and guidance from experts could have helped to ensure that the client treated the process seriously and not be tempted to be dishonest when submitting the disclosure report.
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