Civil investigation of tax fraud - a contractual disclosure facility ?

In what must be one of the more puff-laden exercises of the modern era, HMRC has issued a discussion document in which it is proposed to make changes to the procedures for the Civil Investigation of Fraud. The document, for which the closing date for comments is 20 September, can be downloaded here.

The general gist is that the majority of taxpayers suspected of serious irregularities in their tax affairs are given the opportunity to come clean, engage a firm such as ourselves to prepare a formal report disclosing the irregularities, and to make a financial settlement with HMRC.  The facility, which is available to the vast majority of persons, obviates the prospect of criminal prosecution and reflects the fact that it is the core function of HMRC to collect money for the State rather than to spend it on instigating expensive prosecutions.

This policy was sanctioned by Parliament in 1923 and has remained, in substance, unchanged ever since. In days gone by and, indeed, up to relatively recent times, it has worked effectively. Specialist departments of HMRC, most noticeably the now departed Enquiry Branch, were staffed by senior HMRC staff who were regarded as expert in identifying suitably recalcitrant taxpayers and, on occasion, were the best people to approach for entirely voluntary disclosures by taxapyers who, whilst not being under obvious threat of investigation, nevertheless wanted to come clean.  

Importantly, all parties took the procedure seriously and respect was afforded to all concerned. The vast majority of "Hansard" cases were worked to a satisfactory conclusion and often with remarkable efficiency being displayed by both sides.

In more recent times, as recorded by HMRC in its latest document, it is undoubtedly true that the wheels have come off or, at the least, are wobbling somewhat.  This is reflected by the drastic increase in the number of cases which are commenced but which fail to reach a conclusion. 

HMRC, in a truly splendid effort at misdirection, point the finger at persons abusing the process and, most particularly, taking advantage of the initial immunity from prosecution to avoid "working" the case to a conclusion, and worse besides. Well, duh, of course people will abuse the system if they can and, even more so when they are already known or suspected to have a track record of so doing. 

What is not said is that the procedure, whether it is offered and whether it remains, is wholly within the gift of HMRC under its taxes management powers; and quite rightly so. But the corollary to this is that responsbility for preventing such abuse rests with HMRC, and that HMRC have failed in this task for two reasons.

The first is operational. Since the advent of the Civil Investigation of Fraud departments in 2005, responsibility for investigations under the Code of Practice 9 procedure has been given to HMRC staff who are commonly held not to be up to the task. There is no reason to doubt the sincerity of the staff involved, but their competence and, in particular, woeful lack of professional education, has meant too many such staff being promoted beyond their capabilities. 

The second, not entirely unrelated to the inevitable consequences which flow from the first, is that COP9 is being used in circumstances where, in the context of its traditional use, the procedure is simply inappropriate. We have a recent example of such an inappropriate circumstance, where the taxpayers could be guaranteed not to be in the slightest bit concerned about the threat of being prosecuted. The reason being they were dead !

So, we have, according to HMRC, reached the stage where the present procedure is unsatisfactory, and change is required. 

A private concern would almost certainly address these issues from the obvious direction of asking whether the creation of the CIF departments was a good idea, and whether, 6 years on, their operation needs to be reviewed ? HMRC, being a public body has, predictably, turned a blind-eye to its own possible shortcomings and taken its now standard approach of demanding more. More powers, more rights, more laws, more of anything.

The HMRC proposal is for the introduction of a contract at the outset of an investigation. The contract, which would be offered primarily by HMRC to the taxpayer but which could also be used the other way around by a taxpayer making an unprompted disclosure, would bind both sides. The taxpayer would be required to make an "outline" disclosure of irregularities to HMRC within a set period and, in return, HMRC would be bound by an indemnity not to instigate a criminal prosecution. 

The proposal is that the taxpayer would have 60 days in which to make the outline disclosure. 60 days will be more than adequate in some cases, but woefully inadequate in others. Traditionally such timeframes have been negotiated and agreed, between taxpayers' agents and HMRC, on an ad hoc basis and this box-ticking approach of a prescribed timeframe, of whatever length, seemingly has nothing to recommend it.

In any event, once made, an outline disclosure (assuming it is satisfactory within whatever laws or guidelines are prescribed for such outlines) will afford the taxpayer of the benefit of the indemnity from prosecution. The indemnity will continue even if the taxpayer then fails to co-operate further in the submission of a full and final disclosure. If so, using the content of the initial outline disclosure, HMRC will "work" the case itself and, in return for the privilege, seek appropriately higher financial penalties from the taxpayer in acknowledgment of the lack of co-operation.

Leaving aside the concern of why a procedure which has worked perfectly well for almost a century only now needs to be supplemented, the wider concern here will be whether, for the reasons stated above, we are now seeing the beginnings of the end for CIF in anything like its established form ?

In tax law, it is necessary for the edges to be left somewhat blurred and undefined when one reaches the "outer-reaches" of the code.  Anti-avoidance legislation is riddled with uncertainties and ambiguities which serve a purpose, and the entire management of the tax system reflects any number of discretions afforded to HMRC as a governmental agency.

When it comes to the investigation and resolution of serious taxpayer irregularities (or, as HMRC now so glibly call it at every turn, fraud), the established regimen has shown, except in very recent times, that it is the lack of very prescription and lack of certainty which enables the system to work and for, more often than not, adaptations and compromises over timescales, technical, accounting and practical issues to be resolved to the satisfaction of both sides. HMRC obtain an acceptable financial settlement, and often additional information which is useful to them in performing their functions elsewhere. And the taxpayer receives a clean slate. 

HMRC staff, when working in the field of serious investigations, should continue to be afforded these discretions; which are not, in any event, without restraint.  HMRC presently have the discretion over the selection of COP9 cases, the granting of immunity from criminal prosecution and the subsequent withdrawal of that immunity. Adding inflexibility to a system which has long since been proven to work will only run the risk of weakening the system and reducing the deterrent that comes with the threat of criminal prosecution. If that threat is reduced, the long-stop of criminal prosecution will cease to be taken seriously, the system will be abused further, and evasion will inevitably continue to increase. 

Rather than pursue this self-absorbed desire for wanting more, HMRC should, instead, look at its own efficacy in its management, and increasingly, its mismanagement, of its COP9 policy. The better selection of staff, the better training of staff and a more refined selection of cases to be worked under COP9 would all go a long way to stopping the rot which has set in, and which has done so entirely through the fault of HMRC. The disbanding of the Civil Investigation of Fraud departments in favour of the return of the old Enquiry Branch would probably be welcomed by many as being a good start.   

Credit: Above image pinched from Accountancy Age.