This article explains the policy reasons for the COP9 promise, why HMRC retains discretion to prosecute under the WDF, and whether offshore cases that involve deliberate behaviour should be dealt with under COP9 instead. We then assess whether there is any real benefit to the public purse in keeping a prosecution option for WDF disclosures, and set out the practical considerations for choosing between COP9 and the WDF.
Introduction
HMRC offers two main routes for putting serious tax issues right. COP9 is HMRC’s civil investigation of fraud and, if you accept the Contractual Disclosure Facility and make a full and frank disclosure on time, HMRC gives a criminal promise not to start a criminal investigation into the admitted conduct. The Worldwide Disclosure Facility (WDF) is the route for offshore disclosure, but it carries no criminal promise.
What is a COP9 investigation?
The Code of Practice 9 (‘COP9’) is a civil investigation of fraud procedure, used as an alternative to criminal investigation by HMRC under the Contractual Disclosure Facility (‘the facility’). It offers the recipient or the taxpayer, the chance to make full disclosure of their conduct under a contractual agreement, with HMRC agreeing not to instigate a criminal investigation or prosecution in relation to the conduct disclosed (“the criminal promise”).
- The COP9 procedure is available where HMRC have reasonable grounds to suspect tax fraud (prompted) or where the individual voluntarily admits tax fraud (unprompted).
- Once the defaulting taxpayer enters the facility, they are required to make full and frank disclosure and repay any tax/interest incurred over the preceding 20 years together with a financial penalty.
- The penalty, in some cases, can exceed 200% of the tax or duty owed, subject to reduction and depending on the circumstances of the defaulting taxpayer’s behaviour as well as the quality of their disclosure.
In consideration for a full and frank disclosure, HMRC agree not to instigate a criminal investigation and/or prosecution. The criminal promise is retroactive and cannot bind other law enforcement agencies, such as the police.
When might HMRC pursue prosecution despite COP9?
Where a recipient of a COP9 letter returns the acceptance, enters the facility and subsequently provides valid outline disclosure within the 60-day period, there is then an initial ‘scoping meeting’ between the taxpayer and HMRC where details are discussed in preparation for the full disclosure report. If HMRC accept the full disclosure report and the final liability of the taxpayer is accepted, this is where the criminal promise comes into play.
- Following this promise, should HMRC nonetheless seek to initiate criminal proceedings despite the taxpayer’s cooperation with the facility, it is highly likely that, except for in certain serious cases, any prosecution would be barred by way of abuse of process rooted in the principle of prosecutorial promise.
- This principle says that: once such a promise is made and relied upon to the detriment of the taxpayer, it should be honoured to avoid an abuse of process, as established in the case of R v Hamza [2006] EWCA Crim 2918. The criminal prosecutorial promise is contained in the substance of COP9.
Why does COP9 offer immunity from criminal investigation and prosecution?
A COP9 investigation is the one of the most serious investigations HMRC can undertake so carrying criminal immunity may seem counterintuitive, however the policy behind this immunity is sound, justified and sensible for a public body. The criminal promise is likely designed to incentivise taxpayers to make a full and honest disclosure of their tax affairs additionally facilitating the resolution of tax fraud cases via payment of the outstanding debt one way or another, whether that be a lump sum payment or a time-to-pay-arrangement. It encourages either unprompted disclosures and/or full cooperation with prompted disclosures which is a much more cost effective, commercially responsible and generally pragmatic approach which is ‘civil-investigation-focused’.
Focusing on civil investigations rather than criminal is a choice of HMRC wherever appropriate, because criminal investigation and prosecution is expensive and counter to the above aims of raising and recovering revenue. Criminal prosecutions in the current criminal justice system would serve little purpose when the aim of a tax investigation is, and should be, recovering unpaid taxes; punishment of the defaulting taxpayer (the penalty) and deterring future defaults and liabilities (the penalty and the accrual of interest).
What is the Worldwide Disclosure Facility and who should use it?
The WDF is a facility that allows individuals to disclose offshore tax non-compliance voluntarily. Whilst COP9 is only available where there is suspected or admitted fraud, WDF can apply to negligent or careless conduct without intent or fraud. It was introduced following the closure of the Liechtenstein Disclosure Facility and the Crown Dependency Disclosure Facilities and is modelled on these previous facilities which offered partial amnesty terms. The WDF covers all direct taxes, including inheritance tax, and can be used by anyone, including non-residents, to disclose UK tax liabilities related wholly or partly to offshore issues.
- The introduction of the WDF on 5 September 2016 aligned with the implementation of the Common Reporting Standard (CRS), which enhanced HMRC’s ability to detect offshore non-compliance with 100 countries committing to exchanging information on a multilateral basis.
- The WDF does not specifically target serious fraud but provides a means for taxpayers to correct their offshore tax affairs and avoid increased penalties for non-compliance Worldwide Disclosure Facility.
- Penalties under the WDF vary depending on the circumstances with the maximum penalty for prompted disclosure being 200% of the unpaid tax which can be reduced to 150% via accuracy and 100% as the minimum penalty for unprompted disclosure if full mitigation is unavailable.
Does the Worldwide Disclosure Facility provide criminal immunity?
The WDF does not offer immunity from criminal prosecution and does not provide a guarantee against criminal investigation or prosecution. The only benefit to making a correct and complete disclosure, in addition to fully cooperating and supplying any further information requesting, is that HMRC will not seek to impose a higher penalty, except in specific circumstances, and won’t publish details of the disclosure.
- Like under COP9, HMRC reserves the right to initiate criminal proceedings if the disclosure is incomplete, inaccurate, or if the taxpayer making the disclosure fails to provide additional requested information, but
- there is no equivalent criminal promise if HMRC accept the disclosure and therefore the principle of prosecutorial promise does not apply to criminal prosecutions following an accepted WDF. HMRC retain a discretion under the WDF to pursue criminal action which, in theory, is for cases where HMRC needs to send a strong deterrent message or where the conduct involved is particularly egregious.
However, this article questions whether HMRC reserving their right to prosecute ever bears any fruit. Specifically, are any prosecutions ever seen through under the WDF, is there any corresponding benefit to HMRC and the public purse from prosecutions that cannot be obtained through a criminal promise, accrued interest and 200% penalty approach and, finally, why is there no criminal promise offered for a worldwide disclosure mechanism and should there be one?
Do prosecutions following a WDF disclosure deliver any public benefit?
It is unclear how many prosecutions have actually resulted from disclosures under the WDF so it is difficult to assess the benefits of HMRC retaining their discretion to prosecute in this case. However, the benefits sought from the WDF in the first-place mirror those under COP9 therefore surely the same considerations apply? Sending tax evaders to prison, unless they fall into the exceptions of the utmost severity, neither recovers nor raises revenue (it actually does the opposite by removing a source of revenue from actively contributing to the economy and instead using existing revenue to fund a prosecution and potential prison sentence).
Furthermore, the lack of a criminal promise under WDF likely lessens any incentive to disclose that may exist under COP9 as there is no assurance that a full disclosure won’t result in a prosecution.
Should HMRC extend the COP9 criminal promise to the Worldwide Disclosure Facility?
Given the above and the lack of any tangible benefit that can be gleaned from retention of the discretion to prosecute, the question of why there is no criminal promise should be considered. In the absence of existing literature on this point, two possible reasons for why there is no criminal promise under the WDF have been identified.
- First, HMRC tend not to need to resort to prosecution under the WDF given it’s non fraudulent basis. Whereas under COP9, given the increased severity and the suspected or admitted fraud, a prosecution is more likely hence the need to incentivise disclosure.
- Second, in cases under the WDF where recourse to prosecution is considerably more likely due to the increased severity in the taxpayer’s liability and/ or the egregious nature of the taxpayer’s behaviour, the taxpayer can opt to enter COP9 instead and make an unprompted disclosure. The criminal promise would then be engaged.
As such, although the WDF doesn’t carry an explicit and formal promise of criminal immunity, in substance criminal investigations and/or prosecutions are extremely unlikely to go ahead, so it doesn’t have the criminal promise because, effectively and indirectly, it does have the criminal promise. However, an indirect substantive criminal promise cannot be as effective as a formally enshrined clause so shouldn’t the WDF formally enshrine a criminal promise and attract the same incentives and benefits as contained in COP9, whilst retaining a residual discretion to prosecute in the most serious cases?
What should you take away when choosing between COP9 and the WDF?
A formal enshrinement of the criminal promise would ensure that the principles of recovery and repayment of revenue as well as the principle of cost-effective investigation, deterrence and punishment are all promoted and upheld by HMRC for offshore liabilities, putting the WDF on the same page as COP9 in terms of aims and values.
Need help deciding between COP9 and the WDF? Speak to Andy Lynch, Partner in our tax disputes team, or Connor Coombs for a confidential initial discussion.
