The Contractual Disclosure Facility

The CDF is a contract between HMRC and the taxpayer. Where the taxpayer meets all the terms of the CDF, HMRC commits not to pursue the taxpayer using its criminal powers. However, HMRC expects absolute candour from taxpayers in the CDF and, where HMRC considers that this has not been provided, the risk of HMRC pursuing criminal investigation and prosecution is increased.

Taking part

There are two main ways in which taxpayers can become involved in the CDF process.

Firstly, and most commonly, those who HMRC believes have committed tax fraud will have their tax affairs reviewed to determine whether they should be subjected to a criminal investigation. Where it is decided that such an intervention is inappropriate, taxpayers will be offered the chance to participate in the CDF.

Alternatively, taxpayers who wish to voluntarily disclose that they have deliberately under-declared their tax liabilities can request permission to enter the CDF by completing form CDF1.

The process – outline disclosure

Initially taxpayers are sent a letter inviting the taxpayer to either accept or reject the offer of the CDF. This is achieved by signing and returning the relevant pages of the CDF contract that is enclosed with the initial letter.. If the taxpayer responds in the affirmative, they are making an admission of all losses of tax and duty brought about by their deliberate conduct. The taxpayer will also receive an acceptance letter and outline disclosure which they are required to submit giving details of the fraud, the period over which it took place and an estimate of the amounts involved. The outline disclosure must also include all other irregularities in their tax affairs, including those that are not deliberate. The relevant pages of the CDF contract must be submitted to HMRC within 60 days of the issue of HMRC’s letter.

It is only the items which are included in the outline disclosure that the taxpayer can get immunity from prosecution in relation to. If HMRC identifies further frauds which are not included in this document there is a risk that the taxpayer will be prosecuted for those frauds. HMRC’s undertaking not to criminally investigate the frauds against HMRC that the taxpayer discloses cannot bind other law enforcement agencies nor can it bind regulatory bodies. It does not extend to other frauds or criminal offences not committed against HMRC.

The process – denial

If the taxpayer denies fraud by singing the letter to reject the offer of the CDF or fails to reply to the opening letter, HMRC is likely to commence its own investigation, which may be a criminal one. In certain situations, this may lead to prosecution and will almost certainly involve demands for information to third parties connected with the taxpayer or their business.

The process – detailed reporting

HMRC compares the outline disclosure with the records it already holds to determine whether the taxpayer has disclosed all the frauds of which HMRC is aware. Provided HMRC is satisfied that the disclosure is complete the CDF process continues, usually along traditional Code of Practice 9 lines with the taxpayer being interviewed by HMRC and the subsequent preparation by an experienced adviser of a detailed report explaining the sequence of events and the tax due – this is called a disclosure report. The timetable for producing and submitting the disclosure report must be agreed with HMRC. Extensions to the timetable may be possible but taxpayers should be alive to the possible impact on penalties if deadlines are not met.

Any assumptions that have to be made in compiling the report will be set out clearly to enable the adviser to propose an appropriate tax treatment. Interest in relation to the tax due is computed and there will normally be negotiations over the level of penalty to be imposed, which will be directly affected by the behaviour during the CDF/COP 9 process.

Following submission of the report, HMRC may seek clarification of some of the issues and it is common for there to be meetings and correspondence between the tax adviser and HMRC in an attempt to reach an agreement over technical issues.

The process – negotiation and settlement

Tax is payable for a period of up to 20 years where there has been deliberate behaviour, with the exception of Inheritance Tax where there is no time limit for the assessment of deliberately undeclared tax, so it is necessary to reach agreement on the technical issues affecting the tax payable for the whole of that period or the duration of the fraud, whichever is the shorter. Once the amount of tax payable is established, the amount of tax geared penalty is negotiated and agreed. The penalty can be up to 100% of the tax at stake for tax relating to UK issues and up to 200% for tax in relation to offshore issues depending on the offshore jurisdiction involved. When all these issues have been agreed, the taxpayer is asked to sign a contract settlement with HMRC called a Certificate of Full Disclosure agreeing to pay the tax, interest and penalty due. A false Certificate of Full Disclosure may result in criminal investigation for submitting a false document.

Post-settlement

In certain circumstances, HMRC can publish information about a taxpayer who deliberately evades tax or duty or where they charge a penalty for deliberate behaviour. By giving full cooperation from the start of the investigation, the taxpayer improves the likelihood of avoiding publication.

HMRC may decide to monitor the taxpayer’s tax affairs in the years following completion of the investigation to check compliance with their obligations and that they do no revert to deliberate behaviour. HMRC has powers under its enhanced monitoring programme, the Managing Serious Defaulters (MSD) programme, which enables it to monitor any individual or business. HMRC is required to notify the individual or office holder that HMRC has put them on the MSD programme and it will tell the individual how they will be monitored and the timeframe that they will be monitored for.