The perils of signing the Contractual Disclosure Facility or (CDF) disclosure form which states:
“Under the terms of the CDF, I admit that my deliberate conduct has brought about a loss of tax and/or duty”
are often not understood by taxpayers who do not have the benefit of, or cannot afford professional advice. In my experience, some do not even understand what they are signing.
This was starkly illustrated by the fate of the taxpayer in McColgan v HMRC  UKFTT 369 (TC). Mr McColgan had received a routine compliance check letter requesting certain information. In response, he told HMRC about the income he had received but had not reported in his self-assessment tax returns. HMRC then wrote to Mr McColgan saying that they had reason to suspect that he had committed tax fraud and enclosed a copy of Code of Practice 9 (COP 9). They offered Mr McColgan the opportunity to make full disclosure of his tax fraud under the Contractual Disclosure Facility (CDF).
Mr McColgan accepted HMRC’s CDF offer and returned the signed CDF disclosure form admitting that his deliberate conduct had brought about a loss of tax. A disclosure report was then supplied to HMRC and they wrote to Mr McColgan with their tax calculations and penalty figures. HMRC then raised the relevant discovery assessments and issued the penalty assessments under section 93(5) Taxes Management Act 1970 and Schedule 55, Finance Act 2009. The level of penalties must have come as a very nasty shock to Mr McColgan because he decided to appeal to the First-tier Tax Tribunal.
COP 9 Time Limits
Where HMRC show that a loss of tax was brought about deliberately, the time limit for them to make tax assessments is extended from the usual four years to 20 years under section 36(1A)(a) Taxes Management Act 1970.
In order to successfully attack the assessments issued by HMRC for periods that were more than four years old at the time, Mr McColgan had to defeat HMRC’s evidence that he had been deliberate. He tried to do this by arguing that whilst he may have been careless, stupid and incompetent, his actions at the time fell short of being deliberate.
HMRC, of course, relied on the signed CDF form in which Mr McColgan had said: “I admit that my deliberate conduct has brought about a loss of tax …”.
In addition, his disclosure report set out a description of his “deliberate conduct”.
Mr McColgan argued that he should not be bound by this admission because the CDF form was a template and he felt under pressure to sign the CDF. He simply wanted to show co-operation and a willingness to disclose his income and to prevent his clients from becoming aware of HMRC’s interest.
Avoiding a Criminal Tax Fraud Enquiry
The tax tribunal found Mr McColgan’s arguments to be implausible. It said he was not obliged to sign the CDF form and had not been put under pressure by HMRC to sign it. Mr McColgan had signed the CDF in the knowledge that he might have faced criminal prosecution for tax fraud if he had not signed it. The tax tribunal concluded that Mr McColgan had accepted by reason of entering into the CDF that he deliberately failed to deliver the relevant tax returns and he was now prevented from going behind that agreement. He was therefore liable to penalties and HMRC could invoke the 20 year period in which to issue the discovery assessments.
Practical Lessons from COP 9
As far fetched as it seems, many clients in the position Mr McColgan found himself in, do sign the CDF without realising that they are admitting deliberate behaviour and, in effect, tax fraud. I met with a client recently who instructed me only after signing the CDF, and when I pointed out that he had admitted deliberately failing to pay his tax, he reviewed the form and still denied that this was the effect of signing the CDF.
Despite what the tax tribunal said about Mr McColgan being under no pressure to sign the CDF, that does not reflect the reality that clients find themselves in when a COP 9 letter arrives which in effect amounts to an accusation by HMRC of tax fraud. Although HMRC will argue that there is no accusation of tax fraud and that they are merely stating that they have reason to suspect that tax fraud had been committed, this distinction is, of course, a subtlety that may impress judges in the Court of Appeal but is totally lost on the clients receiving such a threat. Recipients of HMRC’s COP 9 CDF letter are placed under enormous stress and anxiety and this is, of course, the purpose of the letter. Many just sign the CDF in an effort to show a willingness to co-operate and, of course, avoid a criminal enquiry. They have little or no idea that they have opened themselves up to a 20-year exposure and to the possible publication of their name as a tax defaulter under section 94, Finance Act 2009.
Refusing to sign the CDF may open the client up to criminal enquiry with all that entails, including possible arrest, interview under caution, CPS involvement and possible trial and heavy fines and/or jail. Is it little wonder many sign?
One effect of the requirement to admit deliberate conduct is that well-advised professional persons will often refuse to sign the CDF and fight on by denying tax fraud because of the consequences for them of admitting deliberate conduct. Loss of professional membership may also follow from an admission of what is in effect tax fraud. HMRC do not seem to appreciate that putting professionals such as surgeons, lawyers and accountants in such a position just makes their task more difficult and time-consuming in such cases.
To say that a client is under no pressure to sign the CDF as HMRC and the tax tribunal said in McColgan is frankly to ignore the purpose and reality of the letter.
If you or your client has received a COP 9 letter or is under criminal tax enquiry contact Patrick Cannon for advice and assistance including attendance at interviews and representation in court.