COP9 Investigation: A Complete Guide to the Contractual Disclosure Facility

Receiving a Code of Practice 9 (COP9) letter from HMRC is one of the most serious events a taxpayer can face. COP9 is used when HMRC suspects serious tax fraud, and it offers the taxpayer a choice: make a full disclosure under the Contractual Disclosure Facility (CDF) and avoid criminal prosecution, or refuse and face a criminal investigation.

This complete guide explains what COP9 is, how the Contractual Disclosure Facility works, the penalties involved, and what to do if you receive a COP9 letter.

What Is Code of Practice 9 (COP9)?

Code of Practice 9 (COP9) is the procedure HMRC uses when it suspects a taxpayer has committed serious tax fraud. It's the most serious type of HMRC investigation.

The Contractual Disclosure Facility (CDF)

Under COP9, HMRC offers the taxpayer a Contractual Disclosure Facility (CDF). The CDF is a formal contract between the taxpayer and HMRC:

• The taxpayer agrees to make a full and complete disclosure of all tax irregularities (deliberate behaviour that led to a loss of tax)
• HMRC agrees not to criminally prosecute the taxpayer (in exchange for the full disclosure)

If the taxpayer makes a full and complete disclosure, they will not be criminally prosecuted — but they will still face financial penalties (up to 100% of the tax due) and interest.

What Is 'Serious Tax Fraud'?

HMRC defines serious tax fraud as deliberate behaviour by the taxpayer that results in a loss of tax. Examples include:

• Deliberately omitting income from a tax return
• Deliberately inflating expenses or deductions
• Using false invoices or documents
• Operating offshore accounts to hide income
• Using tax avoidance schemes that the taxpayer knows are fraudulent

The key element is 'deliberate' behaviour — the taxpayer must have knowingly and intentionally caused the loss of tax.

The COP9 Process

Step 1: The COP9 Letter

HMRC sends a COP9 letter to the taxpayer, stating that HMRC suspects serious tax fraud and offering the CDF. The letter includes:

• An outline of the suspected fraud
• An offer of the CDF
• A deadline for accepting the CDF (typically 60 days)
• A form for accepting or rejecting the CDF

Step 2: The CDF Offer

The taxpayer must decide whether to accept or reject the CDF:

• Accept: The taxpayer signs the CDF acceptance form and commits to making a full and complete disclosure of all tax irregularities within 60 days (with a possible extension).

• Reject: The taxpayer rejects the CDF. HMRC will then conduct a criminal investigation, and the taxpayer may face criminal prosecution.

Accepting the CDF is almost always the right choice. Rejecting it and facing a criminal investigation carries the risk of a criminal conviction, imprisonment, and confiscation of assets.

Step 3: The Outline Disclosure

Within 60 days of accepting the CDF, the taxpayer must provide an 'outline disclosure' — a summary of all tax irregularities, including:

• The types of irregularities (e.g., omitted income, inflated expenses)
• The years involved
• An estimate of the tax lost

The outline disclosure does not need to include full details or calculations — it's a high-level summary. The detailed disclosure follows.

Step 4: The Detailed Disclosure

After the outline disclosure, the taxpayer works with HMRC to prepare a detailed disclosure. This includes:

• Full details of all irregularities
• Calculations of the tax, interest, and penalties due
• Supporting documentation

The detailed disclosure can take several months to prepare, particularly if the irregularities span many years or involve complex arrangements.

Step 5: Settlement

Once the detailed disclosure is agreed, the taxpayer pays the tax, interest, and penalties. The penalties are reduced for the quality of the disclosure (telling, helping, giving access), but the minimum penalty for deliberate behaviour is typically 20% of the tax due.

Penalties Under COP9

Penalties under COP9 are based on the taxpayer's behaviour and the quality of the disclosure:

Behaviour Categories

• Deliberate: The taxpayer knowingly and intentionally caused the loss of tax. Penalty range: 20-100% of the tax due.
• Deliberate and concealed: The taxpayer knowingly caused the loss of tax and took steps to conceal it. Penalty range: 35-100% of the tax due.

Disclosure Quality Reductions

Penalties are reduced for the quality of the disclosure:

• Telling: Telling HMRC about the irregularities
• Helping: Helping HMRC understand the irregularities
• Giving access: Providing access to documents and information

A full, unprompted disclosure (under the CDF) can reduce the penalty to the minimum of the range (typically 20% for deliberate behaviour). However, if the disclosure is not full and complete (i.e., the taxpayer withholds information), HMRC may withdraw the CDF and pursue criminal prosecution.

Example Penalty Calculation

A taxpayer under COP9 has £500,000 of tax due from deliberate behaviour:

• Penalty range: 20-100% of £500,000 = £100,000 - £500,000
• With full disclosure: 20% = £100,000
• With partial disclosure: 50% = £250,000
• With no disclosure: 100% = £500,000

In addition to the penalty, the taxpayer must pay the £500,000 tax and interest (at 7.5% per year from the due date).

The Importance of Full Disclosure

The CDF is a contract — the taxpayer agrees to make a full and complete disclosure in exchange for immunity from criminal prosecution. If the taxpayer does not make a full and complete disclosure:

• HMRC may withdraw the CDF
• The taxpayer may face criminal prosecution
• The taxpayer may face higher penalties

What Is a 'Full and Complete' Disclosure?

A full and complete disclosure means disclosing all tax irregularities — not just the ones HMRC has identified. If the taxpayer omits any irregularities from the disclosure, and HMRC later discovers them, the CDF may be withdrawn, and the taxpayer may face criminal prosecution for the omitted irregularities.

This is why it's essential to engage a specialist tax adviser who can help identify all irregularities and ensure that the disclosure is full and complete.

What to Do If You Receive a COP9 Letter

Do's

1. Seek specialist advice immediately: COP9 is the most serious type of HMRC investigation. Engage a specialist tax adviser (preferably one with experience of COP9 cases) as soon as you receive the letter. If possible, engage a lawyer (not just an accountant) to ensure that your communications are legally privileged.

2. Accept the CDF: Accepting the CDF is almost always the right choice. It provides immunity from criminal prosecution and allows the taxpayer to resolve the matter through a civil settlement.

3. Prepare a full and complete disclosure: Work with your adviser to identify all tax irregularities and prepare a full and complete disclosure. Do not omit any irregularities, even if you think HMRC doesn't know about them.

4. Be cooperative: Cooperation is key to reducing penalties. Provide all information and documentation requested by HMRC, and be responsive to their queries.

5. Keep records: Keep detailed records of all communication with HMRC, including dates, times, and the content of conversations.

Don'ts

1. Don't panic: While COP9 is serious, it's not the end of the world. With specialist advice and a full disclosure, most COP9 cases are resolved through a civil settlement (without criminal prosecution).

2. Don't ignore the letter: Ignoring a COP9 letter will not make it go away. If you don't respond within 60 days, HMRC will assume you've rejected the CDF and may pursue a criminal investigation.

3. Don't reject the CDF: Rejecting the CDF and facing a criminal investigation carries the risk of a criminal conviction, imprisonment, and confiscation of assets. Accepting the CDF is almost always the right choice.

4. Don't lie or conceal information: If HMRC discovers that you have lied or concealed information, the CDF may be withdrawn, and you may face criminal prosecution. The CDF requires a full and complete disclosure.

5. Don't try to handle it alone: COP9 is not something you should handle without specialist advice. The consequences of getting it wrong are too severe. Engage a specialist adviser immediately.

Legal Professional Privilege

Under COP9, it's essential to engage a lawyer (not just an accountant) for at least some aspects of the case. Communications with a lawyer are legally privileged — HMRC cannot require them to be disclosed. Communications with an accountant are not privileged and can be required to be disclosed.

A lawyer can provide advice on the legal aspects of the case (e.g., whether the behaviour constitutes fraud, whether the CDF should be accepted) without fear that the advice will be disclosed to HMRC. An accountant can then handle the practical aspects of the disclosure (calculating the tax, preparing the disclosure) — but the accountant's work is not privileged.

How Newshams Can Help

At Newshams Tax Advisers, we have extensive experience handling COP9 cases. Our approach includes:

• Immediate advice on receiving a COP9 letter
• Assessment of whether the CDF should be accepted
• Preparation of the outline and detailed disclosures
• Identification of all tax irregularities (to ensure a full and complete disclosure)
• Negotiation with HMRC on penalties
• Coordination with a lawyer (for legal advice and privilege)
• Representation throughout the process

Book a consultation to discuss your COP9 case, or contact us for an informal discussion.

Frequently Asked Questions

What is Code of Practice 9 (COP9)? COP9 is the procedure HMRC uses when it suspects a taxpayer has committed serious tax fraud. Under COP9, HMRC offers the taxpayer a Contractual Disclosure Facility (CDF) — a formal contract where the taxpayer agrees to make a full disclosure in exchange for immunity from criminal prosecution.

What is the Contractual Disclosure Facility (CDF)? The CDF is a formal contract between the taxpayer and HMRC. The taxpayer agrees to make a full and complete disclosure of all tax irregularities. In exchange, HMRC agrees not to criminally prosecute the taxpayer. The taxpayer still faces financial penalties (up to 100% of the tax due) and interest.

What happens if I reject the CDF? If you reject the CDF, HMRC may conduct a criminal investigation. You may face criminal prosecution, which can result in a criminal conviction, imprisonment, and confiscation of assets. Rejecting the CDF is almost always the wrong choice.

What are the penalties under COP9? Penalties under COP9 are based on the taxpayer's behaviour and the quality of the disclosure. For deliberate behaviour, the penalty range is 20-100% of the tax due. For deliberate and concealed behaviour, the penalty range is 35-100%. A full, unprompted disclosure can reduce the penalty to the minimum of the range (typically 20%).

Do I need a lawyer for a COP9 case? Yes. Under COP9, it's essential to engage a lawyer (not just an accountant) for at least some aspects of the case. Communications with a lawyer are legally privileged — HMRC cannot require them to be disclosed. Communications with an accountant are not privileged and can be required to be disclosed.