Last month, former Formula One boss Bernie Ecclestone was given a suspended prison sentence after pleading guilty to a charge of fraud by false representation, following an ongoing HMRC investigation.
Ecclestone's guilty plea relates to a false representation made to HMRC that he was not the settlor or beneficiary of any trusts outside of the UK, except a single trust established and declared in favour of his children.
The remarks made by the sentencing judge refer to Ecclestone being linked to two trusts outside the UK and a Singaporean bank account containing "very substantial" funds.
HMRC is not alleging that the trusts themselves are problematic from a tax perspective – their complaint is that they were not told about them.
In this article, we look at the tax investigation tools HMRC used in this case, and the trend in increasingly vigorous use of HMRC's enforcement powers.
COP9 investigation
Initially, this case started as an HMRC Code of Practice 8 (COP8) investigation, which is used in circumstances where HMRC had no reason to suspect fraud.
However, the information disclosed as part of that investigation led HMRC to open a COP9 investigation, which applies where HMRC suspect that the person under investigation has been involved in tax fraud. COP9 is one of the more invasive tools in HMRC's kit.
It is a civil process under which a tax payer is required to lay bare their tax affairs, often stretching back over a considerable period. It is used for HMRC's more serious investigations, and while it is not a criminal process, it can only be used in cases of suspected tax fraud.
HMRC's guidance describes tax fraud as "any deliberate dishonest behaviour in respect of an individual's liability to pay tax, duties or levies".
Under COP9, the taxpayer and HMRC will enter a contract in which the taxpayer commits to make a "complete, accurate, open and honest disclosure" of all "deliberate behaviour" and all other irregularities in their tax affairs.
In return HMRC commits not to open a criminal investigation. The policy intention is to encourage taxpayers under COP9 to engage constructively with HMRC to regularise their tax position.
This benefits both parties: HMRC saves the cost of a full investigation, and the taxpayer pays outstanding tax, penalties and interest but draws a line under the matter, without more serious consequences.
However, failure to engage fully and honestly with the process risks HMRC opening a criminal investigation, which could result in prosecution, as it did for Ecclestone.
The COP9 process can be lengthy and expensive for a taxpayer. Ecclestone's motivation was described by the sentencing judge as a desire to save the costs of the investigation he was incurring, and bring it to an end.
Criminal proceedings: fraud by false representation
When HMRC considers that a taxpayer has not complied with the COP9 process, a criminal investigation can be opened.
