Alas, Poor Hansard!
Author:
Harry Carvill
CHANGES TO THE HANSARD PROCESS
The “Rules of Engagement” as between the Revenue, the taxation practitioner and the taxpayer in the investigation of cases involving suspected serious tax fraud, have witnessed several fundamental changes over the last five years. The process known until 31 August 2005 as the “Hansard” procedure has yet again been overhauled with effect from 1 September 2005. The term “Hansard” is to be gently discarded and replaced by what is to be known as the Civil Investigation of Fraud procedure.
I will endeavour in this Article to chart the changes in the Hansard process over the last five years and the reasons and circumstances which have led to the various alterations and refinements ending with the new “Rules of Engagement” taking effect from September 2005.
Background
Where HMRC (formerly the Inland Revenue) suspected serious tax fraud and they did not wish to pursue criminal prosecution, they have until recently dealt with the case under the “Hansard” procedure (also known as Code of Practice 9 or COP9).
Under Hansard at the opening meeting (known as the Hansard interview) HMRC issued the Hansard practice. The practice was set out in a parliamentary question and answer thereby deriving the name “Hansard”.
Hansard 1990 - 2002
The version of Hansard in operation from October 1990 until November 2002 was as follows:-
“The practice of the Board of Inland Revenue in cases of tax fraud is as follows:
The Board may, (author's emphasis) accept a money settlement instead of instituting criminal proceedings in respect of fraud alleged to have been committed by a taxpayer.
They can give no undertaking that they will accept a money settlement and refrain from instituting criminal proceedings even if the case is one in which the taxpayer has made a full confession and has given full facilities for investigation of the facts. They reserve to themselves full discretion in all cases as to the course they pursue.
But in considering whether to accept a money settlement or to institute criminal proceedings, it is their practice to be influenced by the fact that the taxpayer has made a full confession and has given full facilities for investigation into his affairs and for examination of such books, papers, documents or information as the Board may consider necessary”.
During the Hansard period 1990 - 2002 the Revenue reserved the right to prosecute, even where the taxpayer had made full confession. That said, in practice they never to my knowledge did so, where a full and accurate disclosure was forthcoming. However this time honoured “gentleman's agreement” was thrown into disarray as a result of comments made in the House of Lords case of RV Allen (2001) STC 1537. In this case the learned judges observed that the Revenue would have great difficulty in prosecuting any taxpayer who had made a full disclosure in view of the protection offered by Article 6 of the European Convention on Human Rights Act 1988.
Hansard 2002 - 2003
In response to the House of Lords comments in the Allen case, the Revenue revised Hansard in November 2002 to read:
“The practice of the Board of Inland Revenue in cases of suspected serious tax fraud is as follows:-
(a) The Board reserves complete discretion to pursue prosecutions in the circumstances it considers appropriate.
(b) Where serious tax fraud has been committed, the Board may accept a money settlement instead of pursuing a criminal prosecution.
(c) The Board will (author's emphasis) accept a money settlement and will not (author's emphasis) pursue a criminal prosecution, if the taxpayer, in response to being given a copy of this Statement by an authorised officer, makes a full and complete confession of all tax irregularities”.
The new version was widely welcomed in that it was unequivocal. If the taxpayer made a full and complete disclosure he would not be prosecuted.
The new Hansard appeared to be working satisfactorily until August 2003 when all Hansard cases were temporarily suspended to allow the Revenue time to consider their position in the light of the judge's comments in the Court of Appeal case of R V Gill & Gill (2003).
Hansard 2003 - 2005
The Revenue's response to the Gill case, after taking legal advice, was that it was necessary to alter its “Rules of Engagement” once again in view of the Court of Appeal comments in the Gill case.
The Revenue's view post Gill was that since Hansard involved investigating a criminal offence, it was thus necessary to conduct Hansard interviews using the Code of Practice imposed by the Police and Criminal Evidence Act 1984 (PACE). The Revenue therefore immediately trained its Inspectors in PACE procedures for issuing formal cautions and conducting tape recorded interviews. Briefing sessions for tax practitioners specialising in Hansard cases were held at various locations in the UK in October/November 2003 to explain the new process and Hansard cases were then subsequently taken out of their suspended state.
The new Hansard interviews under PACE appeared to be working fairly smoothly from November 2003. However, for reasons which are as yet not entirely clear, HMRC have once again decided to amend the civil investigation of suspected tax fraud with effect from September 2005.
CIVIL INVESTIGATION OF TAX FRAUD FROM SEPTEMBER 2005
A new COP9 has been issued which has taken effect from 1 September 2005. In the new COP9 HMRC summarise the Revenue's revised policy as follows:-
HMRC practice in cases of suspected serious tax fraud is as follows:-
1 The Commissioners reserve complete discretion to pursue a criminal investigation with a view to prosecution where they consider it necessary and appropriate.
2 Where a criminal investigation is not considered necessary or appropriate the Commissioners may decide to investigate using the Civil Investigations of Fraud procedure.
3 Where the Commissioners decide to investigate using the Civil Investigation of Fraud procedure they will not seek a prosecution for the tax fraud which is the subject of that investigation. The taxpayer will be given an opportunity to make a full and complete disclosure of all irregularities in their tax affairs.
4 However, where materially false statements are made or materially false documents are provided with intent to deceive, in the course of a civil investigation, the Commissioners may conduct a criminal investigation with a view to a prosecution of that conduct.
5 If the Commissioners decide to investigate using the Civil Investigation of Fraud procedure the taxpayer will be given a copy of this statement by an authorised officer.
HMRC also state in COP9:
“The investigation is not (HMRC emphasis) being conducted with a view to your prosecution for tax fraud”.
COMMENTARY ON THE NEW COP9 POLICY STATEMENT
In 1 above HMRC re-affirm the fact that they reserve complete discretion to pursue a criminal investigation with a view to prosecution where they consider it necessary and appropriate. No change here in HMRC previous position.
In 2 above they set out that where criminal proceedings are not considered necessary or appropriate they may decide to investigate the case under the Civil Investigation of Fraud procedure. Again no change in HMRC previous position except that the procedure formerly known as ‘Hansard’ is now re-branded as the ‘Civil Investigation of Fraud’ procedure.
In 3 above HMRC state clearly and unambiguously that if the Civil Investigation procedure is adopted they will not seek a prosecution. In 4 above they confirm that where false statements or false documents are submitted with the intention of deceiving, the Revenue may then decide to prosecute. The important change here seems to be that at the point where the new Civil Investigation of Fraud Statement and (COP9) is given to the taxpayer, he/she is in no danger of prosecution at that point. He or she, it appears can only subsequent to that point by their own actions or inactions thereafter incriminate themselves by either making false statements or providing false documents. The inference appears to be “come clean and you are guaranteed a civil settlement and no prosecution”.
My analysis of 3 and 4 above has been informally confirmed as being a fair one by Special Civil Investigations Office. They have informally commented that only if false statements and/or documents are included in the Report, will prosecution become an issue. Subsequent prosecution will be based on the alleged false statements and/or documents included in the Report.
In 5 above of the HMRC's statement of policy, they set out that a copy of the decision to investigate under the Civil Investigation procedure will be given to the taxpayer by an authorised officer. The statement to be given to the taxpayer, essentially is the practice set out in 1 - 5 above, along with the new COP9 Booklet.
The new Civil Investigation of Fraud process under the new COP9 also seeks to bring former Revenue & Customs investigations under one roof. The formal questions to be posed at the Civil Investigation of Fraud interview will from 1 September 2005 incorporate questions about both Direct and Indirect Taxes.
The 5 questions to be asked in relation to Direct Taxes are:-
1 Have any transactions been omitted from or incorrectly recorded in the books of any business with which you are or have been concerned whether as a Director, Partner or Sole Proprietor to the best of your knowledge or belief?
2 Are the accounts sent to the HM Revenue & Customs for each and every business with which you are or have been concerned whether as a Director, Partner, Sole Proprietor, correct and complete to the best of your knowledge and belief?
3 Are all the Tax Returns of each and every business with which you are or have been concerned whether as a Director, Partner or Sole Proprietor correct and complete to the best of your knowledge and belief?
4 Are all your personal Tax Returns correct and complete to the best of your knowledge and belief?
5 Will you allow an examination of all business books, business and private bank statements and any other business and private records in order that HM Revenue & Customs may be satisfied that your answers to the first four questions are correct?
The 4 questions to be asked in relation to VAT are as follows:-
1 Have any transactions been omitted from, or incorrectly recorded, in the books and records of (name of legal entity) for which you are (responsible status)?
2 Are the books and records you are required to keep by HM Revenue and Customs for (name of legal entity) for which you are (responsible status), correct and complete to the best of your knowledge and belief?
3 Are all the VAT Returns of the (name of legal entity) for which you are (responsible status) correct and complete to the best of your knowledge and belief?
4 Were you aware that any of the VAT Returns were incorrect or incomplete at the time they were submitted?
At the bottom of each list of questions will be a warning in black italics:-
“False statements can result in a criminal investigation with a view to prosecution”.
The list of questions on Indirect Taxes also notes that:-
“If the investigation is concerned with other Indirect Taxes or Customs & Excise duties, a separate set of formal questions will be sent with this Code of Practice”.
Thus if the investigation includes suspected evasion of fuel duty, export/ import duty etc. additional questions relating to these matters will be posed.
PENALTIES
The new COP9 also enunciates how penalties will be calculated.
COP9 states:-
Direct Taxes
- Disclosure
a reduction of up to 20% (30% for full voluntary disclosure where there was no fear of early discovery by us). This reflects the extent of any voluntary disclosure of irregularities you make; and
- Co-operation
a reduction of up to 40%. If you supply information quickly, attend interviews, answer questions honestly and accurately, give all the relevant facts including full written disclosure and pay tax on account when it becomes possible to estimate the amount due, you will then get the maximum reduction; and
- Seriousness
a reduction of up to 40%. This reflects the seriousness of your errors or omissions.
Indirect Taxes
The maximum penalty of 100% tax evaded is reduced by an amount which depends on whether you have disclosed full details of the true VAT liability, and by the extent of your co-operation during the whole enquiry.
Reductions from the 100% penalty figure will normally be made, to the maximum percentages specified, as follows:-
- Up to 40% - early and truthful explanation as to why the arrears arose and the true extent of them; and
- Up to 40% - fully embracing and meeting responsibilities under this procedure by, for example, supplying information promptly, including full written disclosure, attending meetings and answering questions.
In most cases, therefore, the maximum reduction obtainable will be 80% of the culpable tax. In exceptional circumstances however, consideration will be given to a further reduction, for example, where you have made a full and unprompted voluntary disclosure.
The penalty mitigation formula for Direct Taxes is very much as it was previously. What is of greater interest is the penalty mitigation formula in relation to Indirect Taxes. It would appear from HMRC's template that where there is early and truthful explanation, full disclosure and co-operation penalties can be reduced to at worst 20%. Moreover, if the disclosure is an unprompted voluntary disclosure a further reduction is possible.
In practice, with the old SCO cases, the likely level of penalty, with full disclosure and full co-operation, was normally in the 25% - 40% region (based mainly on the gravity of the case). If Indirect Tax penalties where there is full disclosure and co-operation are to be in the region of 20%, are the Direct Tax penalties not going to appear excessive?
Do HMRC intend bringing the Direct Tax penalty regime more into line with the Indirect Tax one (say) by reducing the penalty loading for “seriousness”. Only time will tell. Moreover, I suspect that in the fullness of time, we will see a single penalty regime for both Direct and Indirect Taxes.
CONCLUSION
For some 80 years, until 2000, the Hansard process for dealing with Inland Revenue cases of suspected serious tax fraud changed very little. In the five years since then we have witnessed several critical modifications. The time honoured Hansard procedure has now been dispensed with (in name at least) and replaced with the 21st Century term ‘Civil Investigation of Fraud procedure’.
In the latest refinement the interview under PACE Rules and formal caution have been discarded in favour of a more Civil(ised) mechanism. I would venture to suggest that HMRC inspectors, tax practitioners and taxpayers will all welcome this change. None of the parties, in my experience, have ever been totally comfortable with the PACE approach.
We now have a bilateral penalty structure to accommodate Direct and Indirect Taxes, although I predict that in time this will evolve into a unitary penalty regime as the Revenue & Customs & Excise merger solidifies. Who knows, we may even, someday soon, advance to the point where a taxpayers Tax Reference number and VAT Registration number are one and the same. Let's wait and see!
Harry Carvill F.C.A., A.T.I.I. is a Northern Ireland based Taxation practitioner with over twenty years experience in Special Civil Investigation Office cases. He manages Special Civil Investigation Office cases for a wide range of Accountants and Solicitors in Northern Ireland.
The views expressed in this article are the author's own and by necessity general in nature. In the case of individual cases specific detailed advice should be taken.