So far, our blog post series on tax disputes in the UK has focussed generally on enquiries and appeals processes. Here, we focus on HMRC's civil and criminal processes for the investigation of the most serious forms of tax non-compliance, including fraud.

Where previously it would have been possible to characterise this sort of investigation as falling clearly on one side of the criminal/civil divide, the broad range of powers and processes now available to HMRC means that an investigation can easily acquire both civil and criminal dimensions. HMRC has available a range of responses, which can progress from a conventional enquiry, through their Codes of Practice for investigating tax fraud (COP8 and COP9) to criminal prosecution. For a taxpayer, understanding the potential routes of escalation is key to securing the best possible outcome from an HMRC investigation.

Code of Practice 8: avoidance 

COP8 is HMRC’s mechanism for investigating significant tax loss, typically arising from complex avoidance arrangements or aggressive planning. While fraud is not presumed in a COP8 investigation, it will likely be more intensive than a conventional enquiry. 

In a COP8 investigation, there is a strong possibility that HMRC will deploy its powers (under Schedule 36 of the Finance Act 2008) which require the production of documents and information in relation to the transactions which HMRC suspect may have led to a loss of tax. Those Schedule 36 powers are, of course, the same powers HMRC would be able to use in a conventional enquiry: in the COP8 context, however, they will be directed specifically at understanding the avoidance structure and potential quantum of lost tax and may be exercised in a more expansive manner. 

A COP8 matter may progress to the next stage - COP9 - if HMRC uncovers evidence of deliberate misrepresentation or concealment, if the taxpayer is uncooperative or provides misleading information, or if the suspected tax loss proves materially greater than first estimated. In that sense COP8 may be just a starting point: in the wrong circumstances, what begins as a review of potential avoidance can develop into a fully-fledged investigation of fraud.

Code of Practice 9: civil fraud and the CDF

COP9 is HMRC’s principal civil procedure for investigating suspected fraud. The central feature of COP9 is the Contractual Disclosure Facility (CDF): a taxpayer who accepts the CDF is given a fixed period (generally 60 days) to make a full admission and provide a comprehensive disclosure, in return for HMRC’s contractual undertaking not to prosecute for the disclosed conduct. Acceptance of the CDF requires the taxpayer to disclose all irregularities - whether or not HMRC is already aware of them - and to cooperate fully with HMRC’s enquiries.

Acceptance of the CDF removes the immediate prospect of criminal prosecution in respect of the disclosed behaviour. Rejection of the CDF does not automatically trigger prosecution, but it removes the possibility for contractual protection and allows HMRC to consider escalation to a criminal investigation if the case meets the relevant criteria. 

Criminal investigations: crossing the line 

At the highest level, a civil investigation will become criminal in nature where the evidence indicates that a penal sanction is required. HMRC’s published Criminal Investigation Policy sets out the factors that typically justify such action - including organised or systematic fraud that threatens the tax base, deliberate concealment, deception or the use of false documents, and abuse of a position of trust. Other triggers include repeat offending, links to wider criminality, money laundering (particularly where professional advisers are involved), and conduct involving threats, corruption or the obstruction of HMRC officers.

Once a criminal investigation is authorised, HMRC’s investigatory powers increase further. Investigators may obtain search warrants and execute dawn raids, seize and image electronic devices, arrest suspects, and apply for authorisations for covert activity. Restraint and confiscation measures under the Proceeds of Crime Act 2002 (POCA) may be sought to preserve and recover assets. Common charges in tax-related prosecutions include cheating the public revenue, offences under the Fraud Act 2006, and specialist corporate tax offences such as failure to prevent the facilitation of tax evasion. Any prosecution is ordinarily conducted by the Crown Prosecution Service, in close collaboration with HMRC investigators.

Parallel proceedings? 

HMRC does not always suspend civil action once a criminal investigation begins. HMRC guidance suggests that it is possible to pursue civil and criminal processes in parallel, provided safeguards are observed. Civil assessments and penalties may therefore continue while a criminal case is in progress, and HMRC may also deploy asset-freezing and confiscation powers under POCA alongside normal tax recovery. If confiscation does not produce a satisfactory recovery of tax and proceeds, HMRC can subsequently pursue any remaining liabilities through the normal civil processes of assessments and enquiries.

COP8, COP9 and criminal investigation should not be viewed as isolated categories of tax investigation but as points on a spectrum. Movement between them is driven by the nature of the evidence, the taxpayer’s conduct, and HMRC’s determination of whether escalation serves the public interest. 

How we can help…

For taxpayers, the key is to recognise the potential for escalation and to respond strategically from the outset. Early engagement and informed advice can significantly influence the direction of an enquiry and help ensure the most favourable outcome is reached. This is what we can help with. 

So, please get in touch with either of us or another member of Slaughter and May’s market-leading tax disputes team if you have any questions on the topics discussed in this blog or another tax disputes query.