Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
A COP8 or Code of Practice 8 applies when HRMC believes that an individual or company has taken part in a form of tax avoidance. Issued by HMRC’s Fraud Investigation Service (or FIS), a COP8 usually takes the form of a leaflet and it explains that no criminal misconduct is expected.
If a person is deemed to have taken part in any kind of illegal activity that could be tantamount to tax fraud, a COP8 is not issued – a COP9 is issued instead. In cases where a COP8 is received, it is simply suspected that not all taxes have been paid.
When Are COP8s Used?
COP8s are now often in use by HMRC where people are suspected of having interests offshore. At one time, they were only used where aggressive tax planning was suspected. This included instances of:
- Income planning (such as, where loans were used to pay employees and owners rather than an income)
- Trusts that were used within inheritance tax planning
- Film Partnership Schemes
- SDLT (Stamp Duty Land Tax Planning)
- Employee Benefit Trusts
- Any other planning for which there is a legal requirement for a DOTAS (Disclosure of Tax Avoidance Schemes) number to be issued.
COP8 is being used less and less in recent years due to the fact that HMRC has been using retrospective legislation in order to recover unpaid taxes that they believed to be due. Furthermore, HRMC has also brought in strict penalties to be levied against any professional body, for example, accountants and lawyers, who provide tax planning within their services.
Tax Avoidance And Planning
Tax avoidance and planning are legitimate. Making arrangements to help avoid specific charges is acceptable, for example exemptions, and maximising tax allowances, exemptions and reliefs. But that does not mean that planning of this nature always works when done by inexperienced individuals who get it wrong.
Taxpayers who enter schemes having taken professional advice need to understand what is involved and be aware that the object of the scheme is to avoid paying tax. In turn, this implies that they are aware of all the risks associated with potential disapproval by HMRC. Therefore, if they deem the risk to be worth the possible gain then the same needs to be understood if the scheme fails.
Attention is now being switched by HMRC to offshore tax with individuals who may technically not be domiciled or resident in the UK. In 2018 the AEOI (Common Reporting Standard) or rule regarding Automated Exchange of Information was brought into force and this is putting a stop to the hiding of funds in offshore accounts since it means that information is shared internationally.
Information is now collected by HMRC from building societies, financial institutions and banks and when a link is found to anybody in an overseas country, red flags are raised. Information thus flies around the globe alerting the tax authorities in question.
What Penalties Are Associated With COP8?
There are high penalties in cases where an individual with an offshore account gets their sums wrong, both accidentally and on purpose. A COP8 can be issued by HMRC when it is suspected that the person in question has a link overseas since there could be an assumption that they will have elaborately planned their tax scheme to reduce how much tax they need to pay within the UK or their lack of professional advice should result in a quick mea culpa and rectification.
Often, tax planning that was deemed to be completely legitimate in the past is deemed illegal now, with the individual being caught out in recent years by the changed legislation. The COP8 notice advises people to take professional advice since large amounts of money are at stake.
While HMRC states that as part of their COP8 procedure they will let the individual that they are investigating know the reasons for the investigation being launched, these explanations are typically vague, leaving them open to varying interpretations. It is important to contact HMRC quickly and to obtain clarification as to the source of their information in order to respond appropriately.
In a worst case scenario, if HMRC decides during the COP8 process that the individual has not paid enough tax deliberately and was aware that their tax returns were not correct at the time of submission, they may decide to withdraw COP8, issuing a COP9 (Code of Practice 9) instead. This is only issued in cases where tax fraud is suspected. They may even decide to prosecute the person in question.
The Difference Between COP9 And COP8
There are two distinct codes of practice that are followed by HMRC’s FIS – COP8 and COP9. Although they may seem similar, they are actually very different, and being issued with a COP9 is far more serious than being issued with a COP8.
COP9 is operated by HMRC in any case in which it believes that fraud has taken place. As part of the process, individuals are allowed to disclose any errors that they have made deliberately and, in return, receive immunity from prosecution.
Any case that is opened initially under COP8 is able to be transferred to Code Of Practice 9 if HMRC then comes to believe during the course of the investigation that deliberate behaviour has taken place. The COP9 process allows taxpayers the chance to report and disclose any irregularities in their tax affairs.
Some of HRMC’s FIS investigators are keen to use COP8 rather than COP9 because they are able to drive the process of investigation more effectively. Some may even open a case under COP8 even if they suspect that serious fraud has occurred from the very start of the process. One common misconception is that someone who is under a COP8 enquiry is able to be charged a deliberate penalty and could at any time find themselves being referred for a criminal investigation.
If a COP8 enquiry is opened against you by HMRC and you have submitted a false tax return knowingly, it is always recommended to apply to make voluntary disclosures under COP9 procedure so that you will be immune from prosecution proceedings. Seeking professional advice in this matter could not be more important.
Guidelines For Issuing COP8
HMRC has strict guidelines to follow when issuing COP8s. The leaflet that is presented states that all required information has to be presented to HMRC and a meeting may be required too in order to discuss the matter at an early stage. Nevertheless, taking professional advice is imperative.