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Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539

The Role of COP9 in Combatting Tax Avoidance

Author: Azizur Rahman  27 February 2013
4 min read

HMRC has been voicing its concerns on tax avoidance. Here we look at the issue and examine the role of COP9 in the tax man’s attempts to chase revenue.

Tax avoidance seems to be on the news agenda with increasing frequency. Some of the largest foreign-owned companies have been before the Public Accounts Committee to answer questions about their tax affairs. And one of them, Starbucks, has now come out and said it will voluntarily pay more tax in the UK.
Certainly, the climate regarding tax avoidance seems to be hotting up. HMRC has said that foreign-owned companies are responsible for almost half of the tax being underpaid by large corporations – a total of £11 billion. This £11 billion is 44% of the £25 billion of tax “under consideration’’ by HMRC, which means any tax that has been potentially underpaid and the amounts of tax at risk to the Exchequer because companies are in legal dispute over the amounts of tax they have overpaid. The chances of HMRC ever seeing all or even most of that £11 billion headline figure are remote.

Another figure that has been put out by HMRC is the £400M in underpaid taxes it believes are owed by directors and senior executives of some of the UK’s largest companies. As executive pay has risen faster than that in any other sector, it could be argued that it makes sense for the tax man to take a closer look at the mega-rich big earners who seem to be doing so well while many others are enduring hard times. But again, the question has to be asked: how much, if any, of this cash will HMRC ever recover?
Certainly, HMRC has identified its targets. But whether we talk about the foreign-owned companies and their £11 billion or the business big hitters and their £400 million, the issue is not a straightforward one. In both cases, it will prove to be the case that any payments or earnings have been structured and arranged so that they are liable for only the minimum tax. What we are talking about may not break the law even if it tramples all over the spirit of it. Yes, some cases may prove to be illegal and give the tax man an easy conviction and a welcome cash windfall if all goes to plan. Others may clearly be legal, while a third group may occupy a rather vague legal area. Such distinctions not only make HMRC’s work more time consuming, they also offer few guarantees regarding any likely outcome. For example, looking at how Starbucks sold nearly £400 million of goods in the UK last year, we see how it legitimately avoided paying any corporation tax at all. It transferred money to a sister company in the Netherlands in the form of royalty payments, bought its coffee beans in Switzerland and paid high interest rates to borrow money from other parts of the business. Such elaborate schemes ensure that tax avoidance is not only legal but also difficult for HMRC to “get to the bottom of’’.

Things, however, may change. The Treasury has said it will give HMRC £77M to help it track down wealthy individuals and companies that are doing their utmost to avoid paying tax. The Chancellor has also talked of introducing an anti-avoidance rule and of teaming up with other G8 countries to stop the practice. And, of course, there is now the COP9.
COP9 is the letter sent to a person to let them know that their tax payments are being investigated. Its name comes from the fact that the letter indicates that the investigation is being carried out under Code of Practice 9. When writing to someone, HMRC offers them three options:

Disclosure – where someone can accept that they have committed a tax fraud and can state that they want to enter into a Contractual Disclosure Facility (CDF) contractual agreement with HMRC, whereby they disclose the full extent of their tax wrongdoing.

Denial – where a person can deny they have committed tax fraud but states that they will co-operate with the HMRC investigation.

Non-co-operation – where a person denies committing tax fraud and refuses to co-operate with the COP9 investigation.

For HMRC, COP9 could become an increasingly useful weapon against the suspected tax avoiders mentioned earlier in this article. This is because it gives both hunter and the hunted a degree of lee way. If an individual or company agrees to go down the disclosure route, HMRC will give an undertaking that it will not pursue a criminal tax investigation with a view to prosecuting over the tax frauds disclosed. A civil monetary settlement is agreed instead of a criminal penalty. By offering such an option, a COP9 can be a useful negotiating tool for any HMRC investigator looking to gain a full and frank picture of someone’s tax affairs. For the person under suspicion, it offers the chance to avoid a criminal punishment and a lengthy investigation while also allowing them to make a clean breast of things.

If a person chooses the denial option then HMRC can still begin a criminal investigation into the taxpayer’s affairs, with every possibility that it could lead to a prosecution. It is not obliged to tell the person that it has begun such an investigation – the person’s denial letter can even be used in evidence against them.  By choosing the non-co-operation option, HMRC begins a criminal investigation, obtains information about the person’s financial affairs from third parties, raises tax assessments and is likely to charge much higher penalties than those likely to be imposed under the disclosure option.

As HMRC decides how to target those it suspects of underpaying tax in 2013, it will surely see the COP9 as one of its best weapons. COP9 investigations are usually carried out by HMRC specialist investigations staff, who are the ones used when it is believed that large amounts of tax have gone unpaid. With HMRC itself now coming out and saying who it suspects of not paying the tax it must surely only be a matter of time before the COP9 becomes the weapon of choice for the tax man in this coming year.

Azizur Rahman C 09369

Azizur Rahman

Senior Partner

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Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.

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