In the past an investigation by HMRC into a tax avoidance scheme was conducted under Code of Practice (COP) 8.

Under such circumstances, there is no question of tax fraud having taken place and a prosecution is not on the agenda.

Recently there have been a number of cases involving tax avoidance schemes where COP9 has replaced the existing COP8 enquiry. This is a very strong indicator that HMRC considers serious fraud to be involved and that increases the element of culpability where penalties are inevitably considered. This also raises the extremely serious possibility of prosecution if HMRC considers that full disclosure of all irregularities has not been made.

The use of COP 9 under these circumstances raises the intriguing question of exactly who does HMRC suspect of having committed fraud? There are usually at least 3 or 4 parties involved with any tax avoidance scheme – the taxpayer, the scheme proprietor, any appointed representative of the proprietor whose job it is to “sell” the scheme to taxpayers and a barrister who has given a formal “opinion” on the scheme.

The taxpayer will not have a clue as to how the scheme works in practice. He will not be aware of the legislation which he has been told should enable the scheme to succeed. Neither will he be aware of the legislation of which HMRC proposes to use in an attempt to show that the scheme does not afford the tax breaks which were anticipated.

Ignorance of the law does not amount to fraud – that is very clear from HMRC guidance provided in the COP 9 notes. Given that, it is very difficult to see how HMRC believes that it has a case of fraud against the taxpayer.

Tax avoidance schemes will usually be based around a strict interpretation or inter-linking of tax law and if the law is read and interpreted in a certain way then it can be argued that significant tax breaks are generated by the scheme.

HMRC will, of course, interpret the law somewhat differently and a Tribunal is often required to decide which interpretation is correct. Misinterpretation or a failure to properly understand the law does not in any way constitute fraud, so unless the scheme proprietor or his appointed representative have deliberately failed to provide all of the information requested by HMRC, or have deliberately failed to make a full disclosure of the planning if required to do so under the DOTAS provisions (disclosure of tax avoidance schemes) or have deliberately misled HMRC, then it is difficult to see why any enquiry cannot continue under COP8.

Most, if not all, tax avoidance schemes will be referred to a barrister for a formal “opinion” before the scheme is marketed by the proprietor. The barrister will consider each step of the scheme based on the facts as provided to him by the scheme proprietor and will then give his considered opinion based on those facts. It should be noted that Counsel will never say that a scheme will be successful – he provides a considered opinion, not a guarantee.

It is surely inconceivable that Counsel could be accused of fraud by HMRC, so which party does HMRC suspect of having committed fraud?

I cannot see that any taxpayer will have had a full comprehension of the technical intricacies of a tax avoidance scheme (very few accountants will ever fully understand them!) and taxpayers would normally rely totally on the advice given to them by the proprietor or his appointed representative in deciding whether or not to use a scheme.

If HMRC believes that the fraud lies within the disclosures provided, then any COP9 enquiry should be focussed on the person who has been responsible for any failure to provide the full disclosure of the facts. Surely any taxpayer who has merely taken high level professional advice that the scheme is legal and backed by an interpretation of the law cannot be guilty of fraud just because he has been a participator in the scheme?

Accountants should vigorously defend any attempt by HMRC to use COP9 to investigate participators in a tax avoidance scheme provided, of course, that they have satisfied themselves that their client really has done nothing worse than accept professional advice/recommendation.

Anyone who needs help or advice in this regard please contact me.

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