Every year HM Revenue & Customs (HMRC) undertakes hundreds of investigations including:

1. Criminal prosecutions for tax and VAT fraud
2. Civil investigation of fraud
3. Corporate tax investigations
4. Income tax investigations
5. VAT investigations
6. Investigations as a result of failure to register for tax, national insurance and VAT.

This article looks specifically at civil investigation of fraud and the underlying reasons for the start of such an investigation.

HMRC will follow this course when evidence is gathered of serious non- payment of tax as a result of tax evasion or tax fraud. Normally, the tax lost is in excess of £75,000 and the case will be one in which the sanction of a criminal prosecution has been considered by HMRC and deemed unnecessary. However, deliberate deception by a taxpayer in the course of a civil investigation can lead to a criminal prosecution in the future.

Such a case begins with a written notification to the taxpayer that a civil investigation of fraud is being undertaken. Included with this opening letter will be a copy of the HMRC Code of Practice 9, which outlines the latest guidelines to the civil investigation of fraud process. Written in straightforward language, this should be read carefully before taking any action. The benefits to be gained by complying with the investigation and the making of an early Payment on Account are described along with examples of the type of questions to be answered at the forthcoming meeting with HMRC. In addition and of most importance, the rights of the taxpayer and the expected standards of treatment by HMRC are outlined.

The formal questions in relation to direct taxes (income tax, corporation tax etc.) to be posed are as follows:

• 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 director, partner or sole proprietor to the best of your knowledge or belief?
• Are the accounts sent to HM Revenue & Customs for 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?
• 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?
• Are your personal tax returns correct and complete to the best of your knowledge and belief?
• 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?

There are some variations to the questions concerning indirect taxes (VAT etc.) to encompass such topics as the correctness of VAT returns.

Having read Code of Practice 9, regard should be given to the following points:

1. All relevant paperwork, business and private, should be retained as this will greatly assist in the disclosure aspect of the matter.
2. Any current fraudulent or evasion activity should be halted forthwith as assurances of such a cessation will be sought by HMRC in the course of the investigation.
3. Finally consideration should be given to the appointment of an expert with the knowledge experience to act as an intermediary and who can prepare the necessary formal Disclosure Report to settle matters.

Tax investigations are stressful and time-consuming, for the taxpayer and often the mainstream accountant or solicitor.