Fraud: What to do if HMRC ask you to use their Contractual Disclosure Facility

Let’s cut to the chase: if HMRC writes to you asking you to use their Contractual Disclosure Facility (CDF), then it’s likely that you’re under initial investigation for fraudulent tax activities. If this happens, it’s crucial that you do two things: stay calm, and consult a tax expert.

The good news is that this initial investigation is not a formal investigation – they are giving you the opportunity to provide evidence. Now, it may well be that you have not intentionally committed tax fraud, but if you are receiving a CDF request, then it’s likely that something is not right. This might be non-deliberate errors in your tax affairs, and if that is the case, you should be able to avoid prosecution, provided that you cooperate with HMRC.

What is the CDF?

The CDF is a vehicle designed by HMRC to encourage fraud offenders to ‘own up’ to wrongdoings, or for businesses to flag any errors or mistakes that they have become aware of. Typically, the CDF process involves a series of letters and forms covering various stages of acceptance, rejection and disclosure. Of course, we would never recommend ‘rejection’ because even if your tax affairs are above board, this will only raise more suspicion, and after all, you should have nothing to hide.

What to expect if you cooperate

• HMRC will allow you to work with a tax expert or advisor of your choice, who will be able to help you produce your disclosure report
• HMRC will look favourably upon you, reducing penalties and working to close the investigation as soon as possible
• HMRC will give you the opportunity to settle the sum of outstanding tax (and this might include interest and penalties, depending on the case)

What if you don’t cooperate?

• HMRC will progress the initial investigation to a formal investigation and may also decide to prosecute you
• HMRC may contact third-parties for evidence (eg: businesses that you have dealt with). This won’t look good on your business
• HMRC may choose to publicly disclose information regarding your tax affairs. Again, this will not reflect well on you or your business

HMRC also has the power to delve into a maximum of twenty years of tax history, so should there be any wrongdoing or errors over the last two decades, it’s likely that it’ll catch up with you. If for any reason you’re unsure about historic tax affairs within your business then do not sit on it for any longer. Get it checked by an independent tax expert to put your mind at ease, or to take the necessary steps to avoid a CDF.

Why and how to avoid CDFs

It might seem obvious, but the best way to avoid HMRC delving into your business’ affairs is to ensure your finances (everything from teams and transactions to taxes and returns) are handled correctly. As we’ve said, mistakes can be made, so it’s important to have the right expertise to hand. Whilst it may not make financial sense to have an in-house tax expert, we would highly recommend consulting a tax specialist or accountancy firm on a regular basis.

A CDF should be avoided at all costs, not least because of the threatening nature of the HMRC’s correspondence. They are not pleasant letters to receive and can cause stress and anxiety to business owners and finance teams. The CDF process itself is invasive and time consuming, especially if your records are not kept up to date or in good order. So do everything you can to stay on the good side of HMRC, from filing and bookkeeping to tax returns and confirmation statements. It all matters.

If this has got you thinking about a historical tax hiccup or the overall health of your tax affairs, then it wouldn’t hurt to get in touch with a tax specialist. We can help you ensure everything is in good order, and more importantly, reduce the risk of a CDF.