COP8 / Code of Practice 8

What is Code of Practice 8?

Code of Practice 8 is a leaflet issued by HMRC (usually by HMRC Fraud Investigation Service (FIS) in cases where they suspect that the individual has instigated tax planning that they do not believe works or where they have reason to suspect that all taxes have not been paid.

Where HMRC issue Code of Practice 8 or Requirement to Correct it should always be noted that HMRC do not, at the time of issue, suspect that a person has deliberately taken illegal steps to reduce their tax bill (ie tax fraud or tax evasion).

It would appear that HMRC are now targeting people with offshore interests using Code of Practice 8.

This is a change in approach as for the last few years Code of Practice 8 (COP 8) has generally be used to target marketed tax planning such as:

• Disguised Remuneration Planning (Loans from Companies)
• Film Partnership Planning
• Inheritance Tax Planning involving trusts.
• Employee Benefit Trusts
• SDLT Planning involving options and sub sale relief.
• Any other planning where the law requires that a DOTAS number be issued to the person using the planning.

Due to the challenge to all of these tax planning arrangements, including retrospective legislation to claw back funds HMRC believe are due, along with legislation introducing heavy penalties on accountants who provide tax planning that is legislated against the use of COP 8 has declined as the amount of “unauthorised” tax planning has reduced.

Offshore tax and Requirement to Correct

HMRC’s focus has now turned to offshore matters with regards to planning and to people who reside in the UK (although they may not be technically resident or domicile in the UK).  

Late last year the Automatic Exchange of information legislation came into force.  What this means is that a most tax authorities in the world are now gathering and exchanging information with other countries in the world.

Each tax authority is gathering information from financial institutions (banks, building societies, insurance companies and investment companies and where there is a linked address to someone in another country, they are automatically sending the information to the tax authorities in the relevant country.  

The exchange of this information has already led to HMRC’s Risk and Intelligence unit sending out a significant number of standard letters asking people to confirm that they have declared all of their income.

What are the COP 8 penalties?

The requirement to correct legislation also introduces significantly higher penalties for people who have accounts offshore where they get their tax affairs wrong (whether intentionally or accidentally)

Where HMRC decide to enquire into the tax affairs of someone with overseas links then they will generally do this under Code of Practice 8 as their suspicion will be that the person has undertaken some form of planning to mitigate their UK tax exposure and to take advantage of their domicile or residence position.  Often people will have instigated legitimate tax planning which is not updated and due to changes in the law now no longer works.  There are usually significant sums potentially at stake and it is important (and stressed in the leaflet COP 8) that people take professional advice.

It should be stressed that COP 8 has no legal construct and that it does not provide HMRC with any special powers and therefore HMRC should be held to what the law says that they can and cannot do.

The COP 8 leaflet suggests that an individual should provide HMRC with all of the information they require, meet with HMRC to discuss matters at an early stage to enable HMRC to ask questions and clarify points.  This is not always the best approach as it can lead to long and intrusive tax investigations and unfortunately HMRC generally look for evidence to support their view rather than forming a view after objectively reviewing the evidence.

HMRC state that generally as part of the COP 8 procedure they will tell the individual the reasons for starting the investigation.  This is true but the explanation is usually very vague and open to interpretation.

If, as part of the COP 8 process HMRC come to the opinion that an individual has deliberately not paid sufficient tax and knew that the tax returns were incorrect when submitted they potentially will withdraw COP 8 and issue Code of Practice 9 (cases of suspected tax fraud) or at worst decide to prosecute the individual.

Code of Practice 8 Specialists

COP 8 is not a formulated process and whether information is provided to HMRC or a meeting is held should be considered on the merits of providing it and how best to resolve the tax investigation.  

The general approach of Gilbert Tax with regards to COP 8 tax investigations is to gather all of the relevant facts and information and do a detailed review before deciding what, if anything to provide to HMRC and where needed presenting the conclusion relating to whether or not there is an issue with the relevant and pertinent information.  This can lead to a much quicker settlement of the matter than answering what can be reams of pointless questions from HMRC and enables our clients and ourselves to keep control of the Code of Practice 8 enquiry.