HM Revenue and Customs

2. Mr and Mrs H complain on 24 May 2018 HMRC inappropriately started an investigation into their tax affairs under COP9. They say it would have been more appropriate for HMRC to use COP8, which is designed to investigate tax avoidance schemes.

3. They also complain HMRC unfairly continued its COP9 investigation although they gave it all relevant evidence and reached a financial settlement.

4. They say due to HMRC's actions they spent a lot of money on specialist advice. They would have needed advice for a COP8 investigation but the demands of a COP9 investigation led to further costs. The threat of criminal prosecution that comes with COP9 was very stressful and this continued for longer than it should have done.

5. Mr and Mrs H would like financial compensation to cover the excess specialist fees. They would also like an apology and for HMRC to accept it got something wrong and financial compensation for the distress they experienced.

6. HMRC sent letters dated 24 May 2018 to Mr and Mrs H and their tax agent. These explained HMRC suspected they had committed tax fraud and had opened an investigation using COP9. COP9 defines tax fraud as ‘dishonest behaviour that led to or was intended to lead to the loss of tax’.

7. The letters gave Mr and Mrs H the opportunity to disclose any tax losses caused by their deliberate or non-deliberate behaviour. This is known as the Contractual Disclosure Facility (CDF). It is an agreement HMRC will not open a criminal investigation if the individuals admit to certain behaviour.

8. On 11 July, the tax agent contacted HMRC on behalf of Mr and Mrs H. The agent explained Mr and Mrs H had rejected the CDF but would comply with the investigation and gave details of a conversation he had with Mr and Mrs H.

9. It seems during that conversation they discussed information they should have disclosed to HMRC earlier but did not. The agent told HMRC income from letting a property abroad was not disclosed as it had made a loss and capital gains tax (CGT) was not paid on a property sale as Mr and Mrs H wrongly believed it was exempt. The agent was working out how much Mr and Mrs H owed and would tell HMRC in due course.

10. On 22 August HMRC’s investigator asked the tax agent when they would send the calculations. The agent explained it was taking some time to prepare these due to the complexity of the issue. HMRC received the calculations and supporting documents on 5 October. HMRC needed more information for its independent assessment and the agent sent this in several emails between 5 November and February 2019.

11. The agent also sent Mr and Mrs H’s banking information to HMRC in early 2019. On 12 April he asked for an update and the HMRC investigator replied on 30 April explaining they had been on annual leave. They spoke on 9 May and agreed to meet in person on 25 June along with Mr and Mrs H.

12. The meeting lasted for approximately five hours. The investigator explained their role and how COP9 worked. They asked Mr and Mrs H about the businesses they ran and the properties they owned. They explained HMRC’s investigation would focus on addressing the CGT they failed to pay and the failure to disclose income from property and VAT exemption from their business.

13. On 12 August HMRC requested extensive evidence about Mr and Mrs H’s income. The agent believed the nature and quantity of this information was unjustified. The investigator issued a new information request on 9 September when they returned from annual leave and training. This reduced the amount of evidence and set out why they wanted each piece.

14. The investigator’s letter also said they had finished checking the agent’s calculation of CGT Mr and Mrs H owed. On 16 October the agent sent HMRC £14,000 on Mr and Mrs H’s behalf to settle the unpaid CGT.

15. Extensive correspondence about the evidence request continued between the investigator and agent. The investigator agreed to visit the agent’s London offices on 12 and 13 November to review the information in person. The investigator did not have enough time to review all the records and asked the agent to email certain information, but they did not respond.

16. On 16 December the agent contacted HMRC and asked for an update. They said Mr and Mrs H would like the investigation closed by Christmas. The investigator replied two days later asking for more bank statements for a business Mr and Mrs H ran. They added it would not be possible to end the investigation before Christmas.

17. On 17 January 2020 the agent told HMRC they would not disclose the bank statements for Mr and Mrs H’s business. They said the professional fees to do so were not proportionate and if HMRC continued to investigate their business they would argue HMRC gave the wrong advice to Mr and Mrs H about their VAT exemption in 2003.

18. In early February the investigator went on bereavement leave. The agent asked for an update on 17 February and the investigator returned to work on 2 March. In mid-March the investigator’s manager discussed the case with the agent over the phone and the investigator sent him a letter the next day.

19. In their letter, the investigator explained why they had been off work and apologised for the delay. They said they were still waiting for some of the records they had requested in September 2019 and they only got some of the information when the agent sent their letter the previous month.

20. On 16 March the investigator wrote to the agent explaining the progress of the investigation and that they had almost dealt with all the risks they had identified. Only one open question was left and this was about Mr and Mrs H’s business accounts. They asked for the records again and explained having these documents would speed up their investigation significantly.

21. The agent responded in writing on 14 April. Due to HMRC’s COVID-19 working practices at the time this letter did not reach the investigator. The agent sent it again by email on 2 June. They asked HMRC to close its investigation quickly and disputed Mr and Mrs H knowingly did not pay CGT. They asked the investigator to reconsider their request for business accounts and reiterated how stressful Mr and Mrs H were finding the investigation.

22. The agent and investigator spoke by phone on 10 June and the agent followed up the call by email five days later. They agreed to complete a certificate of full disclosure and accept the CGT penalties. This certificate would be a written agreement, signed by Mr and Mrs H, stating they gave all necessary information for HMRC to complete its investigation. They also agreed to give the bank records for their European business account.

23. The agent asked HMRC for blank certificates and confirmation of the penalties before sending the agreed account statements. As HMRC had not received the statements it did not send the certificates and penalties.

24. This back and forth continued, with changes to letters showing the amount of CGT owed and agreement on the suspension conditions. HMRC sent the certificates of disclosure and letters of offer on 28 August. This confirmed the amount of tax owed and the suspended penalties agreed. At this point the investigation was effectively over.

Type of investigation

27. Mr and Mrs H say HMRC should not have investigated using COP9. They believe COP8 was more appropriate to look at their tax affairs and would have resulted in lower professional fees. COP8 is used when HMRC believes someone is involved in a tax avoidance scheme and bending the rules of the tax system. While tax avoidance is legal it involves acting within the letter of the law but not the spirit of it. HMRC uses COP9 when it suspects someone of illegal fraudulent behaviour.

28. HMRC should follow the Manual’s guidance to decide what type of investigation to open. Part 202010 says an investigator should have strong evidence to demonstrate the suspicion of fraud. The investigator should prepare a registration report saying why they suspect fraud before they start the investigation. Loss of tax is not needed for HMRC to investigate potentially fraudulent behaviour.

29. Section 2210 of the Guidance sets out what behaviour can indicate someone has potentially committed fraud. The first is deliberately compiling false accounts.

30. The investigator completed a registration report, as per the Manual. It identified several risks relating to Mr and Mrs H’s tax affairs that raised suspicion they (or their accountant) had compiled false accounts. This included not paying CGT when selling a property when it seemed to be owed, potentially undeclared income from rental property, the commercial viability of businesses they ran and wrongly claiming their businesses were VAT exempt. The investigator could not match Mr and Mrs H’s lifestyle with their income and chose to investigate using COP9.

31. Based on the information HMRC had at the outset of its investigation it understandably suspected Mr and Mrs H had filed false accounts. As HMRC classes this as tax fraud, not avoidance, it started a COP9 investigation. We consider it was justified to do so.

Length of investigation

32. Mr and Mrs H also complain HMRC took too long to close its investigation. Mr H sent us several reasons they and their tax agent argue HMRC should have done so sooner. They say HMRC did not keep an open mind as it should have done and did not accept the innocent explanations they gave. They say HMRC unfairly added their European business to its investigation despite not being concerned about it beforehand.

33. They add they admitted early on to mistakenly not paying CGT and acted quickly to put this right, which should have settled HMRC’s concerns. They also handed over all the necessary evidence quickly, but HMRC unfairly continued its investigation.

34. Lastly, they said the investigation caused them a lot of stress and their agent asked HMRC to close it for this reason. They say even towards the end of the investigation HMRC still asked for additional evidence and rejected pleas to finalise a settlement.

35. Mr H points to HMRC’s LSS as relevant guidance. The principles are broad but set out how HMRC should behave when resolving tax disputes through civil investigations like COP9. It says HMRC’s investigations should be proportionate, critically examine the evidence and base decisions on facts. HMRC should pursue evidence in a collaborative and non-confrontational way.

36. Point 16 of the LSS says ‘where there is more than one dispute between a customer and HMRC, each dispute must be considered and resolved on its own merits…’. The introduction says the LSS should be considered alongside more detailed operational and policy guidance.

37. We have also considered the Guidance, which sets out how HMRC should investigate suspected fraud. Section 4810 says HMRC should close an investigation when it has identified if fraud happened and addressed all the risks to its satisfaction. Section 4820 says sometimes the investigation leads to new areas of concern, when the investigator should use their judgement and advice from colleagues or team leaders on ending the investigation.

38. HMRC’s guidance from the time, Your Charter, sets out how it should act when dealing with the public. It says HMRC will treat people fairly and listen to their concerns. Your Charter also says it will deal with information from people quickly and efficiently.

39. The COP9 Briefing Note says HMRC ‘will keep an open mind to the possibility there may be an innocent explanation for the suspected fraud’.

40. HMRC opened its investigation in May 2018. Mr and Mrs H asked the tax agent for help and discussed their tax. He wrote to HMRC in July and denied Mr and Mrs H deliberately withheld tax, but said two parts of their accounts may not have been properly disclosed – their property abroad and the CGT on the sale of their home. So they rejected the CDF, which gives people an opportunity to confess to fraud and avoid the chance of prosecution, but agreed to help with HMRC’s investigation.

41. HMRC had evidence of other risks it could not explain. This included the commercial viability of their businesses and potential VAT fraud. As set out in section 4810 of the Guidance, HMRC needed to collect and examine further evidence to make its own decision about fraud. It completed more checks before agreeing the tax problems with Mr and Mrs H’s CGT and rental properties were simply mistakes. This does not mean it failed to keep an open mind as it accepted their explanations after checking the evidence. We consider its approach here was appropriate.

42. We have also considered the settlement that put right Mr and Mrs H’s underpaid CGT. The agent agreed to get help calculating the CGT Mr and Mrs H owed as this needed several external experts. It took until July 2019 for the agent to send HMRC the calculations and supporting information. It then took HMRC until September to verify this, and the following month Mr and Mrs H agreed to pay a total of £14,000.

43. This payment settled one risk HMRC had identified but others needed further attention. Some of these risks were suspected before the investigation began and some came to light during it. Settling one part of the investigation does not mean HMRC should close the rest of it. As per the Guidance, HMRC should close the investigation when it has addressed all risks to its satisfaction, which was not the case here.

44. The fact HMRC added aspects of Mr and Mrs H’s tax affairs to its investigation does not suggest it acted unfairly. We consider it would be disproportionate and wasteful for HMRC to identify a new and associated risk during its investigation and open a separate enquiry into this issue alone.

45. We have also looked at whether HMRC asked for relevant and proportionate evidence to address its concerns. Although it made several information requests during the investigation it would be disproportionate to consider each one individually. This is because the agent responded to all but one of the requests relatively quickly and without disagreement. Instead we have focused on the one the investigator and agent disagreed about and seems to have caused the most delay.

46. In August 2019 HMRC asked for business records for each of Mr and Mrs H’s four businesses. This amount of information needed a lot of analysis from the agent but did not cover lengthy periods. The agent told HMRC it would be excessive to give so much evidence and asked the investigator to scale back her request and justify why they wanted each piece of information.

47. The investigator reviewed the information request with her line manager and reissued it on 9 September. They cut the amount of information requested and confirmed the focus of their investigation, explaining her concerns and how each piece of evidence would help reach a decision.

48. This demonstrates the investigator listened to the agent’s concerns and acted fairly, in line with Your Charter. We are satisfied this request was proportionate and prepared in collaboration with the agent and with oversight from her line manager. This is in line with HMRC’s LSS.

49. We considered the investigation’s impact on Mr and Mrs H emotionally. It is important HMRC is aware of how its investigations affect people. The Guidance says agents may want to cut an investigation short because of their clients’ anxiety or they believe no more information will emerge. The Guidance explains these may be genuine concerns but can ‘obscure a taxpayer’s dishonest desire to conceal facts’. HMRC’s duty is to balance this concern with its obligation to investigate potential fraud – client anxiety is not an absolute reason to close an investigation.

50. On several occasions the agent told HMRC how stressful Mr and Mrs H were finding the investigation. The investigator’s letter dated 13 March 2020 said they were aware of this and wanted to progress the investigation quickly. They added it was difficult to do so without the evidence they had asked for. This justification of the setbacks is accurate.

51. We do not doubt the investigation was incredibly stressful. It is unfortunate to hear Mr and Mrs H found it worrying at the time and it still affects them. But the investigation could not proceed without the requested evidence. The investigator had a responsibility to make evidence based decisions in line with the LSS. They balanced this against the impact on Mr and Mrs H and the possibility their agent was concealing facts.

52. We have spoken to HMRC about how long its investigation took. It has accepted its actions caused some delays. Firstly, the investigator was on annual leave and bereavement leave for periods of the investigation. These were small and unavoidable delays and did not substantially affect the overall length of the investigation.

53. Between March and July 2020 HMRC could not access mail the agent had posted. It said COVID 19 restrictions meant lots of its offices had closed and the agent’s letter dated 14 April was not scanned to its system. So it did not get to the investigator and the agent had to send it by email two months later after chasing a response.

54. HMRC did not tell the agent about the changes to the mail system either by phone or email. We acknowledge it was common knowledge lots of people were working from home at this time. It is reasonable to expect the agent to suspect traditional mail services were disrupted. But it would also have been reasonable for the investigator to confirm this and update the agent on HMRC’s working practices. As they did not do so it meant HMRC did not deal with the agent quickly or efficiently in line with Your Charter.

55. We acknowledge this delay happened during the first COVID-19 lockdown. These were exceptional circumstances when standard business procedures were disrupted, and the information did arrive after a short delay. We do not think this isolated example fell so far below Your Charter to call it a failing. Instead, we find it was a shortcoming and have decided to take no further action.

56. Having looked at the investigation in detail we agree HMRC took a long time to scrutinise Mr and Mrs H’s tax affairs. We understand this no doubt made the process more stressful for them. Combined with the expense of professional representation, we fully understand why they are so unhappy with HMRC’s actions.

57. But these upsetting impacts alone do not mean HMRC got things wrong. We consider it did not unfairly delay its investigation or take longer than necessary.

1. The Parliamentary and Health Service Ombudsman considers HM Revenue and Customs (HMRC) was justified in opening a Code of Practice 9 (COP9) tax fraud investigation and did not delay it or take longer than necessary. So we have decided not to uphold this complaint. We recognise this was a difficult and stressful time for Mr and Mrs H and our decision in no way intends to detract from that.