HM Revenue & Customs Special Civil Investigations (SCI)
The Civil Investigation of Fraud (CIF) procedure

SCI is HM Revenue & Customs' elite Head Office investigation unit. SCI negotiates monetary settlements in the larger and more serious tax investigations. Unlike its predecessor, Special Compliance Office, it does not handle prosecution cases. Prosecutions for tax fraud are now the responsibility of the independent Revenue & Customs Prosecutions Office (RCPO) - see below for further information. It is a very serious matter if SCI become involved and specialist advice should be taken at the earliest opportunity.

"Suspected serious fraud"?

An enquiry would be regarded by HMRC as involving "suspected serious fraud" if one or more of the following features were present:

HMRC's published criminal prosecutions policy must also be considered.

Criminal or civil?

If one or more of the above features are present, or the enquiry potentially falls within the criminal prosecutions policy, local HMRC offices are required to submit their papers to either SCI (in the largest most complex cases) or the local CIF team to review. A decision will then be made on whether to criminally prosecute or proceed on a civil basis. Prosecution cases are referred to the Revenue and Customs Prosecutions Office (RCPO). If it is decided not to prosecute, the Civil Investigation of Fraud procedure (Code of Practice 9) should be followed. If you believe that the above circumstances may apply, we recommend that you seek specialist advice immediately.

What is the Civil Investigation of Fraud (CIF) procedure?

This is a formal method of opening a major investigation into suspected serious fraud under Code of Practice 9. It replaced what was known as the "Hansard procedure" in September 2005. If this procedure is used by HMRC in an enquiry, the Civil Investigation of Fraud statement will be read to the client at a meeting. This statement effectively gives the client immunity from prosecution for tax fraud in relation to those offences which are the subject of the enquiries. HMRC said in July 2006 that "the CIF procedure is an important weapon in HMRC’s armoury for tackling fraud and supporting our programme to improve compliance." We recommend that you seek specialist advice if the Code of Practice 9 is issued.

What are CIF teams and where are they based?

CIF teams were formed in July 2006 to handle the vast majority of HMRC enquiries under the Civil Investigation of Fraud procedure. They are staffed by very experienced investigators, many of whom were previously part of SCO or SCI. Local compliance CIF teams will be operating out of London, Nottingham, Wolverhampton, Bristol, Stockport, Southampton, Leeds, Belfast, Cardiff, Glasgow and Edinburgh. HMRC National Compliance will also have CIF capability within the Labour Providers Unit and in the Special Trade Investigation Unit.

What does the "Civil Investigation of Fraud statement" say?

The practice of HM Revenue & Customs (HMRC) in cases of suspected serious tax fraud is as follows.

Unlike under some previous versions of the Hansard extract, which the CIF statement has replaced, it is now explicitly clear that a taxpayer will not be prosecuted for tax fraud, unless "materially false statements are made or materially false documents are provided with intent to deceive in the course of a civil investigation".

Is it correct that SCI caution people at serious fraud meetings and tape the meeting?

No. The Civil Investigation of Fraud procedure does not involve a caution, and meetings are no longer taped in civil enquiries. The forerunner of SCI, Special Compliance Office, was cautioning taxpayers suspected of serious fraud and taping meetings from November 2003, until this was dropped for all serious fraud civil enquiries started on or after 1 September 2005.

Should a solicitor attend meetings conducted under the Civil Investigation of Fraud procedure?

In our view, this is not necessary following the introduction of the new CIF procedure with effect from 1 September 2005.

What happens at a meeting under the Civil Investigation of Fraud procedure?

The CIF statement above will be read out and the person under investigation will be asked to confirm that they understand it. The investigating officer will then ask 5 short, specific questions about whether or not the Tax Returns and business accounts are correct, and whether the person under investigation is prepared to co-operate with the HMRC enquiries. Similar questions on VAT may also be asked if VAT is an issue in the enquiries. More detailed information on this is given in Code of Practice 9.

It is very important that these questions should be answered correctly. Usually they can be answered with a simple "Yes" or "No". A disclosure of all tax irregularities, at least in outline, will then be requested. The next stage of the meeting will consist of factual questions about the business and private financial affairs, unless advice is given to terminate the meeting after the 5 questions. If detailed questions are answered at the meeting, it is also vital that they are answered correctly. Getting it wrong at this stage can seriously damage the position later in the investigation. Where in doubt, we suggest that you seek specialist advice.

Would you advise that a CIF meeting be terminated after the initial 5 questions?

Generally speaking, no. Providing that an experienced adviser is present, who has properly briefed the client beforehand, and a disclosure of tax irregularities is being made to the best of the client's ability, there should be no reason to fear answering the sort of questions which will be asked. Willingness to answer such questions establishes in HMRC's eyes that the person under investigation is prepared to co-operate. Under the current penalty regime, this will earn a reduction in the financial penalties when the investigation is settled. In some circumstances, however, the adviser may recommend that the meeting either does not take place or is terminated after the opening questions. Where in doubt, we suggest that you seek specialist advice.

Will HMRC tell me why they suspect "serious fraud"?

For many years, HMRC inspectors played their cards very close to the chest when serious fraud was suspected and no indication at all would be given regarding the reasons for their suspicion. Under the new CIF procedure, there are signs that this is changing and it is now not uncommon for some indication to be given for at least part of the reasons why the CIF procedure is being used.

What is the difference between HMRC's Codes of Practice (8 & 9)?

Code of Practice 8 is used by SCI in major enquiries where serious fraud is not suspected. Typically, these are cases where SCI suspect there has been a large loss of tax to the Crown, involving some sort of tax avoidance, perhaps bordering on evasion. Many of these cases have some sort of offshore connection. Code of Practice 9 is used in "serious fraud" cases where a prosecution has been ruled out. Please contact David Cunliffe if you need further information.

The tax inspector has requested that a disclosure report should be prepared . Is this the correct way to proceed?

For many years this has been standard practice in Code of Practice 9 investigations, and it may also be suggested (or advisable) in Code of Practice 8 investigations, or even in major enquiries by local Tax Offices. If neither of these Codes of Practice has been issued, seek specialist advice immediately as a prosecution may be under consideration. Evidence contained in a report could be used against the person under investigation in such a prosecution if one of the above mentioned Codes of Practice has not been issued. If the investigation is being conducted by a local tax inspector, great care must also be taken in using a disclosure report if the tax irregularities are large or serious. Disclosure reports sent to local Tax Offices in such circumstances have been used as evidence in a subsequent prosecution. Once again, if in doubt, we recommend that you seek specialist advice.

What will happen if I refuse to co-operate with an investigation under CIF?

HMRC has given every indication that anyone offered protection from prosecution under CIF who then refuses to co-operate with the enquiries will be treated harshly. Therewill be a vigorous investigation of the suspected tax irregularities and this is likely to include approaches to all relevant third parties (eg banks, customers, suppliers, etc), pursuit of estimated additional tax liabilities, refusal to accept postponement of estimated tax liabilities, forcing bankruptcy or liquidation, seeking tax liabilities from directors of companies personally, and more. Poor co-operation will also result in higher penalties being charged at the end of the investigation. Generally speaking, co-operation is the best policy, providing that you seek specialist advice on the best way to go about this.

What is the policy of HM Revenue & Customs on prosecutions?

Since April 2005, the function of prosecuting HMRC’s criminal casework has been wholly undertaken by the Revenue and Customs Prosecutions Office (RCPO), which is an independent prosecuting authority reporting to the Attorney General. RCPO determines which of the cases referred to it by HMRC proceed to prosecution. Although HMRC is no longer a prosecuting authority, it still investigates both under civil and criminal codes any offences and suspected offences it discovers in several areas, including tax fraud.

It is HMRC's policy to deal with fraud by use of the cost effective Civil Investigation of Fraud (CIF) procedures, wherever appropriate. Criminal Investigation will be reserved for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate.

However, HMRC reserves complete discretion to conduct a criminal investigation in any case and to carry out these investigations across a range of offences and in all the areas for which the Commissioners of HMRC have responsibility. Examples of the kind of circumstances in which HMRC will generally consider commencing a criminal, rather than civil investigations are:

What powers do HM Revenue & Customs officials have to obtain information from third parties?

The Inland Revenue and Customs & Excise had extensive powers to obtain information from third parties. Following the merger of the two departments in 2005, each department retained its own information powers. However, those powers are under review and when they are revised it is unlikely that they will be any less extensive than those of the departments pre-merger.

Can HMRC information powers be used overseas?

Not at present. However, there are provisions facilitating the exchange of information with overseas tax authorities in most double taxation agreements and it is known that a large volume of information passes both ways every year. HMRC has also used its extensive information powers against banks in the UK to obtain information about funds deposited or on trust offshore.

Can information be obtained by HMRC from overseas?

Yes. Substantial amounts of information regularly pass between the UK and overseas tax authorities, particularly those in Europe and North America. During the year ended 31 March 2002, for example, over 800,000 items of information (a quadrupling in only five years) were received from other countries in this way. Often such information is exchanged spontaneously but specific requests can and are made.

In recent years, it is believed that substantial amounts of information have been received from, for example, the Isle of Man and the Channel Islands. HMRC also uses its information powers to obtain details of offshore assets held by UK resident individuals from UK based banks. For example, in May 2006 Barclays Bank lost an appeal to the Special Commissioners against an HMRC information notice requiring it to supply details of customers' offshore bank accounts to HMRC. Given the amount of information obtained by that notice, it is thought inevitable that other banks will receive similar notices in due course.

Information obtained from overseas tax authorities plays an important part in some major investigations and leads to substantial additional tax liabilities.

In a fraud investigation into one of my clients, the inspectors are asking detailed questions about the methods of working in my accountancy practice. Should I be concerned?

Not necessarily but it would obviously be sensible to try and ascertain why. If they are simply trying to establish links between the client’s books and records and the figures in the accounts or Tax Return, there may be nothing to be concerned about. However, they may, rightly or wrongly, have more general concerns about the way the practice operates. There could be a danger that HMRC may start a broader investigation into both your practice and investigate more of your clients. One of SCI’s duties has always been to “police” the professions in connection with tax irregularities. We strongly recommend that you take specialist advice, to protect yourself and your clients, if you are not happy about the approach being taken.

Can the tax authorities search my offices?

Only if they have obtained a search warrant. This should only happen in a serious fraud case being worked on prosecution lines. Search operations must be authorised at the highest level of HM Revenue & Customs, and warrants can only be issued by the appropriate judicial authority (a Circuit judge in England and Wales, a sheriff in Scotland, or a county court judge in Northern Ireland). If tax officials arrive at your offices (or home) with a valid search warrant, they have a legal right to enter the premises, and seize and remove anything which may be needed as evidence in criminal proceedings, including all of your working papers for the clients under investigation. They can also search people on the premises, but searches must be conducted by persons of the same sex. They must not be obstructed in their duties. It is strongly recommended that the advice of a lawyer experienced in this field is immediately sought in such circumstances. Contact us if you would like us to recommend such a lawyer.

Is tax evasion a reportable offence under the Money Laundering Regulations?

Yes. Solicitors, accountants, tax advisers and other professional advisers will normally be obliged to report suspected tax evasion to the Serious Organised Crime Agency (SOCA) under the money laundering regulations (this was formerly dealt with by the National Criminal Intelligence Service). More information on this may be found on the ICAEW's website and AccountingWeb. We regret that we are unable to advise on or discuss this matter.