What is a Code of Practice 8 (COP8) tax investigation?
Where HMRC suspects a large amount of tax is at risk then it can issue a COP8 notice of investigation. COP 8 investigations are managed by the Fraud Investigation Service (FIS) and are among the most serious civil tax investigations. If you’ve received a COP8 letter, immediate specialist tax advice is essential to protect yourself as there is a process to follow.
What happens in a COP8 investigation?
- COP8 investigations are civil in nature, even if they concern potential tax fraud (i.e. deliberate / dishonest actions)
- However, if HMRC suspect serious tax fraud during the course of their investigation they could decide to deal with the matter under Code of Practice (COP9) instead or, in some cases, seek to investigate criminally with a view to prosecution
- HMRC commence these with a view to financial recovery, i.e. tax, interest & penalties
- It is highly important that care is taken with a COP 8 investigation as, unlike a COP9 case, there is no guaranteed protection from a criminal investigation at any point
- A Code of Practice 8 investigation is just that, an investigation by HMRC, not a disclosure process
- It is not mandatory to meet HMRC, but it is sometimes helpful as it provides you an opportunity to be transparent and co-operative, and in return you learn about the risk(s) HMRC is pursuing
Why Did I Receive A COP8 Letter From HMRC?
What Are The Key Risks In A COP 8 Investigation?
HMRC’s FIS investigators may contact third parties (e.g. your banks, customers and suppliers) to collect information / records if they feel you are not fully cooperating with them. This can lead to:
- Reputational damage for you and your business
- More aggressive information notices / requests, and scepticism
- HMRC escalating the matter into a criminal tax investigation
Remember, unlike a COP9 case, a COP8 investigation does not protect you from a criminal investigation and potential prosecution at any stage. This is why engaging with tax investigation specialists early is critical. Else the risks are significant.
What Happens In A COP 8 Investigation?
HMRC’s Fraud Investigation Service will request:
- Access to your full business records including financial / banking records
- This is likely to include your personal financial records
- Details of any tax planning arrangements implemented, and therefore any tax advice taken in relation to this
- Explanations for unusual transactions, tax treatment applied or missing records
They will often request a face-to-face meeting too, and may even seek to visit your home or office. These meetings should never be attended without qualified and experienced representation as the risks are great. HMRC may not have confirmed which tax risk(s) they are concerned about, so you should find out what that is and why it is relevant and material.
Do HMRC Carry Out Third-Party Enquiries too?
HMRC will compare and test the records obtained from you and third parties against, tax returns filed already and other records they hold. They will be looking to substantiate under-declared taxes. That’s their core approach in a Code of Practice 8 investigation. It is not a disclosure process.
HMRC will be investigating from the outset. This means that HMRC will ask for information and records it requires from you, to develop their tax risk assessment activities. They will request this information formally if it’s not forthcoming, which carries penalties for non-compliance too.
HMRC regularly conduct third party enquiries in all types of enquiries, compliance checks and investigations. This is so that they can test the information they hold and/or have received from you as the first-party.
Again, they will approach your banks for financial records concerning personal, savings and business accounts; where you do not provide them or perhaps you provide a signed mandate to authorise them. Even worse, HMRC write to your customers/clients and suppliers too, to request business records confirming your business relationships, identifying what and how much was sold and bought etc i.e. checking the volume of business done against the records they already hold.
The investigation may uncover non-deliberate and non-serious errors too, for example, careless mistakes and/or those arising despite you taking reasonable care with your tax affairs. These may give rise to additional taxes and so need to be included in the investigation.
Before issuing the COP8 notice of investigation the information held by HMRC will have been reviewed by the FIS officers. They will suspect there has been a serious underpayment of tax and usually several years of errors are concerned.
The Difference Between COP8 and COP9 tax investigations
| Feature | COP8 | COP9 |
| Triggered by | Suspected tax avoidance or complex arrangements, and potentially tax fraud | Suspected serious tax fraud |
| Criminal investigation immunity | Never guaranteed | If acceptable outline disclosure submitted, and detailed disclosure report thereafter made |
| Requires formal admission? | No | Yes (deliberate actions admission) |
| Outcome | Civil contract settlement or sometimes conversion to COP9 | Civil contract settlement or sometimes conversion to criminal investigation |
Understanding these differences is key. COP 8 investigations are generally complex and HMRC’s treatment of the matters at hand can be escalated if mishandled due to a lack of case management experience. Tax Investigation specialists with significant HMRC FIS experience are recommended.
Real-World COP8 Examples
Case 1: Taxpayer with Offshore Trusts
HMRC opened a COP8 investigation into a business owner’s offshore assets and tax arrangements. Pure Tax managed all correspondence and so avoided a criminal investigation referral by demonstrating the origin and purpose of the structures. We demonstrated that one of the trusts was set-up whilst the taxpayer was non-UK resident and non-UK domiciled, and that the other trust had been established by his father who had since deceased.
However, UK situs assets had caused UK Inheritance Tax exposure, and UK sourced income was also reportable here irrespectively. The individual also had to pay personal taxes since he enjoyed distributions from underlying non-UK companies whilst he had become UK deemed domiciled. He reached a favourable financial settlement with HMRC and avoided an escalation due to Pure Tax’s experience and guidance; demonstrating instances where he had taken reasonable care e.g. seeking tax advice, and had also mistakenly followed out-dated advice.
Case 2: Use of Companies Overseas
During a routine compliance check, on learning about a taxpayer’s non-UK bank accounts and non-UK companies (and their bank accounts), he was investigated under COP8 given the multi jurisdictional complexities. He was found to have been running several offshore companies, serving those other territories, but he had failed to take UK tax advice. He could not demonstrate that Central Management and Control of those companies lay with someone else or that his strategic / high-level management took place outside of the UK.
Those companies were treated as UK resident for tax purposes, and the individual also had to pay personal taxes since he enjoyed distributions and interest-free loans from the non-UK companies whilst being UK resident and domiciled. He reached a favourable financial settlement with HMRC and avoided an escalation due to Pure Tax’s experience and guidance; demonstrating the underlying arguments were technical and that on balance in some instances he was misled by other advisers.
Case 3: Use of Poor Tax Planning for Property Portfolios
A group of siblings were targeted for use of a tax planning scheme several years ago. They were investigated under COP8 given the size of the investment properties portfolio and value, and because they used an aggressive arrangement where their joint rental income activity was changed overnight into a Limited Liability Partnership (LLP) including a new company (which they owned and managed). The majority of the income/profits were then allocated to the company partner. This was similar to tax planning offered by Less Tax 4 Landlords.
HMRC asked for the underlying tax advice but were provided by a record of the actions to be taken only. HMRC was clear that existing anti-avoidance rules ensured this type of planning would not work to create tax efficiencies. They reached a favourable financial settlement with HMRC and avoided penalties as Pure Tax identified email chains and text messages comprising the (incorrect) advice provided by the regular agent. Also, while there were personal taxes to pay, we secured Stamp Duty Land Tax (SDLT) savings by encouraging HMRC to use their discretion in the circumstances.
Case 4: Use of Poor Tax Planning for Property Portfolios
A couple were targeted for use of a tax planning scheme a few years ago. They were investigated under COP8 given the properties portfolio’s value, and because they used an aggressive arrangement where their passive joint rental income activity was systematically changed to appear to be an active business partnership, which was then incorporated. The profits would then be chargeable to the lower Corporation Tax rate, Finance Costs would be fully relieved, and the properties’ base costs would be uplifted at market value. This was similar to tax planning offered by Property 118.
HMRC asked for the underlying tax advice and found that it was generic (not bespoke to the couple) and as such it incorrectly claimed that CGT incorporation relief and SDLT relief was available on the property transfers. HMRC argued that this type of planning would not work for the couple since they were not actively running their business; they were full-time dentists. They reached a favourable financial settlement with HMRC and avoided penalties as Pure Tax clearly identified the (incorrect) advice. We saved the CGT and SDLT potentially due by encouraging HMRC to accept that the planning had not been implemented as envisaged and so should be ignored in the circumstances.
What Should I Do If I Have Received a COP8 Letter From HMRC?
- Do not ignore it – a Code of Practice 8 notice of investigation is serious
- Do not contact HMRC directly without an independent, tax investigation specialist’s advice
- Seek professional advice from an experienced, tax investigation specialist immediately to ensure the risks are mitigated
Delays, miscommunication, or over-disclosure can lead to endless additional questions and digging from HMRC. This results in more costs, penalties for mistakes, reputational risks, or an escalation to a criminal tax investigation.
Remember, HMRC has access to a wide range of data sources and can cross-reference your tax returns with those and other financial information. If HMRC believe that you have under-paid significant tax and want to make you a scapegoat, they may bypass the civil COP8 process and instead start a criminal tax investigation with a view to prosecution.
Why Choose Pure Tax Investigations?
We are Ex-HMRC tax disputes expert sand help clients:
- Avoid escalations i.e. tax fraud allegations and criminal investigations / prosecutions
- Manage HMRC through co-operation, focusing on materiality and supporting evidence
- Resolve complex tax disputes efficiently with HMRC, reaching commercial outcomes
- Ensure contemporaneous records/evidence is identified and collated, to support the arguments and representations we make, and calculate the correct amount of tax to be paid
- Resolve your tax investigation efficiently, because tax investigation specialists understand HMRC processes and the approaches taken by their officers
Our founder, Amit Puri is an ex-HMRC senior Tax Inspector, who has considerable FIS / COP8 investigations experience from there, and has been building up on that to date.
A Code of Practice 8 notice is one of HMRC’s most serious civil investigations. Mishandling the process can lead to criminal charges, larger financial penalties, and reputational damage.
Importantly, we deliver that all-important trusted ‘buffer’ between our client and HMRC during their in-depth and intrusive investigations and in all voluntary disclosures too.
Get in touch to learn more about how Amit and the Tax Investigations and Disputes team have successfully guided clients through the WDF disclosure, compliance checks, COP9 / COP 9 or COP8 investigation processes.
Learn more about how we have helped our clients through their kind feedback ere.
See our article COP9 and COP8 Tax Investigations Statistics,
HOW CAN PURE TAX INVESTIGATIONS HELP?
At Pure Tax our Tax Investigation & Disclosure specialists are industry recognised and have dealt with hundreds of contentious situations with HMRC over the years. We are adept at managing interactions with the tax authorities to ensure that the investigation and disclosure processes run smoothly and that your interests are best protected.
