HMRC is now writing en masse to overseas companies it has identified as appearing to own UK commercial property they do not appear to have disclosed any taxable rental income for.

The letters begin:

Disclosure for non-resident landlord liabilities

UK property of [company name]

Our records show that [company name] owns non-residential property in the UK. This means it may need to disclose rental income.

The letters then offer the companies a choice:

• complete an enclosed form – which HMRC calls a “certificate of tax position” – confirming that the company has to bring its tax affairs up to date and the company will use “the disclosure facility detailed in the letter”

OR

• complete the aforementioned form explaining why the company does not need to make a disclosure.

HMRC demands a response within 40 days of the date on the letter.

HMRC has sent similar certificates of tax position with other nudge/one-to-many letters and the certificates have already attracted some controversy. On the one hand, they lack legal weight in as much as there are no direct penalties or automatic sanctions for not completing and returning them. On the other hand, any completed and returned statement that HMRC might consider to be a false declaration could make it easier for HMRC to bring a successful criminal prosecution. Specialist advisers have generally advised our clients to engage with HMRC in such circumstances but to do so through us on their behalf and without completing the certificates.

Fraud process

What is new here is that “the disclosure facility detailed in the letter” is none other than HMRC’s civil investigation of fraud process – Code of Practice 9 (COP 9)/the Contractual Disclosure Facility (CDF). Rather than a more benign regime like the Worldwide Disclosure Facility, COP 9/CDF requires:

• any application to use it to first be automatically routed through HMRC Fraud Investigation Service’s criminal investigations team to check whether they would prefer to embark on a criminal investigation with a view to prosecution and possible imprisonment
• assuming acceptance into COP 9/CDF, an upfront admission in the initial outline disclosure of deliberate wrongdoing
• the parties concerned to be interviewed by HMRC without the protection of Police and Criminal Evidence Act 1984 (PACE) procedures
• an understanding that the guarantee of non-prosecution can be taken away at any stage if HMRC feels there is insufficient cooperation or a lack of full disclosure.

Somewhat bizarrely, although HMRC is writing to the companies and demanding that “the company will declare all of its outstanding UK tax using the disclosure facility detailed in the letter”, companies cannot actually use COP 9/CDF as it can only be entered into by human beings with their own deliberate wrongdoing to admit to. So, HMRC is demanding without actually making it clear that the directors of the overseas companies personally admit tax fraud with all the personal peril that may put them in.

Investigation gateway

Under COP 9/CDF, since HMRC is actually putting individuals through the process, rather than to any particular company, HMRC can use the process as a gateway to investigate any other companies that person might have been a director of or exercised any other form of control over.

Inevitably, most directors managing and controlling overseas companies will be overseas themselves to prevent the companies from being tax resident in the UK. Imagine the situation, therefore, for professional directors working for overseas service providers who might be a director for hundreds of other companies with countless different ownership structures. How many will be willing to submit themselves to a tax enforcement process in the UK or would be in a position to offer full cooperation if that might mean giving HMRC a gateway to investigate companies for other clients outside of HMRC’s initial concerns? Will overseas authorities fully assist HMRC in working COP 9/CDF against people in their jurisdictions?

Closing the tax gap

HMRC has to be applauded for its increasing use of the data at its disposal to continue to close the tax gap. It is also commendable that HMRC is seeking to make greater and more effective use of COP 9/CDF – underpinned, as it is, by the threat of criminal prosecution where cooperation isn’t given. However, in going after overseas companies with the demand that their overseas-based directors must make an upfront admission of fraud and expose other companies owned by other people to investigation it is surely making its own task unnecessarily difficult.

Of course, in practice, there are lots of reasons why HMRC’s suspicions are often unfounded or else any underpayment of tax might not have been deliberate. Every company’s circumstances will be different and the appropriate response to one of these latest letters will tend to vary beyond the simple binary choice of response demanded by HMRC. It is possible to fully engage with HMRC without surrendering to all of its demands where that might not be appropriate. The crucial thing for any company receiving one of these letters – and before making a response of any kind to HMRC – is to seek urgent advice from a UK tax investigations specialist.