Tax returns: Ana Wisdell considers an HMRC investigation of a UK resident with a Swiss bank account

My client is a non-UK domicile and has been a resident and ordinarily resident in the UK for five years, while completing and submitting his tax returns claiming the remittance basis of taxation. His family have a significant international business empire, of which he is a shareholder. These holdings were settled into an offshore trust before coming to the UK. Also, a substantial capital appointment was made from the foundation settled by his grandfather, the monies being placed in a bank account with HSBC, Switzerland. The interest on the capital was accumulated in a separate bank account and capitalised each April up until 2008; since then the interest has been accruing in a segregated account.

My client received a letter from the special investigations team of HMRC under code of practice 9 (COP 9), advising him that they have reason to believe that his tax returns may be incorrect and setting out the terms of the investigation. A COP 9 investigation is a civil investigation of tax fraud and there is a commitment not to prosecute where the client makes a complete and full disclosure and cooperates.

HMRC received information relating to the HSBC account following the release of confidential data by the whistleblower. Since then, under the exchange of information clause of the double taxation treaty, it has obtained detailed information from the Swiss authorities. In addition, HMRC has obtained information relating to a number of foreign companies and has information relating to a number of further accounts, with significant balances that my client either holds or controls.

HMRC simply has to have reason to believe that a client's tax returns may be incomplete or incorrect to commence an investigation. It is not obliged or required to disclose the information it holds; it has powers to raise assessments for a period of up to 20 years for the purposes of making good tax lost. On appeal and before the tribunal HMRC must disclose its information and must satisfy the tribunal that the assessments raised are reasonable based on the information in its possession.

During the period of the investigation, HMRC can use its powers to request further information and documents. However, it cannot use the investigation as a means of obtaining information and documents to support or prove its suspicions where it did not previously have sufficient evidence '“ it cannot use a tax investigation to go on a 'fishing expedition' for evidence.

The solution

My advice in summary is that:

• we write to HMRC, acknowledge the COP 9 letter and ask for six weeks to review the matter with the client;
• we meet with the client and undertake a review of his affairs to ensure that all is correct, in particular that there has been no failure of implementation either careless or innocent;
• where we are confident that there has been no default, we meet with HMRC, without the client, where we discuss the substance of the COP 9 and HMRC's concerns. HMRC is generally forthcoming and indicative of its general concerns and the generic information it holds;
• following a further meeting with the client, we link what we believe to be HMRC's concerns with his personal affairs and look to find answers and explanations; this may well result in the disclosure of information that goes beyond what is statutorily required by the tax return, but is prudent in dispelling and satisfying HMRC's concerns; and
• we seek a further meeting where we put our findings and explanations to HMRC and hopefully bring the COP 9 to a close without further action.

In the event that an under-declaration was found during our review, it is most likely that the client would have to submit himself to the COP 9 process. At the end of the initial interview, HMRC could still decide not to proceed with a report in the event of a single, minor error; in such circumstances the investigation is dealt with at district level. It is only in the event of significant default, or where it is apparent that there is a lack of care with implementation and other aspects of his personal affairs, that HMRC will proceed under the COP 9 process.

It is assumed that both during our reviews and the COP 9 interview nothing came to light that suggested the client may have been in a more serious position.