HMRC Fraud Investigations: What to Do if You Receive a Letter of Enquiry

Few pieces of post carry the weight of a letter from HM Revenue and Customs (HMRC) opening an enquiry into your tax affairs. The language is measured and the deadlines can feel generous, yet the consequences of mishandling the first few weeks are severe. Where fraud is suspected, HMRC does not always announce it in plain terms, and the difference between a routine compliance check and the opening move of a serious fraud investigation is not always obvious to the untrained eye. If you have received such a letter, what you do next and, critically, who you instruct, will shape the entire outcome.

This guide explains what an HMRC letter of enquiry actually means, how fraud investigations are structured, the deadlines that govern your response, and the practical steps you should take immediately. Our specialist ex-HMRC tax solicitors and barristers deal with these matters daily, and the single most common mistake we see is delay.

What Is an HMRC Letter of Enquiry?

An enquiry letter is HMRC’s formal notice that it intends to examine one or more aspects of your tax position. For individuals and businesses within self assessment, the power to enquire into a return arises under section 9A of the Taxes Management Act 1970, and HMRC must generally open such an enquiry within twelve months of the return being filed. Alongside that, HMRC can compel the production of documents and information under a Schedule 36 information notice (Finance Act 2008), which carries penalties for non-compliance.

Not every letter is an enquiry in the strict sense. HMRC increasingly issues “nudge” or “one to many” letters prompts sent to categories of taxpayer inviting them to check and, if necessary, correct their affairs. These are not accusations, but they are not neutral either: how you respond can determine whether HMRC escalates. The safest course is never to assume a letter is trivial. A carefully worded reply drafted with legal input can close a matter that a defensive or incomplete response would inflame. Our team regularly advises at this early stage through our HMRC tax investigations service.

When Does an Enquiry Become a Fraud Investigation?

The turning point is HMRC’s suspicion of deliberate conduct. Where HMRC believes tax has been lost through carelessness, it operates within the ordinary enquiry framework. Where it suspects dishonesty, that a taxpayer knew a return was wrong and submitted it regardless, it moves into its fraud investigation regime, run by its Fraud Investigation Service.

That regime has two principal civil tracks, each announced by a different code of practice:

• Code of Practice 8 (COP8) is used where HMRC suspects a significant loss of tax, often through complex arrangements or avoidance schemes, but does not (yet) allege fraud. A COP8 enquiry can nonetheless escalate if evidence of dishonesty emerges.
• Code of Practice 9 (COP9) is the serious one. It is HMRC’s civil investigation of suspected tax fraud, offered in place of criminal prosecution through the Contractual Disclosure Facility (CDF).

Separately, HMRC retains the option of a criminal investigation with a view to prosecution, typically reserved for the most serious cases, those involving forged documents, or professionals in a position of trust. The category of fraud alleged, whether VAT evasion, Missing Trader Intra-Community (MTIC) fraud, offshore non-disclosure or duty fraud, dictates the legal strategy from day one.

Recognising a COP9 Opening Letter

A COP9 investigation begins with an opening letter enclosing a copy of the code and offering the CDF. This is not correspondence to be forwarded to your accountant and dealt with in due course. It is a formal allegation of fraud, and it starts a strict 60-day clock.

Under the CDF, HMRC offers immunity from criminal prosecution for the tax fraud you disclose, in exchange for a complete and honest Outline Disclosure of the deliberate conduct that brought about a loss of tax. You have three broad choices, and only two now exist in practice: accept the CDF and make a disclosure, or reject it. The former “denial” route, under which a taxpayer could deny fraud while co-operating, has been withdrawn. Rejecting the offer where fraud has in fact occurred is dangerous, HMRC can then pursue its own investigation, which may turn criminal, and any rejection letter can be deployed against you later.

Because the consequences of an inaccurate or incomplete Outline Disclosure are so serious, an invalid disclosure releases HMRC from its side of the bargain, this is precisely the stage at which specialist legal representation is decisive. Our solicitors and barristers manage the entire COP9 and Contractual Disclosure Facility process, from the Outline Disclosure through to the Disclosure Report and final settlement.

Why You Should Not Rely on Your Accountant Alone

When an HMRC letter arrives, the instinct is often to call the accountant who prepared the return. That instinct is understandable but, in a fraud investigation, potentially costly. Communications with an accountant are not protected by legal professional privilege. HMRC can compel their production, and the accountant who prepared the return under scrutiny may also face a conflict of interest.

This is not a matter of opinion but of settled law. In R (Prudential plc) v Special Commissioner of Income Tax [2013] UKSC 1, the Supreme Court confirmed that legal advice privilege does not extend to tax advice given by accountants, even where that advice is legal in nature. By contrast, in R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax [2002] UKHL 21, the House of Lords held that legal professional privilege is a fundamental right that HMRC’s statutory information powers do not override. Advice from your solicitors and barristers is confidential and privileged; advice from your accountant is disclosable. The Law Society explains the principle in similar terms.

In practice, we frequently instruct a forensic accountant on your behalf, so that their analysis is produced within the umbrella of privilege and directed by your legal team. This preserves confidentiality while ensuring the numbers are prepared to the standard HMRC expects.

The Question That Decides Everything: Was the Conduct “Deliberate”?

Almost every serious enquiry turns on whether your behaviour was careless or deliberate. The distinction is not academic. It governs the level of penalty, the number of years HMRC can reassess, and whether the matter is treated as fraud at all.

The leading authority is now HMRC v Tooth [2021] UKSC 17. The Supreme Court held that a “deliberate inaccuracy” requires an intention to mislead HMRC, it is not enough that a statement was made deliberately and happened to be wrong. The Court also confirmed that a tax return must be read as a whole, so that a taxpayer who enters a figure in the wrong box but explains the position clearly elsewhere has not necessarily made a deliberate inaccuracy. Tooth also disposed of the argument that a discovery assessment can become “stale” through delay.

The time limits flowing from that distinction are stark. Under section 29 of the Taxes Management Act 1970, HMRC can ordinarily assess within four years, extended to six years for carelessness, and up to twenty years where the loss of tax was brought about deliberately. Successfully characterising conduct as careless rather than deliberate can therefore reduce both the assessable period and the penalty by a very large margin. That is the heart of what experienced tax investigation solicitors argue.

Penalties and the Value of Co-operation

Penalties for inaccuracies are governed by the behaviour-based regime in Schedule 24 to the Finance Act 2007. For deliberate onshore conduct, penalties can reach 100% of the tax lost; where an offshore element is involved, they can rise to 200%. Under COP9, the level of penalty is heavily influenced by the quality of your disclosure and co-operation, with the largest reductions available for a prompt, full and unprompted approach.

This is why strategy at the outset matters so much. A disclosure that is complete, well-evidenced and delivered within the deadlines can move a penalty from the top of the range to the bottom. Our team advises on HMRC penalties and, where a penalty or assessment is wrong in law, on challenging it by internal review or appeal to the First-tier Tribunal. Where HMRC has acted outside its powers, a judicial review of the decision may be the appropriate remedy.

Considering Voluntary Disclosure

If you know your affairs are not in order and HMRC has not yet made contact, a voluntary disclosure is almost always better than waiting to be found. Coming forward reduces penalties, demonstrates good faith, and can keep a matter civil that might otherwise turn criminal. HMRC operates various disclosure routes, and the correct one depends on the tax, the period and whether an offshore element is involved. Our solicitors advise on voluntary disclosure and HMRC campaigns, including where cryptoasset holdings are in issue.

For company directors, there is an added dimension. A tax investigation can expose the business to enforcement and the individual to personal liability. Where a company cannot meet an established liability, HMRC is the most prolific presenter of winding-up petitions in the country, and directors should understand the insolvency risks they face personally. Engaging early, including negotiating with HMRC before a petition is issued, is far more effective than reacting to a statutory demand after the fact.

What to Do the Day the Letter Arrives

The right sequence in the first days is straightforward, and each step protects the ones that follow:

1. Do not ignore it and do not reply in haste. Diarise every deadline in the letter, especially any 60-day CDF window, but take advice before responding substantively.
2. Preserve documents. Do not alter, delete or “tidy” any records. Destruction of evidence can convert a civil matter into a criminal one.
3. Instruct specialist tax lawyers before anyone else. Legal advice is privileged; accountant communications are not. This must happen first.
4. Do not contact HMRC’s investigators directly or attend an interview unadvised. What you say in an HMRC interview can be used against you, and answers given without preparation are a frequent source of avoidable damage.
5. Let your lawyers manage the disclosure and the evidence, including any witness statement and the instruction of a forensic accountant under privilege.

Where the difficulty was caused or worsened by poor professional advice, for example an adviser who filed inaccurate returns or mishandled an earlier enquiry, there may be a separate remedy in the form of a professional negligence claim against the accountant or adviser. That is a distinct matter from the tax investigation itself, but the two are often connected, and we can advise on both.

Speak to Specialist HMRC Fraud Investigation Lawyers

An HMRC fraud investigation is one of the most stressful events a taxpayer or director can face, but the outcome is rarely fixed at the start. With early, specialist intervention, matters that appear grave are frequently resolved on a civil basis, with penalties minimised and reputations protected. Our dual-qualified tax solicitors and barristers, including former HMRC counsel, assess the merits of your case at the outset and manage HMRC on your behalf from our chambers in Middle Temple.

If you have received a letter of enquiry, a COP8 or COP9 notice, or any other communication from HMRC’s Fraud Investigation Service, contact us before you respond. Call 02071830529, email taxdisputes@lexlaw.co.uk, or submit your case for assessment.