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I am sorry to hear about this. The notice should include details of the charge against you. Review it and check if you agree with all the details. You should submit a plea of guilty or not guilty within 21 days from the date of the notice. If you decide to plead guilty, you can choose to go to court or not.
If you do not reply, your case will be heard without you and this could mean you have to pay a higher fine.
Yes, it is possible however, If Transport for London believe that you have committed a criminal offence, they may decide to prosecute you.
The best thing to do could be to instruct a solicitor to help you decide how to plead.
And if needs to be, defend you.
We can't do it on this website I am afraid.
I wish I could but the site rules prevent me from doing so. As you are based in London, just google Fare Evasion Lawyers London, and you will see a number of firms who specialise in it.
It will show up as a criminal record, if you are found guilty, or if you plead guilty.
It is interesting, as the relevant Bylaws state (23): http://content.tfl.gov.uk/railway-byelaws.pdf that if you breach the Byalws then you commit an offence.
I am not entirely convinced if this would not show on the enhanced DBS...
I think it is worth trying but as they issued the notice, you need to ensure you do not miss any deadline, in case they are not interested in negotiating.