A recent case involving a foreign national illustrates how difficult it usually is to overturn a Sch 36 notice.
Schedule 36 to FA 2008 gives HMRC powers to (among other things) obtain information and documents if they are ‘reasonably required’ for the purpose of ‘checking the tax position’ of someone.
In the anonymised decision of Foreign National v HMRC [2023] UKFTT 475 (TC) (reported in Tax Journal, 23 June 2023, a foreign national (FN) who was neither resident nor domiciled in the UK sought before the First-tier Tribunal (FTT) to challenge the validity of a notice issued under Sch 36. The outcome reminds us of how difficult it usually is, in practice, to overturn such a notice.
FN had since 2009 owned residential properties in the UK, some of them jointly with family members. When in January 2018 an application was made under the ‘non-resident landlord’ scheme for permission to receive rent without deduction of tax, HMRC responded by requiring tax returns to be made for 2014/15, 2015/16 and 2016/17. One infers that this may have been because HMRC were aware of property disposals that had occurred in May 2014 and May 2015.
The returns did not disclose the 2014 gain (on the basis that non-residents were not liable to tax on such gains until the rules changed from 6 April 2015) but also failed to disclose the 2015 disposal (albeit that since FN was liable to UK CGT only on any increase in value from April 2015, it was vanishingly unlikely that there would be any gain to report). HMRC also took exception to the fact that FN had not declared his UK interest income – despite the fact that, as HMRC agreed, in the hands of a non-resident such as FN this was ‘disregarded income’ which could never give rise to a charge to tax.
HMRC purported to be concerned that FN might be carrying out a trade of property dealing in the UK. This was apparently on the basis that, although the property sold in 2014 had been owned for five years, the property sold in 2015 had been refurbished and sold at a profit within seven months of purchase. There’s an interesting but little-known technical point here: most double taxation treaties have the effect that a non-resident carrying on a trade in the UK is liable to UK tax only if there is a ‘permanent establishment’ in the UK. However, FN was resident in a country with which the UK has no double tax treaty so – under UK domestic law unmodified by the terms of any treaty – would be liable to UK tax on any trade carried on in the UK, even if there was no ‘permanent establishment’. Moving on…
In pursuance of its enquiries, HMRC issued a Sch 36 notice in July 2019 demanding to see, among other things, a schedule of all UK bank accounts and credit cards operated by FN during 2015/16 and copies of the relevant statements, chequebooks and paying-in book counterfoils. The FTT noted that HMRC accepted that there was ‘no suggestion that [FN] has UK income or gains other than from UK real estate’ and considered carefully whether this information was ‘reasonably required’ to check FN’s tax position. It concluded, perhaps surprisingly, that it was, noting that ‘because of the inconsistencies in previous accounts given by the agent and FN, we accept that [the HMRC officer] has cause to approach FN’s statements with a degree of circumspection’.
An unusual feature of the case is the presence of a ‘jeopardy amendment’ to FN’s tax return. HMRC is permitted to make such an amendment to a self-assessment return in the course of any enquiry (and so bring additional tax into charge) if they have reason to believe that unless the self-assessment is immediately amended, there is likely to be a loss of tax. It’s seldom used and is normally reserved for cases where there is evidence that a taxpayer intends to do a moonlight flit, declare bankruptcy, dispose of significant assets or otherwise take steps to pre-empt collection of any tax which may be found to be due on closure of the enquiry. All the more curious, then, that having issued the jeopardy amendment, HMRC subsequently agreed to postpone the tax payable under it – which rather defeats the object of making the amendment.
Such an amendment may be made only if an officer of HMRC ‘forms the opinion’ that the self-assessment is insufficient. There was a hint in the case of an argument on the part of FN that if HMRC had already formed its opinion, it could not logically be the case that further information was required: information-gathering should come before making assessments (or amendments), not after. The FTT was unpersuaded.
A recent case involving a foreign national illustrates how difficult it usually is to overturn a Sch 36 notice.
Schedule 36 to FA 2008 gives HMRC powers to (among other things) obtain information and documents if they are ‘reasonably required’ for the purpose of ‘checking the tax position’ of someone.
In the anonymised decision of Foreign National v HMRC [2023] UKFTT 475 (TC) (reported in Tax Journal, 23 June 2023, a foreign national (FN) who was neither resident nor domiciled in the UK sought before the First-tier Tribunal (FTT) to challenge the validity of a notice issued under Sch 36. The outcome reminds us of how difficult it usually is, in practice, to overturn such a notice.
FN had since 2009 owned residential properties in the UK, some of them jointly with family members. When in January 2018 an application was made under the ‘non-resident landlord’ scheme for permission to receive rent without deduction of tax, HMRC responded by requiring tax returns to be made for 2014/15, 2015/16 and 2016/17. One infers that this may have been because HMRC were aware of property disposals that had occurred in May 2014 and May 2015.
The returns did not disclose the 2014 gain (on the basis that non-residents were not liable to tax on such gains until the rules changed from 6 April 2015) but also failed to disclose the 2015 disposal (albeit that since FN was liable to UK CGT only on any increase in value from April 2015, it was vanishingly unlikely that there would be any gain to report). HMRC also took exception to the fact that FN had not declared his UK interest income – despite the fact that, as HMRC agreed, in the hands of a non-resident such as FN this was ‘disregarded income’ which could never give rise to a charge to tax.
HMRC purported to be concerned that FN might be carrying out a trade of property dealing in the UK. This was apparently on the basis that, although the property sold in 2014 had been owned for five years, the property sold in 2015 had been refurbished and sold at a profit within seven months of purchase. There’s an interesting but little-known technical point here: most double taxation treaties have the effect that a non-resident carrying on a trade in the UK is liable to UK tax only if there is a ‘permanent establishment’ in the UK. However, FN was resident in a country with which the UK has no double tax treaty so – under UK domestic law unmodified by the terms of any treaty – would be liable to UK tax on any trade carried on in the UK, even if there was no ‘permanent establishment’. Moving on…
In pursuance of its enquiries, HMRC issued a Sch 36 notice in July 2019 demanding to see, among other things, a schedule of all UK bank accounts and credit cards operated by FN during 2015/16 and copies of the relevant statements, chequebooks and paying-in book counterfoils. The FTT noted that HMRC accepted that there was ‘no suggestion that [FN] has UK income or gains other than from UK real estate’ and considered carefully whether this information was ‘reasonably required’ to check FN’s tax position. It concluded, perhaps surprisingly, that it was, noting that ‘because of the inconsistencies in previous accounts given by the agent and FN, we accept that [the HMRC officer] has cause to approach FN’s statements with a degree of circumspection’.
An unusual feature of the case is the presence of a ‘jeopardy amendment’ to FN’s tax return. HMRC is permitted to make such an amendment to a self-assessment return in the course of any enquiry (and so bring additional tax into charge) if they have reason to believe that unless the self-assessment is immediately amended, there is likely to be a loss of tax. It’s seldom used and is normally reserved for cases where there is evidence that a taxpayer intends to do a moonlight flit, declare bankruptcy, dispose of significant assets or otherwise take steps to pre-empt collection of any tax which may be found to be due on closure of the enquiry. All the more curious, then, that having issued the jeopardy amendment, HMRC subsequently agreed to postpone the tax payable under it – which rather defeats the object of making the amendment.
Such an amendment may be made only if an officer of HMRC ‘forms the opinion’ that the self-assessment is insufficient. There was a hint in the case of an argument on the part of FN that if HMRC had already formed its opinion, it could not logically be the case that further information was required: information-gathering should come before making assessments (or amendments), not after. The FTT was unpersuaded.
