HMRC is consulting on amending its civil information powers. The proposals broadly seek to give HMRC more power when requesting information from third parties. HMRC wants to streamline the existing process by removing the need for approval from the tribunal or taxpayer. The advent of the common reporting standard, the automatic exchange of information between tax authorities around the world, is cited as one of the drivers for change. HMRC is taking the opportunity to propose increasing the daily penalties for non-compliance with notices and extending powers to enable it to obtain information for debt collection too.
HMRC already has wide-ranging powers to obtain information and documents under FA 2008 Sch 36. In July 2018 HMRC opened a consultation on amending these information powers (see bit.ly/2KNzo5B). The consultation is open until 2 October 2018.
HMRC does not use Sch 36 for criminal investigations with a view to prosecution. It has other powers for such investigations and can issue unexplained wealth orders (UWOs) under the Criminal Finances Act 2017.
References to ‘para’ or ‘Part’ in the text below are references to paragraphs or parts, respectively, of Sch 36.
Historically, HMRC had more limited information at its disposal and this was mainly domestic. Today, HMRC has enormous amounts of information at its finger tips and powerful systems to analyse it in order to identify discrepancies for investigation. This abundance of information informs HMRC where to focus its efforts.
Often, this will result in HMRC opening self-assessment enquiries. Alternatively, HMRC will open investigations under codes of practice (COP) 8 or 9. After an enquiry is opened, HMRC usually issues initial informal information requests to taxpayers (or very rarely, third parties). Failure to comply with an informal request for information and documents or ceasing co-operation during an investigation will usually result in formal Sch 36 notices. The legislation sets no deadline for complying with notices. HMRC sets the deadlines on a case specific basis. HMRC can arrive with a notice to obtain documents with no warning.
HMRC can issue notices to taxpayers or third parties such as banks, customers and suppliers. HMRC’s Sch 36 powers are limited to ‘checking the taxpayer’s tax position’ across all taxes and penalties. Beyond the requirement for information and documents to be ‘reasonably required’ for this purpose, there are other clear boundaries set out within Sch 36:
Case law confirms that information notices should be expressed in clear terms so that it is possible to tell whether the recipient complies with them (R D Utilities Ltd v HMRC [2014] UKFTT 303 (TC) and Couldwell Concrete Flooring Ltd v HMRC [2015] UKFTT 136 (TC)). Schedule 36 notices can be issued to persons resident in the UK, not overseas (R (oao Jimenez) v The First-tier Tribunal & HMRC [2017] EWHC 2585 (Admin)).
If taxpayers are unable to respond fully to informal requests before HMRC’s deadline (even for valid reasons), officers tend to issue formal information notices rather than agreeing revised deadlines. Failure to comply results in penalties: £300 plus £60 per day for continued failure and possibly tax geared penalties (paras 39, 40 and 50). Tax geared penalties for errors or failures to notify will increase as delays in providing information impact detrimentally on the timing of ‘telling’, ‘helping’ and ‘giving access’. Provision of inaccurate information in response to an information notice can result in a £3,000 penalty (para 40A). Concealing or destroying documents can also be a criminal offence (Part 8).
First party information notices may be appealed within 30 days unless HMRC obtained tribunal approval in advance (para 29). There is no right of appeal if the information requested forms part of the taxpayer’s ‘statutory records’ (as defined at para 62).
Currently HMRC is required to contact the third party before issuing the notice and give a summary of its representations to the tribunal. These tribunal hearings are ex parte – the taxpayer and third party have no right to attend. Taxpayers cannot appeal against third party information notices but they should be informed when one is issued unless the tribunal is satisfied that this would prejudice the assessment or collection of tax. Third parties can appeal on the grounds that complying with the notice would be unduly onerous (para 30).
The consultation proposals seek to bolster these existing powers by:
However, the following powers will remain unchanged:
HMRC needs access to information in order to check that the right amount of tax is paid. Its aim is to ensure that the Sch 36 information powers remain effective and efficient now that ten years have passed since they were originally enacted.
Digitalisation resulted in much more information being held electronically. HMRC considers that financial records can therefore be shared more easily and perhaps sees an opportunity to capitalise on this.
The common reporting standard (CRS) heralded a new era of tax transparency and cooperation globally, with unprecedented amounts of data being made available to HMRC. UK financial institutions must pass data to HMRC without the need for information notices. Some might say that this should be enough information for HMRC to be dealing with but, on the contrary, it wants more. HMRC sees a stark contrast between the readily available banking information and its existing powers under Sch 36.
One area of concern for HMRC is providing timely replies to information requests from other jurisdictions. It considers that the UK is lagging behind other countries, most of which do not have the same requirement to seek tribunal approval before issuing notices.
In the year to 31 March 2017, there were 215 requests for tribunal approval of third party notices. HMRC expects the number of notices to remain low even after CRS data is fully analysed, following the CRS’s full implementation in September 2018. This small number of requests annually does not seem to justify the extension of powers proposed in this consultation.
HMRC wants to increase daily penalties to deter taxpayers from ignoring information notices for long periods. HMRC considers that extending the use of information powers to cover debt collection will be useful where it believes that the debtor has hidden assets; and to enable it to meet international information exchange obligations.
HMRC should be able to demonstrate that new powers are balanced with adequate safeguards. The rights of taxpayers and third parties need to be protected and third party notices must not be unduly onerous. However, the proposals lack safeguards beyond further internal HMRC processes. This point is open to respondents of the consultation document to provide ideas. In our view, the existing tribunal approval process is a necessary step to protect against misuse of HMRC powers, particularly as the tribunal service is independently run by the Ministry of Justice, not the Treasury.
The approval of an HMRC authorising officer will be seen by many as a weak and insufficent replacement to the tribunal’s scrutiny. We fear there will be little protection from unreasonable requests, other than costly and lengthy appeals or judicial review which, of course, are beyond the means of many people. In an ideal world, at least for domestic cases, first party powers and third party notices issued with the approval of taxpayers or the tribunal would be used before any streamlined form of third party information notice is issued.
The consultation proposes a ‘financial institution notice’ as an alternative to giving HMRC the power to issue all third party notices without recourse to taxpayers or the tribunal, unless it wishes to engage the higher sanctions for failure to comply with the notice or disapply the requirement to give the taxpayer a copy of the notice issued. Given that the majority of third party information requests received by HMRC relate to bank information, if existing powers are to be changed then the ‘financial institution notice’ is perhaps more easily justified than the wholescale softening of safeguards for all third party information notices.
We are concerned about the proposed removal of the requirement to seek approval from the tribunal or the taxpayer before a third party notice is issued. This represents a significant increase in HMRC’s civil information powers, as it removes the requirement to demonstrate to the tribunal that the information is reasonably required for the purposes of determining a person’s tax position. The third party would retain limited rights of appeal against the notice but would lose the ability to make advance representations, a summary of which is given to the tribunal for consideration as part of its decision making process.
The taxpayer will still be prevented from appealing against the notice or providing any representations for the tribunal’s consideration before the notice is issued, even where telling the taxpayer is not considered to prejudice the collection of tax. Giving HMRC this level of power to obtain information without recourse to the tribunal or the taxpayer could be seen as unfair. There are many instances where this may result in HMRC obtaining information to which it is not strictly entitled or which is irrelevant to the taxpayer’s tax position.
Once an enquiry window expires, HMRC must have a ‘reason to suspect’ an under-assessment in order to issue a notice to obtain information and documents (para 21(5)), unless requesting information unrelated to income tax, capital gains tax or corporation tax. The FTT in K Betts v HMRC [2013] UKFTT 430 (TC) emphasised that HMRC cannot issue a notice to find something that may give rise to a ‘reason to suspect’ an under-assessment. This case may not be an isolated incident. HMRC occasionally issues information notices when it is not strictly entitled to do so. This propensity could go unchecked for third party notices if the consultations’ proposals are enacted. HMRC would potentially be issuing far more third party notices and taxpayers would be unable to protect themselves against improper use of these powers, not least because the third party’s appeal grounds are limited and the third party simply will not know whether what HMRC requests is ‘reasonably required’ to check the taxpayer’s tax position.
HMRC is consulting on amending its civil information powers. The proposals broadly seek to give HMRC more power when requesting information from third parties. HMRC wants to streamline the existing process by removing the need for approval from the tribunal or taxpayer. The advent of the common reporting standard, the automatic exchange of information between tax authorities around the world, is cited as one of the drivers for change. HMRC is taking the opportunity to propose increasing the daily penalties for non-compliance with notices and extending powers to enable it to obtain information for debt collection too.
HMRC already has wide-ranging powers to obtain information and documents under FA 2008 Sch 36. In July 2018 HMRC opened a consultation on amending these information powers (see bit.ly/2KNzo5B). The consultation is open until 2 October 2018.
HMRC does not use Sch 36 for criminal investigations with a view to prosecution. It has other powers for such investigations and can issue unexplained wealth orders (UWOs) under the Criminal Finances Act 2017.
References to ‘para’ or ‘Part’ in the text below are references to paragraphs or parts, respectively, of Sch 36.
Historically, HMRC had more limited information at its disposal and this was mainly domestic. Today, HMRC has enormous amounts of information at its finger tips and powerful systems to analyse it in order to identify discrepancies for investigation. This abundance of information informs HMRC where to focus its efforts.
Often, this will result in HMRC opening self-assessment enquiries. Alternatively, HMRC will open investigations under codes of practice (COP) 8 or 9. After an enquiry is opened, HMRC usually issues initial informal information requests to taxpayers (or very rarely, third parties). Failure to comply with an informal request for information and documents or ceasing co-operation during an investigation will usually result in formal Sch 36 notices. The legislation sets no deadline for complying with notices. HMRC sets the deadlines on a case specific basis. HMRC can arrive with a notice to obtain documents with no warning.
HMRC can issue notices to taxpayers or third parties such as banks, customers and suppliers. HMRC’s Sch 36 powers are limited to ‘checking the taxpayer’s tax position’ across all taxes and penalties. Beyond the requirement for information and documents to be ‘reasonably required’ for this purpose, there are other clear boundaries set out within Sch 36:
Case law confirms that information notices should be expressed in clear terms so that it is possible to tell whether the recipient complies with them (R D Utilities Ltd v HMRC [2014] UKFTT 303 (TC) and Couldwell Concrete Flooring Ltd v HMRC [2015] UKFTT 136 (TC)). Schedule 36 notices can be issued to persons resident in the UK, not overseas (R (oao Jimenez) v The First-tier Tribunal & HMRC [2017] EWHC 2585 (Admin)).
If taxpayers are unable to respond fully to informal requests before HMRC’s deadline (even for valid reasons), officers tend to issue formal information notices rather than agreeing revised deadlines. Failure to comply results in penalties: £300 plus £60 per day for continued failure and possibly tax geared penalties (paras 39, 40 and 50). Tax geared penalties for errors or failures to notify will increase as delays in providing information impact detrimentally on the timing of ‘telling’, ‘helping’ and ‘giving access’. Provision of inaccurate information in response to an information notice can result in a £3,000 penalty (para 40A). Concealing or destroying documents can also be a criminal offence (Part 8).
First party information notices may be appealed within 30 days unless HMRC obtained tribunal approval in advance (para 29). There is no right of appeal if the information requested forms part of the taxpayer’s ‘statutory records’ (as defined at para 62).
Currently HMRC is required to contact the third party before issuing the notice and give a summary of its representations to the tribunal. These tribunal hearings are ex parte – the taxpayer and third party have no right to attend. Taxpayers cannot appeal against third party information notices but they should be informed when one is issued unless the tribunal is satisfied that this would prejudice the assessment or collection of tax. Third parties can appeal on the grounds that complying with the notice would be unduly onerous (para 30).
The consultation proposals seek to bolster these existing powers by:
However, the following powers will remain unchanged:
HMRC needs access to information in order to check that the right amount of tax is paid. Its aim is to ensure that the Sch 36 information powers remain effective and efficient now that ten years have passed since they were originally enacted.
Digitalisation resulted in much more information being held electronically. HMRC considers that financial records can therefore be shared more easily and perhaps sees an opportunity to capitalise on this.
The common reporting standard (CRS) heralded a new era of tax transparency and cooperation globally, with unprecedented amounts of data being made available to HMRC. UK financial institutions must pass data to HMRC without the need for information notices. Some might say that this should be enough information for HMRC to be dealing with but, on the contrary, it wants more. HMRC sees a stark contrast between the readily available banking information and its existing powers under Sch 36.
One area of concern for HMRC is providing timely replies to information requests from other jurisdictions. It considers that the UK is lagging behind other countries, most of which do not have the same requirement to seek tribunal approval before issuing notices.
In the year to 31 March 2017, there were 215 requests for tribunal approval of third party notices. HMRC expects the number of notices to remain low even after CRS data is fully analysed, following the CRS’s full implementation in September 2018. This small number of requests annually does not seem to justify the extension of powers proposed in this consultation.
HMRC wants to increase daily penalties to deter taxpayers from ignoring information notices for long periods. HMRC considers that extending the use of information powers to cover debt collection will be useful where it believes that the debtor has hidden assets; and to enable it to meet international information exchange obligations.
HMRC should be able to demonstrate that new powers are balanced with adequate safeguards. The rights of taxpayers and third parties need to be protected and third party notices must not be unduly onerous. However, the proposals lack safeguards beyond further internal HMRC processes. This point is open to respondents of the consultation document to provide ideas. In our view, the existing tribunal approval process is a necessary step to protect against misuse of HMRC powers, particularly as the tribunal service is independently run by the Ministry of Justice, not the Treasury.
The approval of an HMRC authorising officer will be seen by many as a weak and insufficent replacement to the tribunal’s scrutiny. We fear there will be little protection from unreasonable requests, other than costly and lengthy appeals or judicial review which, of course, are beyond the means of many people. In an ideal world, at least for domestic cases, first party powers and third party notices issued with the approval of taxpayers or the tribunal would be used before any streamlined form of third party information notice is issued.
The consultation proposes a ‘financial institution notice’ as an alternative to giving HMRC the power to issue all third party notices without recourse to taxpayers or the tribunal, unless it wishes to engage the higher sanctions for failure to comply with the notice or disapply the requirement to give the taxpayer a copy of the notice issued. Given that the majority of third party information requests received by HMRC relate to bank information, if existing powers are to be changed then the ‘financial institution notice’ is perhaps more easily justified than the wholescale softening of safeguards for all third party information notices.
We are concerned about the proposed removal of the requirement to seek approval from the tribunal or the taxpayer before a third party notice is issued. This represents a significant increase in HMRC’s civil information powers, as it removes the requirement to demonstrate to the tribunal that the information is reasonably required for the purposes of determining a person’s tax position. The third party would retain limited rights of appeal against the notice but would lose the ability to make advance representations, a summary of which is given to the tribunal for consideration as part of its decision making process.
The taxpayer will still be prevented from appealing against the notice or providing any representations for the tribunal’s consideration before the notice is issued, even where telling the taxpayer is not considered to prejudice the collection of tax. Giving HMRC this level of power to obtain information without recourse to the tribunal or the taxpayer could be seen as unfair. There are many instances where this may result in HMRC obtaining information to which it is not strictly entitled or which is irrelevant to the taxpayer’s tax position.
Once an enquiry window expires, HMRC must have a ‘reason to suspect’ an under-assessment in order to issue a notice to obtain information and documents (para 21(5)), unless requesting information unrelated to income tax, capital gains tax or corporation tax. The FTT in K Betts v HMRC [2013] UKFTT 430 (TC) emphasised that HMRC cannot issue a notice to find something that may give rise to a ‘reason to suspect’ an under-assessment. This case may not be an isolated incident. HMRC occasionally issues information notices when it is not strictly entitled to do so. This propensity could go unchecked for third party notices if the consultations’ proposals are enacted. HMRC would potentially be issuing far more third party notices and taxpayers would be unable to protect themselves against improper use of these powers, not least because the third party’s appeal grounds are limited and the third party simply will not know whether what HMRC requests is ‘reasonably required’ to check the taxpayer’s tax position.
