FA 2008 Sch 36 is now the basis for what most people still call HMRC ‘investigations’ or ‘enquiries’. It represents a significant broadening of HMRC’s powers with very limited protections for taxpayers. HMRC must be delighted it has been given these powers as it gives its officers far wider ability to gather information than pre-April 2009, and to do so even before a return is filed. It also simplifies the process for getting bulk information from third parties, such as banks. In many instances officers do not need to obtain the approval of the Tribunal, and often there is a limited right of appeal.
FA 2008 Sch 36 is designed to be a coherent set of information and inspection powers covering all the taxes that HMRC administers. There is limited interaction with the existing (and continuing) enquiry powers at FA 1998 Sch 18 (for companies) and TMA 1970 s 9A (for individuals). HMRC takes the view that Sch 36 is a self-contained code unaffected, except in very prescribed situations, by its other statutory powers.
The three types of information notice
HMRC may issue three types of information notice:
(‘Checking’ includes any investigation or enquiry of any kind, and is therefore not limited to self-assessment enquiries.)
In each case the notice must be given in writing and may require information or documents reasonably required for the purposes of checking the tax position of the relevant person. The recipient must be given a reasonable time to respond and comply although no statutory lower limit is prescribed. In practice for straightforward para 1 notices, it is normal practice for HMRC to allow 30 days, whereas for complex unknown identity notices a much longer period is allowed, commonly around 90 days. However it is for the recipient to recognise early on after the receipt of the notice whether the timescale allowed is in fact reasonable and to make representations accordingly. HMRC is unlikely to be so sympathetic if objections are raised only when the deadline approaches.
The notice may only require production of a document if it is within the person’s power or possession. In contrast, if specified information is requested it may require the recipient of the notice to create new documents, eg, explanations, lists or summaries.
A taxpayer notice cannot be issued for a period for which a return has already been made unless
In practice the new powers are broader because they allow notices based on the suspicions of an officer – so HMRC has much greater latitude than previously.
Notices must be complied with ‘by such means and in such form’ as may be reasonably specified in the notice. This allows HMRC to specify the format of the documents so that they may be required electronically rather than in paper form. HMRC is particularly keen on this development when looking through financial records as it allows them much speedier data manipulation and analysis if needed. In connection with this power, it should be remembered that a document includes ‘anything in which information of any description is recorded’ (FA 2008 s 114(2)(a)) and that access to such computerised records entitles HMRC to ‘check the operation of any computer or associated apparatus’ (FA 2008 s 114(3)). Given that virtually every business maintains its records on computer, this power allows HMRC to access all these computers as well as have delivered to it the information held on them.
Where a person complies with a notice by supplying a copy document, HMRC may request to inspect the original.
Wide-ranging powers ...
Probably the most controversial aspect of Sch 36 is the concept of ‘tax position’ which is defined to include ‘past, present and future liability to pay any tax’. This is so broad as to cover any reasonably possible liability at any time to UK tax and ‘relevant foreign tax’, ie, tax of an EU Member State or of a country with whom the UK has a tax information exchange agreement.
The practical issue here that most differentiates Sch 36 from any predecessor power is that it enables HMRC to demand information before the return is filed or even before a transaction has taken place. It is clearly designed to enable HMRC to react to a possible loss of tax by taking real time action to combat the loss. HMRC is particularly keen on this approach where it perceives avoidance is taking place or contemplated.
However, the ability to serve a notice about past liabilities, based upon an officer’s suspicion, is just as controversial. The interaction between Sch 36 powers and HMRC’s assessing powers (particularly the so-called discovery provisions) is untested. See the Example.
HMRC has maintained that Sch 36 is a free-standing set of powers and the self-assessment deadlines have limited relevance to their application.
The objection may then rest on whether the information is reasonably required to check the tax position, as it would have been reasonable to make an enquiry within the time allowed and, as things stand without a discovery of a loss of tax, there is nothing for HMRC to assess so the tax position is not in doubt.
Such objections may be grounds for an appeal. Whilst there is a right of appeal against first and third party notices, no appeal is available if the documents requested are part of the taxpayer’s statutory records or if the giving of the notice was approved by the First-tier Tribunal. Statutory records are anything required to be kept under the Taxes Acts or VATA 1994. Hence the taxpayer’s redress is very limited in such a case. If however there is an appeal to the First-tier Tribunal, the decision of the Tribunal is final.
Schedule 36 restricts the scope of information notices so that legally privileged documents cannot be required, nor can an auditor’s papers or a tax adviser’s advice, in their hands. There remains the thorny issue of the protection of tax advice in the client’s hands, where the legislation is silent.
HMRC officers may ask the First-tier Tribunal for approval to issue a taxpayer notice, and where there is prejudice to the assessment or collection of tax, they do not need to inform the first party or summarise their reasons for asking for the notice. In such cases as there is no right of appeal, it seems the only redress allowed is through judicial review. It should be expected that this approach is reserved for serious fraud (as the predecessor legislation made clear) although the change of wording significantly broadens its application.
Where there is no prejudice to the assessment or collection of tax, a ‘normal’ taxpayer notice cannot be issued without giving the taxpayer an informal opportunity to comply and to make representations to the Tribunal. If the notice is still given, a summary of reasons for making the application must be supplied.
Approval must be sought for a third party notice unless the taxpayer has agreed to its issue. Similarly, the Tribunal must approve an identity unknown notice.
Identity unknown notices have been used extensively by HMRC to gather information to inform risk profiling and to target campaigns. It has been widely reported that HMRC has sought information from health authorities, pharmaceutical companies and insurance firms. Currently HMRC is said to be seeking information on users of online auction and trading sites.
Information notices cannot require documents more than six years old unless an authorised officer agrees. An authorised officer is also required for an identity unknown notice. An authorised officer is one authorised by HMRC and will be a senior grade.
Notices on deceased persons may only be given within four years of the death.
There are other restrictions on what HMRC may require, and these broadly follow earlier legislation. So information relating to the conduct of a pending appeal, journalist’s material, medical, psychological or counselling records are all exempted.
There are penalties for non-compliance, ranging from £300 for failure, up to £60 a day for continuing failure, tax-geared penalties where someone seeks to pay less tax as a result of the failure and, in the extreme cases involving concealment and destruction of documents, a possible prison term of up to two years.
The current Finance Bill contains provisions to extend Sch 36 as it relates to foreign tax, thus allowing HMRC to supply information requested by the UK’s treaty partners.
So HMRC has a strong and clear framework to support its requirements for information from taxpayers and third parties. Perhaps the bigger challenge is not getting the information in the first place, but knowing how best to use it.
Richard Clarke, Director, PwC
Jennifer Knowlson, Manager, PwC
