HMRC is consulting on changes to the powers which it has to obtain documents from third parties, such as banks, when investigating somebody's tax affairs. The proposals have generated much adverse comment in the media because they would remove safeguards which currently exist to prevent HMRC from using its powers indiscriminately.
On 10 July 2018, HMRC published a consultation document, Amending HMRC's civil information powers. This sets out a number of proposals for changes in the powers which HMRC has to obtain information from third parties such as banks. The current rules are at least 10 years old but have their roots in legislation which goes back 50 years or more.
HMRC says that there are two main reasons for proposing changes. In the first place, far more information is now held digitally and the existing rules were designed in an era where paper records were the norm. Secondly, the new rules for international exchange of information mean that HMRC is being asked for information from other countries' tax authorities. Those authorities generally have a more simplified procedure for obtaining third party information. HMRC considers that its powers are out of line with those in other jurisdictions and can cause problems in dealing with such requests.
If HMRC wishes to obtain information from a third party, it currently has two options. The first is to ask the taxpayer to agree that it can approach the third party. The second is to apply to the independent tax tribunal for permission to issue a notice to the third party. In most cases, the taxpayer must be informed that an application is being made to the tribunal but has no right to attend the tribunal hearing. The third party can make representations to the tribunal against the issue of the notice but again has no right of attendance. In cases where HMRC believes that there is a risk that the taxpayer may not pay any tax which could be due, the tribunal can direct that the taxpayer is not informed that the application is being made, but there is nothing to stop the third party from informing the taxpayer.
The consultation document proposes that in future, HMRC will not need the approval of a tribunal to issue an information notice to a third party. Instead, an authorised officer of HMRC would have the power to issue a notice. The quid pro quo would be that the third party would have the right of appeal on the grounds that it would be too onerous to comply with the notice. It would still be open to HMRC to apply to a tribunal to authorise a notice; where this is done, the third party would have no right of appeal. HMRC is also proposing that where a tribunal has authorised a notice, the third party will be banned from telling the taxpayer that a notice has been issued.
The main proposal is that these new rules should apply to all third party notices, but HMRC also raises an alternative approach under which new rules would only apply to banks and financial institutions, with the existing rules continuing to apply in other cases.
The consultation does not propose any wholesale changes to the types of information which can be obtained under a notice but does suggest that HMRC should have a power to obtain third party information for debt collection purposes - at the moment, this is not within the scope of its information powers.
One other point which is rather tucked away in the consultation document is a concern over the way that the legislation for penalties for non-compliance with information notices is drafted. Responsibility currently seems to fall in the middle between HMRC and the tribunal - and this prevents some penalties from being raised. This seems fair enough, but HMRC is also suggesting that it is given a power to impose higher penalties for all cases of failure to comply with an information notice. This would not only apply to the third party notices which are the main subject of this consultation but also to notices issued directly to taxpayers. These are far more common and a change in the law here would have a much greater impact. HMRC should have been more upfront in the introduction to this consultation by saying contrary to what is said at paragraph 1.5, that it did contain material relevant to first party notices.
Practical implications
How much of a change do these proposals actually represent? To judge by some of the headlines, it is revolutionary: 'Taxman will now have shocking new powers to raid bank accounts'. That is an overreaction. It should be stressed that this is all about information - there is nothing here about giving HMRC access to bank accounts themselves.
But clearly, what is proposed does have significant implications. These issues are ultimately about balance. Everybody would accept that HMRC does need to have some powers to obtain information; equally, even HMRC would accept that such powers can't be limitless. These proposals do tip the balance a bit more in HMRC's favour. The real question is the extent to which HMRC actually needs a new power. Only 215 requests were made to the tribunal for information in 2016/17 and HMRC itself says that it does not expect a big increase in the number of third party notices that it might need to issue in the future.
The proposed new power in itself might not be regarded as unreasonable, but there is an important matter of principle here. HMRC needs to make a compelling case that existing powers are inadequate before seeking any new powers. There is real doubt over whether or not that case is made out of this consultation document.
It should be stressed that this is only a consultation and there are no immediate changes to the law. Responses to the consultation document are required by 2 October 2018. HMRC will then set out its response. It is possible that we may see legislation in the next Finance Bill but what happens next will depend on how people respond to the consultation. If you feel strongly about the issue, why not send in your own consultation response or send some comments to your professional body.
Andrew Hubbard, Tolley (www.tolley.co.uk)
HMRC is consulting on changes to the powers which it has to obtain documents from third parties, such as banks, when investigating somebody's tax affairs. The proposals have generated much adverse comment in the media because they would remove safeguards which currently exist to prevent HMRC from using its powers indiscriminately.
On 10 July 2018, HMRC published a consultation document, Amending HMRC's civil information powers. This sets out a number of proposals for changes in the powers which HMRC has to obtain information from third parties such as banks. The current rules are at least 10 years old but have their roots in legislation which goes back 50 years or more.
HMRC says that there are two main reasons for proposing changes. In the first place, far more information is now held digitally and the existing rules were designed in an era where paper records were the norm. Secondly, the new rules for international exchange of information mean that HMRC is being asked for information from other countries' tax authorities. Those authorities generally have a more simplified procedure for obtaining third party information. HMRC considers that its powers are out of line with those in other jurisdictions and can cause problems in dealing with such requests.
If HMRC wishes to obtain information from a third party, it currently has two options. The first is to ask the taxpayer to agree that it can approach the third party. The second is to apply to the independent tax tribunal for permission to issue a notice to the third party. In most cases, the taxpayer must be informed that an application is being made to the tribunal but has no right to attend the tribunal hearing. The third party can make representations to the tribunal against the issue of the notice but again has no right of attendance. In cases where HMRC believes that there is a risk that the taxpayer may not pay any tax which could be due, the tribunal can direct that the taxpayer is not informed that the application is being made, but there is nothing to stop the third party from informing the taxpayer.
The consultation document proposes that in future, HMRC will not need the approval of a tribunal to issue an information notice to a third party. Instead, an authorised officer of HMRC would have the power to issue a notice. The quid pro quo would be that the third party would have the right of appeal on the grounds that it would be too onerous to comply with the notice. It would still be open to HMRC to apply to a tribunal to authorise a notice; where this is done, the third party would have no right of appeal. HMRC is also proposing that where a tribunal has authorised a notice, the third party will be banned from telling the taxpayer that a notice has been issued.
The main proposal is that these new rules should apply to all third party notices, but HMRC also raises an alternative approach under which new rules would only apply to banks and financial institutions, with the existing rules continuing to apply in other cases.
The consultation does not propose any wholesale changes to the types of information which can be obtained under a notice but does suggest that HMRC should have a power to obtain third party information for debt collection purposes - at the moment, this is not within the scope of its information powers.
One other point which is rather tucked away in the consultation document is a concern over the way that the legislation for penalties for non-compliance with information notices is drafted. Responsibility currently seems to fall in the middle between HMRC and the tribunal - and this prevents some penalties from being raised. This seems fair enough, but HMRC is also suggesting that it is given a power to impose higher penalties for all cases of failure to comply with an information notice. This would not only apply to the third party notices which are the main subject of this consultation but also to notices issued directly to taxpayers. These are far more common and a change in the law here would have a much greater impact. HMRC should have been more upfront in the introduction to this consultation by saying contrary to what is said at paragraph 1.5, that it did contain material relevant to first party notices.
Practical implications
How much of a change do these proposals actually represent? To judge by some of the headlines, it is revolutionary: 'Taxman will now have shocking new powers to raid bank accounts'. That is an overreaction. It should be stressed that this is all about information - there is nothing here about giving HMRC access to bank accounts themselves.
But clearly, what is proposed does have significant implications. These issues are ultimately about balance. Everybody would accept that HMRC does need to have some powers to obtain information; equally, even HMRC would accept that such powers can't be limitless. These proposals do tip the balance a bit more in HMRC's favour. The real question is the extent to which HMRC actually needs a new power. Only 215 requests were made to the tribunal for information in 2016/17 and HMRC itself says that it does not expect a big increase in the number of third party notices that it might need to issue in the future.
The proposed new power in itself might not be regarded as unreasonable, but there is an important matter of principle here. HMRC needs to make a compelling case that existing powers are inadequate before seeking any new powers. There is real doubt over whether or not that case is made out of this consultation document.
It should be stressed that this is only a consultation and there are no immediate changes to the law. Responses to the consultation document are required by 2 October 2018. HMRC will then set out its response. It is possible that we may see legislation in the next Finance Bill but what happens next will depend on how people respond to the consultation. If you feel strongly about the issue, why not send in your own consultation response or send some comments to your professional body.
Andrew Hubbard, Tolley (www.tolley.co.uk)
