Consultation: Extending HMRC’s Information Gathering Powers

Posted On: 09 Aug 2018

HM Revenue & Customs’ (‘HMRC’) recent proposals to amend their civil information gathering powers come with a timely reminder of what their powers currently are and how advisers should ensure that HMRC do not overstep the mark. This article briefly summarises HMRC’s powers for requesting information they consider they need and how they propose to extend them further.

HMRC’s formal information powers are contained in Schedule 36, Finance Act 2008. They allow HMRC to request information from a taxpayer or third parties, provided that it is reasonable and relevant.

Reasonable here means that the information must be ‘reasonably required’ to check the person’s tax position. For example, if an individual is claiming non-UK domicile status and elects to be taxable under the remittance basis, HMRC may not have the right to request details of all overseas assets, without first demonstrating (and at least having a ‘suspicion’) that these assets give rise to income/gains subject to UK tax.

The relevant information must either be in the taxpayer’s possession or it must be within their power to obtain it. For example, being able to ask their bank for financial records. HMRC are also able to levy penalties if the taxpayer does not respond within 30 days, by either providing the information or appealing against the notice. In practice, an extension of the time to comply with the notice can be requested from HMRC in order to collate the documentation. Advisers should identify unduly onerous requests from HMRC.

If the information notice relates to an already submitted tax return, then HMRC must have opened an enquiry into that return before issuing the notice.

There is a fixed penalty of £300 for non-compliance. Usually, further penalties of up to £60 per day are also applicable until such time the information notice is complied with. For continued non-compliance, HMRC may apply to a tribunal to impose a penalty of up to £1,000 per day. In the consultation document, HMRC suggests that the “current wording is misleading – “Tribunals do not impose penalties; instead they grant permission for HMRC to assess penalties” – and so they seek to amend the legislation such that HMRC decides the level of such penalties…

It seems clear to us however that, The person is liable to a penalty of an amount decided by the Upper Tribunal” (Sch 36, para 50(2)), means the Upper Tribunal is charged and responsible for deciding the level of the extraordinary penalty.

Interestingly, the 2018 case Tager & Ors v HMRC [2018] EWCA Civ 1727 looked at exactly this point, and the Court of Appeal reduced penalties imposed by the Upper Tribunal by some £800,000 based on the interpretation of the taxpayer’s behaviour. There was no discussion about whether or not the tribunals had the jurisdiction to impose the penalty. It is clear that HMRC wish to retain more control over the level of penalties in certain cases, the reason for which can only be conjectured upon.

Currently, if HMRC wish to issue a third party notice without advising the taxpayer in advance then HMRC must apply to the tribunal. They need to satisfy the tribunal that notifying the taxpayer might seriously prejudice the assessment and collection of tax.

There are no existing laws preventing the third party from advising the taxpayer about such a notice issued by HMRC. In some cases, it may be clear which taxpayer the request is in relation to, even if they are not named on the notice.

In the consultation document, HMRC proposes to legislate to:

issue these third party notices without advising the taxpayer and without applying to the tribunal; and

prevent any third parties from advising taxpayers if their details have been requested.

In these cases, third parties can be entities or individuals, e.g. banks, business partners, suppliers and customers. We are concerned that without having to go to a tribunal and then not notifying the taxpayer of the third party notice(s), HMRC would be able to undertake unpoliced “fishing expeditions”. This is exacerbated given that such tribunal hearings are ex-parte.

HMRC state that the reason for wanting these extended powers is that the process for obtaining tribunal approval to issue a third party notice is lengthy. In the same paragraph, HMRC state that the number of tribunal approvals requested in 2016/17 were “not…large” and that “even after a possible increase due to the CRS, the numbers of third party notices are expected to remain low”. We are mindful that huge data inflows have already begun under the CRS (Common Reporting Standard), for the automatic exchange of banking/tax information internationally. This begs the question as to why HMRC are proposing to remove the requirement for them to request tribunal approval before issuing a third party notice; it does suggest that without the requirement for tribunal approval, HMRC will have carte blanche to request information from third parties.

For the avoidance of doubt, third parties may only object to a notice on the grounds that it is unduly onerous, whereas a taxpayer could object if they believe that the information requested is not reasonably required to check their tax position, if an enquiry has not been opened into the relevant period, or another qualifying criteria has not been met.

The information obtained by way of the third party notice may provide HMRC with sufficient information to raise a discovery assessment; taxpayer would be left at a significant disadvantage particularly in cases where they made mistakes despite taking reasonable care. Worryingly, as HMRC will soon be permitted to go back up to 12 years more easily in terms of assessing tax, we consider that protection for taxpayers against “fishing expeditions” should be taken seriously rather than comfort from the concept of finality being eroded.

The consultation can be found here and is open until 2 October 2018. We encourage readers to respond.