The original article was published in Taxation Magazine on 9 September 2019 and can be viewed here.
Since Finance Act 2008, HMRC have had the power to request information from taxpayers and third parties, to check the taxpayer’s past, present and future tax positions. The legislation provides HMRC with the authority to:
- issue taxpayer information notices;
- issue third party information notices in relation to identified and unidentified taxpayers; and
- search business premises.
This article addresses safeguards in place for written information requests and highlights areas advisers should be aware of before responding to HMRC. All legislative references are to FA 2008, Sch 36 unless specified otherwise.
Is there an enquiry?
If the information notice relates to a tax return that has already been filed, the relevant return needs to be under open enquiry or investigation before the notice can be issued (para 21(4)). However, the requirement to have an open enquiry is waived if ‘an officer of Revenue and Customs has reason to suspect’ an insufficiency of tax (condition B, para 21(6)). We see this demonstrated in JJ Management LP ( EWHC 2006 (Admin)) in which HMRC issued a Sch 36 information notice in relation to an individuals tax affairs without there being an open enquiry of investigation.
The penalties for not providing information requested or not responding to HMRC within the relevant time limit (usually 30 days) are a standard immediate penalty of £300 and daily penalties if the delay continues for a further month (paras 39 and 40). These penalties are subject to the taxpayer not having a reasonable excuse (para 45).
The information powers were implemented to allow HMRC access to information reasonably required to check the taxpayer’s past, present or future tax positions. The provisions are broad to assist HMRC with gathering of information at the investigatory stage without providing an opportunity for taxpayers to delay the investigation with lengthy disputes. However, the information requested needs to be reviewed carefully to determine whether HMRC are entitled to it. There are some safeguards for the taxpayer in relation to what HMRC can ask for, however advisers have often seen instances where HMRC request more than they are entitled to.
In 2018, a further consultation (Amending HMRC’s civil investigation powers) was carried out and HMRC suggested changes to the legislation so they could issue third party information notices without having to obtain permission from Tribunal. They also consulted on whether any persons issued with a third party notice should be prevented by law from alerting the taxpayer of the request and whether a request for banking information was effectively “carved out” and subject to different procedures.
The consultation closed in October 2018 but no response from the Government has yet been received. Needless to say, HMRC came under criticism for their eagerness to speed up the process of obtaining information from taxpayers given that this would remove certain safeguards.
Although in most cases, it is prudent to cooperate with HMRC, the taxpayer should be made aware that they have right of appeal against an information notice, if they consider the information is not reasonably required for checking their tax position. This is unless the notice has prior approval from the First-tier Tax Tribunal under para 29(3). In the latter case, the taxpayer has recourse to Judicial Review, which looks at whether the reasoning behind the information request is justified.
In addition to appeals by taxpayers, there are safeguards for privileged information and also specific provisions for information held by auditors and tax advisers.
For third party notices to professional advisers, privilege should be reviewed in the first instance as well as relevant case law. For example, in HMRC ex-parte a Taxpayer (TC6710), the FTT determined that the auditor was not required to provide information to HMRC regarding a taxpayer’s audited accounts, despite also being the tax adviser. Although this decision is not binding on future cases, it is worth keeping in mind if challenging HMRC’s right to client information.
If HMRC has not obtained the tribunal’s approval to issue a taxpayer notice (not third party) and the notice is then appealed, HMRC bear the burden of proof in relation to whether the issuance of the notice was justified.
On receipt of a notice, the first thing to check is whether the information requested is reasonably required for checking the tax position and whether it is in the recipient’s possession or power to obtain. For example, are HMRC requesting 20 years worth of information without demonstrating a reasonable belief of deliberate behaviour? Are they asking for documentation relating to overseas territories before determining the residence position? As Long (TC3339) demonstrates, the definition of “reasonably required” can be interpreted narrowly. In this case, it was determined that a Doctor’s appointment diary was not relevant for determining the tax position. When denying HMRC’s request for information however, detail should be provided as to why that information is not considered relevant to the tax position.
Third Party notices
At present, if HMRC wish to issue a third party notice, they must first either obtain the agreement of the taxpayer to whom the information notice relates, or they must apply to Tribunal to issue it (para 3(1)). In their consultation in 2018, HMRC proposed to remove this requirement, suggesting they should be able to issue the notice without tribunal approval. In addition, they wished to consider whether the third party should be prevented from notifying the taxpayer of the information requested.
Results of the consultation have not been published, however, one point that comes immediately to mind is that if the taxpayer is not advised of the contents of the information notice, how can the third party be sure that the information is a) in relation to an open enquiry and b) reasonably required to check the taxpayer’s tax position (as opposed to say, a fishing expedition). This to me appears to attack more than one safeguard and I hope taxpayer rights are protected.
Advisers should also be aware that HMRC may not be entitled to the information requested from them in relation to their clients. In Wilson (TC169), the Tribunal determined that the obligation to hold records does not make a law firm a data holder for HMRC purposes.
According to HMRC’s Compliance Handbook CH21700, Statutory records are records that the relevant tax laws require a person to keep. They are the records needed to enable a person to make a complete and accurate return, declaration or claim and HMRC to check it.
There is no right of appeal against a request under Schedule 36 to produce statutory records in relation to a person’s tax position (para 29(2)). The definition of statutory records can be specified (e.g. VAT records) or unspecified. The legislation specifically notes that records cease to be “statutory” when the period for which they required by law to be retained has elapsed. In relation to information notices, the term statutory record can be construed narrowly where it is not specified in legislation.
The FTT determined in Newton (TC6682) that information is only a statutory record where it is in or taken from a document. The Tribunal specified that the term statutory record in relation to an information notice should be construed narrowly, so as to retain taxpayers’ protection in relation also to other legislation, which may carry strict penalties for failure to retain such information
On receipt of an information notice, in some cases, a client may confirm their belief around the reason for the request (for example, in relation to a tax avoidance scheme) and depending on the circumstances, it is worth reviewing whether Legal Advice Privilege or Litigation Privilege applies.
Legal Advice Privilege and Litigation Privilege
Legal Advice Privilege applies to confidential communications between a lawyer and their client, where the communications are made for the purpose of giving or receiving legal advice. Documents prepared in the process of such communications are also protected. Importantly, LAP does not apply to commercial or strategic advice.
Litigation Privilege applies to advice given where at the time the communications took place, there was a reasonable prospect of litigation. For LP to apply, it is sufficient for the communications to take place for the purposes of avoiding litigation (The Serious Fraud Office v Eurasian Natural Resources Corporation Limited  EWCA Civ 2006).
Both types of protection are lost if confidential communications are sent to third parties, for example, by the client to a tax adviser. Similarly, simply copying a lawyer into emails, is not sufficient for privilege to apply.
To determine whether either privilege can apply, case law (Three Rivers District Council EWCA Civ 474) has shown that the dominant purposes of the communications will turn on the particular facts of the matter and the important point is to identify the “Watershed moment” – the point at which litigation becomes more likely and advice is given with a reasonable prospect of litigation in mind.
Litigation privilege is not restricted to criminal cases and should be considered in relation to investigations conducted under Code of Practice 9. These cases involve an assertion by HMRC of deliberate behaviour and an offer for the taxpayer to make a disclosure under the terms of the Contractual Disclosure Facility (CDF). In other words, the taxpayer admits to deliberate behaviour in exchange for immunity from prosecution in relation to the transactions disclosed.
Where CDF is offered and rejected, it is worth identifying the “Watershed moment” as soon as possible to ensure clients are protected where necessary – was it when CDF was issued, or when the rejection was submitted to HMRC? – in the event that HMRC issue Schedule 36 information notices in relation to their investigation.
In Bilta v Royal Bank of Scotland PLC and Another  EWHC 3535 (CH), Sir Geoffrey Vos highlighted that just because there is “cooperation and regular dialogue and meetings between a company and an authority also does not imply that an investigation is not being conducted for the dominant purpose of litigation”. We see therefore that all the facts of the matter need to be taken into account to determine what information HMRC is entitled to.
It should be noted that in DAC Beachcroft LLP (TC6704), the judge pointed out that the cloak of privilege cannot be acquired simply by copying a lawyer into the communications.
Other defences that have been tested in court include looking at whether a Schedule 36 information notice can be issued to a non-UK resident individual and whether the issuing of such notices breached international law.
- In The Queen oao Tony Michael Jimenez v HMRC  EWCA Civ 51, Mr Jimenez had lived in the UK for a number of years and we understand that this is the period to which the information notices were referring. The notices were issued to Mr Jimenez when he was resident in the UAE. It was determined that the information notices issued to a UAE resident individual in respect of his UK tax position do not breach international law as:
the issue of an information notice does not result in the UK exercising an “enforcement jurisdiction within the territory of another sovereign state”;
- the failure to provide information in response to a Schedule 36 information notice would result in civil penalties, not criminal and again international law would not be breached; and
- because the individual had “sufficient connection to the [UK]”, HMRC would not be acting ultra vires.
The judges ruled unanimously in the Upper Tribunal that a Schedule 36 information notice can have extraterritorial effect without breaching international law. What they did not specify was which notices were affected (individual or third party) and how the scope of the notices could be limited. There were however inferences to “sufficient connection” to the UK and the extent of public interest with references to the Bankruptcy Act and Insolvency Act.
Tax evasion was referred to as very much in the public interest and we consider therefore that future cases in this regard are likely to come down on the side of HMRC, subject to the taxpayer’s connection to the UK.
We saw this again in the case of Mr and Mrs PQ (TC7199) later on in 2019, which concerned third party information notices issued. The taxpayers were the sole owners and directors of a UK company, which the information notices related to. The judge ruled that the Schedule 36 information notices were valid in line with and with reference to the reasoning in Jimenez.
As Schedule 36 notices have become more and more prevalent, HMRC have become more aggressive in their approach, rarely stopping to check whether their requests are wholly legitimate. In many cases, taxpayers and their advisers are so worried about not complying that they inadvertently provide information that HMRC has no right to request. This could not only prolong any investigation but may also potentially leave the adviser open to a professional indemnity claim. It is essential that advisers are aware of the limits to HMRC’s powers and of the options available to them where they consider HMRC to have overstepped their bounds.