Yet more powers for HMRC!

A consultation has recently completed, marking yet another proposed extension of powers for HMRC – ‘Amending HMRC’s Civil Information Powers.’

 

The present position

Schedule 36 Finance Act 2008 (“FA 2008”) provides a series of extensive powers for HMRC to obtain information and documents:

  1. From the taxpayer directly;
  2. From a third party about a known taxpayer;
  3. From a third party about a taxpayer whose identity is not known;
  4. From a third party about a taxpayer whose identity can be ascertained.

 

HMRC’s proposals relate to 1. And 2. only.

 

Taxpayer notices

If information or documents reasonably required by HMRC to check a taxpayer’s tax position are in the power or possession of the person whose tax position they are checking, an officer of Revenue and Customs may issue a taxpayer notice, requiring the taxpayer to provide the relevant information or documents to HMRC.  The taxpayer must comply with the notice within a ‘reasonable’ time-limit, usually 30 days. If the information requested forms part of the taxpayer’s “statutory records” they have no right of appeal against a notice. For notices that require items other than statutory records the taxpayer may appeal against the notice, or any requirement in it, to an independent tribunal.

 

An officer of HMRC may, but is not required to, ask for the approval of the tribunal to the issuing of a taxpayer notice. Where a notice is issued with tribunal approval, the taxpayer has no right of appeal against the notice. The tribunal has to be satisfied that various conditions are met before it can approve the giving of a taxpayer notice (paragraph 3(3) of Schedule 36).

 

HMRC say in the consultation document that:

 

‘Applying for tribunal approval prior to issuing a taxpayer notice may be appropriate where, for example, prior knowledge of the taxpayer indicates that they are likely to appeal against the notice with the sole intention of delaying having to comply with the notice.’

 

Third party notices

If information or documents reasonably required by HMRC for the purpose of checking a taxpayer’s tax position are in the power or possession of a third party (that is, somebody other than the taxpayer), an officer may issue a third party notice. The notice would require the third party to provide the relevant information or documents to HMRC.

 

Before a third party notice can be issued there are a number of requirements set out in the legislation:

 

  • HMRC may not issue a third party notice without either obtaining the agreement of the taxpayer (that is, the person whose tax position is being checked), or the approval of the tribunal;
  • An approach to the tribunal by HMRC must be made, or approved by, an authorised officer of Revenue and Customs;
  • Before approaching the tribunal, HMRC must contact the person to whom the notice will be addressed, tell them what information or documents are required and give a reasonable opportunity for them to make representations to HMRC (a summary of those representations must then be given to the tribunal);
  • The taxpayer must have been given a summary of the reasons why the information or documents are required;
  • Requirements 3 and 4 do not apply to the extent that the tribunal is satisfied that taking those actions might prejudice the assessment or collection of tax (likewise the taxpayer may not be named in the notice where this condition is met).

 

The taxpayer and third party have no right to attend the hearing. As explained above, the third party may make representations to the tribunal via HMRC. The taxpayer, however,  has no right to make representations (either in writing or at the hearing).

 

Where a tribunal has approved a notice, the third party to whom it is given has no right of appeal. Where the notice is not approved by the tribunal but is issued with the agreement of the taxpayer instead, the third party may appeal on the ground that the request is unduly onerous (although there is no appeal against a requirement to provide information or documents forming part of the taxpayer’s statutory records). In either case, the taxpayer has no right to appeal against the giving of the notice to the third party.

 

Keeping up to date

HMRC’s view is that these powers are now out of date. The consultation paper states:

 

‘Many of these powers mirror provisions that date back to the 1970s… 

  • The UK has seen a continuing decline in the use of cash resulting in many more payments being handled electronically.
  • Securities trading has become almost entirely electronic.
  • The use of paper bank statements is starting to decline.
  • Traditional banks and building societies are seeing new competition from start- up “banks” which often have no physical branches.
  • As explained below, there are also new international agreements to facilitate the exchange of bank data between countries……

 The global context has also been fundamentally altered by the advent of the Common Reporting Standard (CRS), which the UK played a leading role in developing……. Under the CRS, UK financial institutions are now required to collect data on all relevant customers and pass this to HMRC, without the need for an information notice or right of appeal, so that it can be sent to the tax authority where the customer is resident. This contrasts markedly with the process required under Schedule 36 for third party information notices…….

 In the UK’s last Global Forum report in 2013 the UK was rated as “Largely Compliant”, this marking is internationally recognised as indicating a satisfactory performance in meeting the international standards and is shared by most major economies. However, the UK requirement for tribunal approval was heavily criticised for adding significantly to the time taken to respond to requests for banking information from other jurisdictions, and for requiring more information to justify the request than is expected under the international standard5. Some jurisdictions have found the UK system to be so onerous that they are discouraged from making a request for third party information……..

 Obtaining approval from the tribunal and its associated processes (please see paragraph 2.5 above) can add a great deal of time to the information gathering process, and ultimately prolongs the course of a domestic enquiry or the time taken to exchange information internationally. As set out in the previous section, these older processes not only leave the UK out of line with the rest of the world, but also out of step with new innovative approaches to sharing information, such as the CRS.’

 

HMRC’s proposals

HMRC’s proposal is to align the issuing of third party notices with that for taxpayer notices. This change would see the removal of the requirement to seek approval from the tribunal or the taxpayer before a third party notice could be issued  (the third party would have a right of appeal against the notice on the grounds that it is ‘too onerous’).

HMRC would still retain the ability to seek approval from a tribunal to issue the notice.  The consultation document states that ‘HMRC would most likely continue to seek approval to issue a notice where it believed, based on previous experience, that a particular third party was likely to seek to deliberately delay the provision of information or documents.’

 

A new Financial Institution Notice?

The consultation states:

‘The majority of third party information requests received by HMRC are requests for banking information. A more targeted alternative to the above suggestion would be to introduce a new notice specifically for this type of information. As the international comparisons show, many countries comparable to the UK can require the production of third party information, by issuing an information notice to the bank within, for example, around one month. Such a notice does not have to be approved by a court and there is no right of appeal.’

 

Penalties

A range of penalties apply in this area:

  • For supplying HMRC with inaccurate information in response to an information notice, the recipient may be liable to a penalty not exceeding £3,000;
  • For an initial failure to comply with a notice, the recipient is liable to pay a fixed penalty of £300, unless they had a reasonable excuse for this failure. If the recipient still does not comply with the notice after the initial penalty of£300 has been imposed, they are liable to a penalty not exceeding £60 for each subsequent day on which the failure continues;
  • For non-compliance with a notice about persons whose identity is not known, HMRC may apply to a tribunal to impose increased daily default penalties. The amount of these are set by the tribunal and can reach a maximum of £1,000 per day;
  • A tax-related penalty may also be charged. These are considered where someone continues not to comply with a taxpayer notice after an initial penalty is charged. If this failure to comply leads an officer to believe the amount of tax paid by that person is ‘considerably less than it otherwise would have been,’ they may apply to the Upper Tribunal to impose a tax- related penalty. The Upper Tribunal will then decide the amount of the penalty.

 

Currently increased daily penalties can only be charged upon a failure to comply with a notice which requires information about a person whose identity is unknown. HMRC propose harmonising the penalty regime across Schedule 36 by extending the scope of increased daily penalties to cover all of the notices contained in Schedule 36.  The consultation document states:

 

‘This would bring about a consistent and robust penalty regime. Daily penalties can be useful in encouraging compliance with an obligation in a timely manner. This change would help HMRC deter long periods of non-compliance with an information notice. As with the existing daily penalties the tribunal’s permission would be needed before such penalties could be charged.’

 

Notifying the taxpayer

As explained above the tribunal may give HMRC permission not to give the taxpayer a summary of the reasons explaining why they require information and documents under a third party notice. The tribunal can also give HMRC permission not to name the taxpayer in the notice or to send a copy of the third party notice to the taxpayer. However, there is currently nothing to prevent a third party from notifying the taxpayer about the notice despite a tribunal having already decided such action might prejudice the assessment or collection of tax.

 

HMRC propose to put an obligation on the third party not to inform the taxpayer about the notice where the tribunal has disapplied the requirement to send a summary to the taxpayer under paragraph 3(3)(e) and (4) of Schedule 36.

 

Levy and Levy comment

As stated above, HMRC’s proposal is to align the issuing of third party notices with that for taxpayer notices. This change would see the removal of the requirement to seek approval from the tribunal or the taxpayer before a third party notice could be issued  (the third party would have a right of appeal against the notice on the grounds that it is ‘too onerous’.  Given that the world has indeed moved on since the introduction of the information powers, the change is inevitable.

 

Levy and Levy – the tax resolution specialists.