Practice note: HRMC's wide ranging information powers

Introduction

HMRC have a formidable array of powers to require the provision of documents and information. These powers are predominantly contained in FA 2008, Schedule. 36. The Sch. 36 information powers include:

The requirement to make available certain ‘statutory records;’
Giving HMRC access to business assets and premises;
The requirement for those whose tax position is being checked (taxpayer notices) to produce relevant information and documents; and
The requirement for third parties to produce relevant documents or provide information (third party notices) about named taxpayers.

The powers apply from 1 April 2009 in relation to income tax, CGT, corporation tax, VAT, and NIC. Their application was extended from 1 April 2010 to Insurance Premium Tax, Inheritance Tax, Stamp Duty Land Tax, Stamp Duty Reserve Tax, Petroleum Revenue Tax, Aggregates Levy, Climate Change Levy and Landfill Tax.

Taxpayer notice

When they carry out an enquiry or a compliance check, HMRC can use their powers under FA 2008, Sch. 36 to issue a taxpayer notice requiring them to provide information and documents reasonably required to check their tax position. The items will usually be requested informally in the first instance but a formal notice may be issued immediately in some circumstances.

The notice can ask only for information and documents reasonably required for checking the taxpayer’s tax position. There is an important distinction in the application of the powers as between matters which are and are not part of a taxpayer’s statutory records. That term is defined in general terms by FA 2008. For a business, the term extends to:

All business receipts and expenses;
VAT records if the business is registered for VAT;
PAYE records if the business employs people.

There is no right of appeal against a notice requiring the provision of statutory records. By contrast, there is a right of appeal against a notice requiring the provision of other information and documents.

Such information or documentation may include:

Records of board meetings;
Diaries of key partners or employees of a business;
E mails and correspondence between the members and employees of a business and its suppliers;
Any further evidence to support a stated position.

The overriding consideration in relation to information that does not comprise part of a taxpayer’s statutory records is that it is reasonably required.

HMRC may issue as many information notices as necessary throughout the course of an enquiry. It would be normal for an informal request for the information to be made on each occasion.

The taxpayer’s private records

HMRC can use their information powers to request private records, including bank and building society statements, paying-in slips and details of property or other assets. The information or documents requested must, however, be reasonably required for checking the taxpayer’s tax position. Whether a request is reasonable is, therefore, dependent on the circumstances in each case.

The opening letter of a full enquiry will normally include a request for the business records to be sent to HMRC. Any request in the opening letter for private records should be resisted, unless it is clear that the business records are inadequate – for example if the accounts for a business are not based on sound and well kept records and include unvouched or unverified sums. In the event of an appeal, the onus will be on HMRC to satisfy the tribunal that the information is reasonably required.

HMRC will be keen to inspect private records in situations where:

Payments from an account into the business (for example capital introduced) are unverified and treated as non-taxable;
The taxpayer’s records are incomplete;
It is reasonable to suppose that undeclared income or gains have been credited to the account;
HMRC have doubts or questions about the taxpayer’s means.

When requesting private records, HMRC must take into account the cost of complying with the notice and the taxpayer’s right to privacy and demonstrate that inspecting private records is an effective way of checking the liability to tax.

Restrictions on HMRC

The legislation sets out a range of restrictions on the requirement to provide or produce information or documents. In summary, a person cannot be required to provide or produce:

A document that is not in his or her possession or power;
Information relating to the conduct of a pending tax appeal;
Journalistic material in the possession of the person who acquired or created it;
personal records concerning the health, spiritual or welfare counselling or assistance in respect of an individual;
Documents more than six years old unless the notice is given by or with the agreement of an ‘authorised officer’;
Information for the purpose of checking the tax position of someone who died more than four years before the date of the notice;
Information or any part of a document that attracts legal professional privilege;
Subject to significant limitations, information held by that person in connection with his or her performance of a statutory audit or documentation created by him or her or on his or her behalf in connection with that function; and
Again subject to significant limitations, information held by a tax adviser about ‘relevant communications’ or documents belonging to the tax adviser, which are communications between the tax adviser and his or her client or any other tax adviser of the client.

Third party notices

HMRC’s new powers under FA 2008 extend to obtaining information and documents from third parties. The purpose of a third party notice is the same as that for a taxpayer notice; the information or document has to be reasonably required for the purpose of checking the tax position of the relevant person. However, there are additional constraints upon the issue of a third party notice. Except in relation to information that forms part of any person’s statutory records and relates to the supply of goods or services (or certain imports), a third party notice can only be issued with either the agreement of the taxpayer or the approval of the tribunal.

Legal privilege

HMRC may not obtain any documents or information in respect of which the taxapyer is entitled to legal professional privilege (“LPP”). The privilege is that of the client, and documents or information in the possession or control of either client or lawyer may not be accessed by HMRC. Broadly, LPP covers advice given by a lawyer to his client and communications between either and a third party for the purposes of pending or contemplated litigation.

Failure to comply with a notice

If a taxpayer or third party fails to comply with a notice requiring the provision of information or the production of a document, HMRC may impose an initial penalty of £300 and a subsequent daily penalty of up to £60 until the notice is complied with.

If the failure continues for more than 30 days beginning with the date of the assessment of a daily penalty, HMRC can apply to the tribunal for an increased daily penalty to be imposed. Before making such an application, HMRC must warn the person concerned that such an application might be made. In determining the amount of any such increased daily penalty, the tribunal must consider the likely cost of complying with the information notice and any benefits (to that person or any other) of not complying with it. The penalty awarded by the tribunal cannot exceed £1,000 for each day starting with the applicable day.

No penalty should be imposed while the appeal period is still open or if an appeal has been made against the notice and the appeal is still open.

Tribunal approval

The majority of taxpayer notices will be issued without the approval of the tribunal. Circumstances in which HMRC may, instead, seek the approval of the Tribunal include:

A history of refusing to provide information;
HMRC wish to protect their information from being disclosed at an appeal hearing on the notice – for example where they hold information from an informer or a third party.

There is no appeal against a taxpayer notice that has been approved by the tribunal.

If HMRC want to inspect documents and business premises at the same time, they can ask the tribunal for their approval for both the inspection visit and the taxpayer notice.

Conclusion

HMRC’s information powers are wide ranging and intrusive. Both taxpayers and third parties served with such notices would be wise to seek expert advice at the earliest opportunity to establish whether the notice is reasonable and proportionate and whether items are being sought that are not relevant to HMRC’s enquiries or otherwise should not be produced.

Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells