Not good – just the bad and the ugly
In the Article dealing with the World Wide Disclosure Facility and the Requirement to Correct elsewhere in this Newsletter we comment upon HMRC’s increasingly muscular approach.
HMRC’s approach and attitude towards investigating tax matters and settling tax disputes has most definitely changed and become more aggressive over recent years.
The inclination of HMRC to flex its muscles is perhaps understandable against a background of the apparent willingness of Parliament to give HMRC whatever powers it requests and in certain circumstances (as with the legislation imposing an income tax liability with regards to EBT loans – The 2019 Loan Charge – what looks and feels like retrospective legislation.
No doubt HMRC takes further comfort from the fact that likewise the courts appear to have a predilection to support HMRC whenever possible. Respected tax barristers have openly opined that in the narrow field of tax the constitution and the rights of taxpayers are being, at best, stretched.
Technical niceties are all well and good and it remains essential to understand the legislation, but it is now more than ever essential to equally understand HMRC’s powers and in this article, we look at two interrelated aspects “HMRC’s Information Powers” and “Professional Privilege”.
There are no statistics for HMRC’s use of its information powers, but empirical experience suggests a growing willingness and confidence in their use.
Anyone receiving a formal request needs as a starting point to consider whether HMRC are entitled to the information requested and respond accordingly.
HMRC will make informal requests and these can often cause greater practical difficulties. An informal request allows taxpayers, advisers and HMRC to work together to find a pragmatic way forward.
However, HMRC will push the boundaries and it is not unknown for them to request more than they could under a formal request. It is easy to assume that responding fully will bring the matter to an earlier conclusion than would otherwise be the case.
It is, however, important to remember that the strict wording of the legislation is partly to protect the constitutional position of the taxpayer no matter what HMRC may believe!
HMRC’s formal powers are found in Schedule 36 Finance Act 2008. Schedule 36 covers all taxes and also covers HMRC’s inspection powers which govern visits and raids; we consider only the information powers in this article and focus on those powers applicable to income and corporation tax. HMRC can use both taxpayer (first party) and third party notices;
- First Party Notices. These require the taxpayer to provide information and documents reasonably required by the officer for the purposes of checking the taxpayers position.
- Third Party Notices. These require relevant parties to provide information and documents reasonably required by the officer for the purposes of checking the tax position of another person whose identity is known to the officer.
What is reasonably required is a grey area and reasonable has to be judged on the specific facts of the case. An appeal can be made against an information notice issued by HMRC (without approval from the FTT) the grounds for which include;
- The information requested does not help ascertain the taxpayers position
- Is irrelevant for the purpose and is too wide and onerous to gather.
Recent case law has established that HMRC have the burden of proof to show the reasonableness of their request. This is an important safeguard in the context of information notices.
What is reasonable will depend on the circumstances. For instance, it was held that a request for diaries was inappropriate where those diaries gave details of business appointments but also health details of a doctor’s patient’s.
Other practical considerations include:
- The information request must relate to information and documents which are in the taxpayer’s power or possession. This means that the information must be physically held, or the taxpayer has the power to obtain it, say from a third party.
- The taxpayer can only provide existing documents and information and is not required to bring such information into existence.
- If the documents are more than six years old the notice may only be given with the agreement of an authorised HMRC officer or the Tribunal.
- The documents must be clearly described and easily identifiable.
- HMRC may accept copies.
- HMRC may be willing to examine extensive digital data on site.
- There is no specific time limit for the delivery to HMRC of the information and this is a matter for discussion between the parties and if necessary the basis for an appeal.
There are penalties for both the failure to provide information and incorrect information. The penalties for failing to provide information include daily penalties and these can quickly add up.
A statutory request for information starts a formal dialogue, however, HMRC does not hold all of the cards and the information requested should be carefully considered to ensure that HMRC is not acting beyond its powers.
Schedule 36 give professional privilege to:
- Auditors who are not required to provide information relating to the performance of the persons role as an Auditor or documents which are the persons property, and which were created in connection with the performance of his role as an Auditor. However, such protection does not extend to information which shows how a figure contained in a return has been calculated. In summary the protection relates to those documents which show how audit judgements have been made.
- Tax Advisers An information notice does not require a tax adviser to provide information about relevant communications, or to produce documents which are the tax adviser’s property and consist of relevant communications. Relevant Communications means communications between the tax adviser and his client or any other advisers acting for the client the purposes of which is the giving or obtaining of advice about any of those tax affairs. HMRC in its internal manual informs staff that tax advice received by the client is not relevant unless it indicates the motive behind the planning. With the introduction of the GAAR and a tax planning motive found in several anti-avoidance provisions the protection given for tax advice has become of less relevance. However professional’s should carefully consider any request by HMRC for working papers or advice.
Legal professional privilege is a common law principle and its provisions overrule the information powers in Schedule 36. There are two types of legal professional privilege;
- Legal Advice Privilege. This applies to documents or information containing confidential communications between a lawyer and their client for the purpose of obtaining or giving legal advice. After a long running litigation, The Supreme Court has decided that this type of privilege does not apply to an accountant’s legal advice.
- Legal Litigation Privilege. This applies to documents produced for the dominant purpose of contemplated or actual litigation and advice from lawyers for that purpose.
Provision is made for a Tribunal, as a preliminary matter to decide if a document or information is covered by legal professional privilege. HMRC makes frequent use of this procedure and will as a matter of course look closely at claims to privilege.
HMRC will in appropriate cases make extensive use of its information gathering powers.
Although some documents and information will be protected from discovery either by tax advice or legal professional privilege the protection given is not complete.
Email is often seen as a more informal means of communication and this can result in less precise language used or more open advice and thoughts being expressed. Where appropriate, a useful litmus test is to consider what impact an email might have on a sceptical inspector or tribunal judge many years after the event.
Enterprise Tax Consultants can advise on HMRC investigations
Enterprise Tax Consultants have extensive experience with tax investigations. If you have a query on behalf of a client about an HMRC enquiry, contact us for a no-obligation initial consultation with one of our chartered tax advisers.