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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;
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;
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:
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:
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;
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 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.