Dealing with HMRC information notices

In this blog (which is based on an article published in Tax Journal on 2 May 2024), we look at three common types of information notice and the extent to which they can be challenged.

Taxpayer notice

An HMRC officer can, by written notice, require a taxpayer to provide information or to produce a document ‘reasonably required’ for checking the taxpayer’s tax position or collecting a tax debt (paragraph 1, Schedule 36, Finance Act 2008 (FA 2008)). This power is very widely drafted and enables HMRC to obtain documents and information before a tax return is filed as well as information on future liabilities a taxpayer may have (paragraph 64(1), Schedule 36, FA 2008).

If a taxpayer has already filed a self-assessment return or a company tax return, an HMRC officer cannot issue a taxpayer notice for the period covered by the return, unless one of the following conditions is satisfied (paragraph 21, Schedule 36, FA 2008):

• there is an open enquiry for that period; and
• the officer has reason to suspect one of the following:
  • an amount that ought to have been assessed to tax for the chargeable period was not assessed;
  • an assessment to tax for the chargeable period may be or has become insufficient; or
  • relief from tax given for the chargeable period may be or has become excessive.

In Hegarty v HMRC [2018] UKFTT 774 (TC), the First-tier Tribunal (FTT) confirmed that HMRC must demonstrate that it had reason to suspect an under-assessment. In that case, Mr and Mrs Hegarty had gifted land to their son which was then sold for four times the market value stated in their capital gains tax calculations. HMRC asserted that this was enough to establish a reason to suspect an under-assessment. However, the FTT held that the documents alone were not enough and HMRC’s failure to call the relevant HMRC officer to give evidence was fatal to its case.

An HMRC officer does not have to obtain prior judicial approval before issuing a taxpayer notice. However, the officer can choose whether or not to seek approval from the FTT in advance (paragraph 3(2), Schedule 36, FA 2008). If the FTT approves the issuing of the notice, then the taxpayer has no right to appeal against the notice. However, a taxpayer can, in such circumstances, seek judicial review of HMRC’s and/or the FTT’s decision to issue/approve the notice, pursuant to rule 54, Civil Procedure Rules, SI 1998/3132 (CPR) (Whitefields Golf Club Ltd v HMRC [2014] UKFTT 458 (TC)).

If the FTT has not approved the issuing of the notice, the taxpayer can appeal against the notice, or any requirement in the notice, other than a requirement to provide information or documents which are part of their statutory records. An appeal must be made in writing to HMRC within 30 days of the date on the notice (paragraph 32(1), Schedule 36, FA 2008).

On appeal against a notice to the FTT, the burden is on HMRC to demonstrate why the information requested is reasonably required to check the taxpayer’s tax position (Joshy Mathew v HMRC [2015] UKFTT 139 (TC)).

Third-party notice

An HMRC officer can, by written notice to any person, require that person to provide information or produce a document that is reasonably required for checking the tax position or collecting a tax debt of a known person (paragraph 2, Schedule 36, FA 2008). The issue of a third-party notice, unlike a taxpayer notice, must be approved in advance by the FTT, unless the taxpayer consents to the issue of the notice (paragraph 3(1), Schedule 36, FA 2008).

Paragraph 3(3), Schedule 36, FA 2008, provides that the FTT cannot approve the giving of a taxpayer notice or a third-party notice unless:

(a) the application is made by an authorised officer of HMRC;

(b) the FTT is satisfied that the officer giving the notice is justified in doing so;

(c) the intended recipient of the notice has been informed that the information or documents referred to in the notice are required and given a reasonable opportunity to make representations to HMRC;

(d) the FTT has been given a summary of any representations made by the intended recipient of the notice; and

(e) in the case of a third-party notice, the taxpayer has been given a summary of the reasons why HMRC requires the information and documents requested.

It should be noted that requirements (c) to (e) do not apply where the FTT is satisfied that taking these actions might prejudice the assessment or collection of tax (paragraph 3(4), Schedule 36, FA 2008).

Also, where the FTT approves the giving of a third-party notice, it may dis-apply the requirement to name the taxpayer in the notice if it is satisfied that the HMRC officer has reasonable grounds for believing that naming the taxpayer might seriously prejudice the assessment or collection of tax (paragraph 3(5), Schedule 36, FA 2008). If the issue of a third-party notice has not been approved in advance by the FTT, the third party may appeal against the notice, or any requirement in the notice, on the ground that it would be unduly onerous to comply with the notice or a requirement contained in the notice (paragraph 30(1), Schedule 36, FA 2008). As with a taxpayer notice, if a third-party notice has been approved by the FTT, the only way to challenge it is by way of judicial review proceedings.

Financial institution notice

An HMRC officer can, by written notice, require a financial institution (ie a financial institution under the Common Reporting Standard (CRS) other than one which is such an institution because (and only because) it is an investment entity within section VIII (A)(6)(b) of the CRS, or a person who issues credit cards) to provide information or produce a document, if the following two conditions are met (paragraph 4A(2)-(3), Schedule 36, FA 2008):

• the information or document is, in the reasonable opinion of the officer, of a kind that it would not be onerous for the institution to provide or produce; and
• the information or document is reasonably required for the purpose of checking the tax position of a taxpayer whose identity is known, or for the purpose of collecting a tax debt of a taxpayer. 

The financial institution notice must name the taxpayer to whom it relates, and the officer must provide the taxpayer with a copy of the notice and a summary of the reasons why the officer requires the information or document (paragraph 4A(6)-(7), Schedule 36, FA 2008).

This information power was introduced by section 126(1), Finance Act 2021. It is exceptional because, unlike third party notices, financial institution notices do not require approval from the FTT in circumstances where the taxpayer does not consent to the notice. HMRC can also apply to the FTT to waive the requirement to name the taxpayer or give them a summary of the reasons for the notice. The FTT must grant the application if it is satisfied that the officer has reasonable grounds for believing that naming the taxpayer might seriously prejudice the assessment or collection of tax (paragraph 4A(8), Schedule 36, FA 2008).

For the purposes of the first condition referred to above, HMRC will not consider a request as being onerous simply because it will be time-consuming for the financial institution to comply with the request. A request will only be onerous if it would likely create a ‘significant resource cost’ to the financial institution (HMRC’s Compliance Handbook at CH232300).

Penalties for failure to comply

A person who fails to comply with an information notice will be liable to a penalty of £300 and a daily default penalty of £60 for each subsequent day on which the failure continues (paragraphs 39 and 40, Schedule 36, FA 2008).

A penalty of £3,000 can be imposed for providing inaccurate information or documentation in complying with an information notice, where any of the following conditions are satisfied (paragraph 40A, Schedule 36, FA 2008):

• the inaccuracy is careless or deliberate;
• the person knows of the inaccuracy at the time the information or document is provided; and
• the person who provided the inaccurate information or document discovers the inaccuracy some time later and fails to take reasonable steps to inform HMRC.

A person may appeal against the imposition of a penalty or the quantum of any such penalty (paragraph 47, Schedule 36, FA 2008).

Liability to a penalty for failing to comply with an information notice does not arise if the person satisfies HMRC, or the FTT, that there is a ‘reasonable excuse’ for the failure (paragraph 45, Schedule 36, FA 2008). There is no statutory definition of ‘reasonable excuse’ which, as confirmed in Rowland v HMRC [2006] STC (SCD) 536, ‘is a matter to be considered in the light of all the circumstances of the particular case’. The burden of proof in an appeal against a penalty for non-compliance is on HMRC (Anstock v HMRC [2017] UKFTT 307 (TC)).

Restrictions on HMRC’s information powers

Legal professional privilege

An information notice cannot require a person to provide information or produce any document (or part of a document) protected by legal professional privilege (paragraph 23, Schedule 36, FA 2008). Legal professional privilege comprises:

• legal advice privilege: confidential communications between lawyers and their clients made for the dominant purpose of seeking or giving legal advice; and
• litigation privilege: confidential communications between lawyers and their clients, or the lawyer or client and a third party, which comes into existence for the dominant purpose of being used in connection with actual or pending litigation.

Documents in the recipient’s possession or power

A person who receives an information notice is only required to produce a document if it is in that person’s possession or power (paragraph 18, Schedule 36, FA 2008).

In litigation in the High Court and Court of Appeal, disclosure and inspection of documents is governed by CPR rule 31. In Lonrho v Shell [1980] 1 WLR 627, when considering whether documents in the possession of a company’s foreign subsidiary were within the ‘power’ of the parent company for the purposes of the predecessor to rule 31, Lord Diplock said in the House of Lords (at page 635): ‘in the context of the phrase “possession, custody or power” the expression “power” must, in my view, mean a presently enforceable legal right to obtain from whoever actually holds the document inspection of it without the need to obtain consent of anyone else’. 

The Lonrho decision was followed by the Court of Appeal in Three Rivers District Council v HM Treasury [2002] EWCA Civ 1182.

The principle can, for example, extend to circumstances in which a taxpayer has the right to receive documents from trustees. In Parissis v HMRC [2011] UKFTT 218 (TC), the FTT held that a taxpayer had documents in its power, for the purposes of section 20, Taxes Management Act 1970 (the predecessor of paragraph 18, Schedule 36), despite not holding them or having a legally enforceable right to them. This was on the basis that HMRC had established a prima facie case that a third party would have given the documents to the taxpayer if a request had been made and the taxpayer had failed to demonstrate that such a request would be refused. In One Call Insurance Services Ltd v HMRC [2022] UKFTT 184 (TC), in the context of a remuneration trust arrangement, the FTT held that a company was required to use its de facto power to make ‘serious efforts’ to obtain documents from any relevant person involved in the arrangement. From a practical perspective, this decision suggests that it is advisable for a taxpayer to seek to obtain documents requested by HMRC under an information notice even if the documents are not in the possession of the taxpayer and they have no legal right to the documents. If that request is refused, the taxpayer will be able to demonstrate to the FTT that the requested documents are not in their possession or power.

Documents more than six years old

An information notice cannot require a person to produce a document if the document originates more than six years before the date of the notice (paragraph 20, Schedule 36, FA 2008).

The future of HMRC’s information powers

HMRC’s practice in relation to the use of its information powers appears to be changing and there is anecdotal evidence that HMRC is more willing to issue information notices. This might be due to the continued pressure the department is under to increase the tax yield and increased demands for data from its international counterparts. On 23 March 2021, the government published a call for evidence, The tax administration framework: supporting a 21st century tax system, which requested ideas for how to modernise the tax administration framework. It envisaged a system whereby HMRC could pre-populate tax returns and suggested that HMRC would need more information from third parties. On 27 April 2023, the government published a further call for evidence, The Tax Administration Framework review – information and data, which suggested that the current safeguards, such as internal reviews and appeals, caused delay in obtaining information. The proposed solution was to give HMRC a ‘graded power’ whereby it could apply higher penalties and dispense with the internal review process if a taxpayer has a history of non-compliance with previous information notices.

In the context of these consultations and the increased pressure on HMRC to increase the tax yield and reduce the tax gap, it seems likely that HMRC’s information gathering powers will be increased further in the future and if this does happen, it will be important that appropriate taxpayer safeguards are maintained.