HMRC seeks power to force disclosure of third party information without judicial oversight
HMRC has opened a consultation “Amending HMRC’s Civil Information Powers”.
According to HMRC, the ‘massive change’ in the information systems landscape since its current powers to demand third-party information were originally legislated, suggest that they may no longer be relevant in some cases.
They state that this consultation is an opportunity to review aspects of these provisions, to ensure they remain appropriate, enable HMRC to carry out its functions efficiently and effectively, and also to consider whether the relevant safeguards remain proportionate.
However I have some concerns, as do other professional advisors and commentators, that the proposals will give unprecedented powers to HMRC to obtain information about taxpayers, without independent tribunal oversight.
Schedule 36 FA 2008 (“Schedule 36”) currently allows HMRC to access information and documents from a number of different sources in different situations :
• From the taxpayer directly
• From a third party about a known taxpayer
• From a third party about a taxpayer whose identity is not known
• From a third party about a taxpayer whose identity can be ascertained.
Currently prior to issuing a Third Party Notice i.e. a request to a third party (bank, accountant, lawyer etc.) to provide information in relation to a taxpayer, HMRC must seek agreement from the taxpayer or the approval of a tax tribunal. The requirement to obtain tribunal approval is to safeguard taxpayer rights and prevent fishing expeditions.
It is used rarely. According to HMRC there were only 215 requests for tribunal approval of a third-party notice in the 2016/2017 financial year. Of those 214 were approved and only one was rejected.
HMRC argues that :
1) Obtaining approval from the tribunal can add a great deal of time to an enquiry or delay exchanging information internationally.
2) The proposed reform will align their processes in relation to Third Party Notices with those for taxpayer notices.
3) the introduction of the Common Reporting Standard (CRS) will allow overseas tax authorities to automatically receive data on UK residents’ accounts with financial institutions without supervision or oversight.
An overview of the proposed reforms is set out below.
Third Party Notices – Proposed Reform/Options for Change
Aligning procedure for third party notices with those for taxpayer notices
This will remove the requirement to obtain tribunal approval for third party notices.
It seems to me a tenuous argument to say that asking a taxpayer themselves for information about their own affairs and asking a third party (sometimes without taxpayer knowledge) for information about a taxpayer are analogous. The situation and implications are very different as are the safeguards required. This is the primary area of concern with the proposals.
Financial Institution Notice
The slightly less intrusive and more targeted proposal considered within the consultation document would instead give HMRC a right to request information such as bank statements and transaction histories from financial institutions without tribunal approval. A new type of notice (a Financial Institution Notice) would be created for this purpose.
This addresses the CRS concern, without extending powers unnecessarily widely. Requests for other forms of third-party information from other parties would remain subject to tribunal approval as currently.
Obtaining Information for Other Functions
A further change is that HMRC propose to extend Schedule 36 to allow it to demand information for any tax purpose. Currently Schedule 36 allows information to be requested to allow HMRC to check a persons’ “tax position”. The extended powers would allow them to request information for other purposes, most pertinently debt collection.
There are various penalties which can be levied by HMRC in relation to failure to comply with information notices. One of these is for non-compliance with a notice about a taxpayer whose identity is not known. HMRC may apply to a tribunal to impose increased daily penalties of up to £1,000 per day. However the legislation in relation to this is badly drafted and has lead to confusion and difficulties. It is proposed that this be changed to make it absolutely clear that in cases where the conditions for an increased penalty are met, HMRC will seek approval from the tribunal to assess the increased penalty. If the tribunal agree then HMRC will notify the person that they are liable for the increased penalty from the specified date and assess the penalty against the person in the same way as they do with other penalties assessed under Schedule 36.
I don’t see this as too much of a concern. Although interestingly, one of the consultation questions is whether increased daily penalties should be extended to all schedule 36 penalties. This would see potential for large increases in some of the other penalty situations.
Third Party obligation not to notify the Taxpayer
Currently HMRC may seek approval from the tribunal when issuing a third party notice, not to notify the taxpayer or provide them with a summary of the reasons why they require the information. This would be approved in cases where the tribunal is satisfied that notifying the taxpayer might prejudice the assessment or collection of tax.
However currently there is no provision to prevent the third party from notifying the taxpayer. This risks the taxpayer being told of the notice by the third party even where the tribunal has decided that such action could be prejudicial to the assessment or collection of tax.
It is proposed in such cases to put an obligation on the third party not to inform the taxpayer about the notice. Reassuringly, HMRC would still require tribunal approval to waive the requirement to notify the taxpayer that a third party notice had been issued.
The closing date for comments on the proposals is 2 October 2018.