Financial institution notices and the removal of taxpayer safeguards

As is well known, Schedule 36 of Finance Act 2008 gives HMRC extensive powers of information-gathering, search and inspection in order to check a taxpayer’s tax position or (following FA 2021) to collect a tax debt owed by the taxpayer. These include powers to obtain information from a person other than the taxpayer:

  • Under para 3 of Sch 36, an HMRC officer may issue a “third party notice” requiring person A to provide information or produce a document if the officer “reasonably requires” it for the purpose of checking the tax position, or collecting a tax debt, of a known person B.
  • A similar power in para 5 enables an HMRC officer to serve a third party notice in order to check the tax position or collect a tax debt of a person whose identity is, or a class of persons whose identities are, unknown to the officer (an “identity unknown notice”).
  • This is extended by para 5A to the use of third party notices to check the tax position or collect tax debts of persons whose identities the officer does not know but has reason to believe could be ascertained with the assistance of the third party to whom the notice is addressed (an “identification notice”).

This suite of provisions about third party notices has now been extended by Finance Act 2021. Section 126 of the Act carves out a new genre of third party notice called a “financial institution notice” (FIN), enabling an “authorised officer” of HMRC to require a financial institution to provide information or produce documents concerning a named taxpayer, if it is reasonably required for the purpose of checking the taxpayer’s tax position or collecting a tax debt owed by the taxpayer.

The authorised officer must be of a senior grade specifically authorised to issue a FIN, and must reasonably believe that it would not be unduly onerous for the institution to provide the information or produce the document. A “financial institution” means a financial institution under the Common Reporting Standard, or an issuer of credit cards.

Financial institution notices may be issued on or after 10 June 2021, the date on which FA 2021 received Royal Assent (though they can relate to a tax position or tax debt prior to that date).

Removal of taxpayer safeguards

As originally drafted, Sch 36 provides certain taxpayer safeguards in relation to third party notices:

  • Before issuing a third party notice, the officer must have either the consent of the taxpayer or the approval of the tribunal, except where statutory records are required or in certain other exceptional cases.
  • Where tribunal approval is sought, the tribunal must satisfy itself that the application is being made by or with the agreement of an authorised officer who is justified in making it, and that the taxpayer has received a precursor letter: in other words, a notification that the information or documents in question are required and giving the taxpayer a reasonable chance to make representations.
  • The tribunal may dispense with the requirements to name the taxpayer in the notice or to serve the taxpayer with a copy of the notice if satisfied that doing so would be prejudicial to the assessment or collection of tax.
  • The third party may appeal against the notice on the grounds that complying with it or any requirement in it would be unduly onerous.

Those are the safeguards attaching to the issue of third party notices under paras 3, 5 or 5A of Sch 36.

The effect of FA 2021, section 126 (which inserts a new para 4A into Sch 36) is to waive two of those safeguards in respect of notices designated as FINs:

  • Firstly, an authorised officer is not required to seek the consent of the taxpayer or the approval of the tribunal before issuing a FIN. The approval of the tribunal need only be applied for if it is desired to dispense with the requirement to name the taxpayer in the notice or to give the taxpayer a copy of the notice and a summary of the reasons why the information and documents are required. The tribunal must grant such an application if satisfied that to comply would be prejudicial to the assessment or collection of tax.
  • Secondly, the third party’s right of appeal has been removed, replaced by a requirement only for a reasonable belief on the part of the officer that providing the information or producing the document would not be unduly onerous.

Justification for removal of safeguards

The government justifies removing the need for tribunal approval on the grounds that the time taken to get it means the UK is too slow in obtaining information requested by overseas jurisdictions. HMRC say it takes them an average of 12 months to obtain information when the international standard is six months because (they allege) seeking the approval of a tribunal takes too long. In fact, according to evidence offered to a Parliamentary committee (see House of Lords report New powers for HMRC: fair and proportionate? Paras 115-118), the tribunal approval process is taking between four and six weeks now that third party information notice applications have moved to video hearings, whereas other stages in the process – work within HMRC and correspondence with foreign tax authorities - takes over eight months on average.

Whatever the justification, the measure has been widely criticised for removing the safeguards of requiring HMRC to obtain the consent of the taxpayer before issuing a FIN, or alternatively the approval of the tribunal, and the right of appeal of the third party recipient of the notice. Even if the time taken to deal with foreign government requests could be said to justify removing the oversight of the tribunal, it does not justify abolishing the third party’s right of appeal, nor does it explain why the same restrictions should be applied to purely domestic cases.

Duties of HMRC

Given the removal of those safeguards, it is important to know what is expected of HMRC officers involved in issuing third party notices, including FINs. A section of HMRC’s Compliance Handbook sets out the respective duties of an investigating officer and the authorised officer who approves the giving of the notice.

Despite the removal of the right of appeal of the financial institution to whom a FIN is given, the authorised officer who issues it must reasonably believe that it will not be unduly onerous for the financial institution to comply, and the reasonableness of his or her belief can be tested if necessary by way of judicial review (although that route is cumbersome, expensive and beyond the reach of the ordinary taxpayer). Officers are encouraged to “consider carefully whether that burden [i.e. on the recipient in terms of time and costs] is reasonable and proportionate compared with your need to check the person’s tax position. Wherever possible, and in every case where the approval of a tribunal is sought, you should give the third party the opportunity to comment on the extent of the burden and those representations should be carefully balanced against the benefits the information or documents will bring to the progress of your check.”

Robin Williamson

Written by Robin Williamson

Robin Williamson MBE CTA (Fellow) is an author and commentator on tax, welfare and public policy. He was technical director of the CIOT’s Low Incomes Tax Reform Group from 2003 to 2018 and a part-time senior policy adviser at the Office of Tax Simplification from 2018 to 2019. In May 2020 he won the lifetime achievement award at the Tolley Taxation Awards. He was recently appointed UK country reporter to the Observatory on the Protection of Taxpayer Rights at the IBFD.

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