Most practitioners will be aware of HMRC’s statutory powers to obtain information and documents from the taxpayer which are reasonably required by HMRC for the purpose of checking the taxpayer’s tax position.
‘Checking’ in this context includes carrying out an investigation or enquiry of any kind (FA 2008, Sch 36, paras 1, 58). HMRC’s information powers are therefore wide-ranging. However, the scope of these powers is subject to various restrictions (in FA 2008, Sch 36, Pt 4). Perhaps the most well-known restriction is that if (say) an individual’s tax return has been submitted to HMRC for a particular tax year, an information notice may not be given for the purpose of checking the individual’s income tax or capital gains tax position for that tax year (FA 2008, Sch 36, para 21(1)).
However, some taxpayers may be disappointed to learn that this restriction in HMRC’s information powers is subject to certain exceptions (ie Conditions A to D in the legislation).
‘Open’ tax return enquiries
Perhaps the most common exception to this restriction (Condition A) allows HMRC to issue an information notice if a tax return enquiry notice has been given to the taxpayer in respect of the return and the enquiry has not been completed, ie there is an ‘open’ enquiry into the return (FA 2008, Sch 36, para 21(4)(a)).
Some practitioners might assume that HMRC cannot issue an information notice if no tax return enquiry notice has been issued and the deadline for an enquiry notice has passed. In most cases, the deadline for HMRC to give notice of its intention to enquire into the individual’s tax return is 12 months after the day on which the return was delivered (TMA 1970, s 9A(2)).
Unfortunately for the taxpayer, such an assumption is incorrect. A separate exception to the restriction in HMRC’s information powers (Condition B) applies broadly where an HMRC officer has reason to suspect as regards the taxpayer that an assessable amount for the relevant tax year may not have been assessed, or that tax may have been under-assessed, or that tax relief given may be excessive (FA 2008, Sch 36, para 21(6)). In other words, this exception applies if there is a potential ‘discovery position’ such that HMRC could correct the taxpayer’s position through a discovery assessment (eg under TMA 1970, s 29, in the case of an individual).
There is no explicit time limit for HMRC to give an information notice in these circumstances. However, HMRC acknowledges that it would need to be in a position to correct the tax position if a discovery was made (see HMRC’s Compliance Handbook manual at CH23540). There is an ordinary time limit for discovery assessments of four years following the end of the relevant tax year, but this is extended to six years if there has been a careless loss of tax, or twenty years if the loss was brought about deliberately (TMA 1970, ss 34A, 36).
The significance of the distinction between an HMRC enquiry and a check was recently illustrated in Nijjar v Revenue and Customs  UKFTT 175 (TC). In that case, HMRC conducted a check into a partnership’s tax affairs for the year ended 5 April 2012, as it was believed possible that trading profits may have been understated. HMRC issued an information notice on 21 March 2016. The appellant partner appealed. He argued that HMRC was conducting a tax return enquiry instead of a check, and that HMRC was outside the time limit allowed (TMA 1970, s 12AC(2)) for opening the enquiry.
However, the First-tier Tribunal disagreed with the taxpayer, and held that HMRC was not conducting an enquiry under the ‘false flag’ of a check. HMRC’s activity was therefore not out of time, as the time limit in TMA 1970, s 12AC applies to enquiries and not to checks.
Reason to suspect
It should be noted that a prerequisite for a valid HMRC check in reliance of Condition B in FA 2008, Sch 36, para 21(6) is that the HMRC officer has ‘reason to suspect’ a loss of tax, as outlined above. HMRC’s information powers potentially enable the HMRC officer to decide whether a discovery assessment needs to be made. However, HMRC acknowledges in the guidance to its officers that the ‘reason to suspect’ requirement imposes a limitation on the scope of the check: ‘”reason to suspect” does not allow you to make speculative enquiries, seeking information merely in the hope that something relevant will crop up. You must be able to identify specific risks’ (CH23560).
In Nijjar, the tribunal noted that there was an ostensible disparity between the taxpayer’s declared turnover (approximately £350,000) and the amount banked (£511,000), which gave rise at that time to a ‘reason to believe’ within the proper meaning of Condition B as outlined above. The tribunal commented: ‘only suspicion is called for – in the sense of to have suspicions or doubts, or to imagine something to be possible: Condition B does not require knowledge…that an amount that ought to have been assessed may not been assessed’.
If Condition B does allow HMRC to check a taxpayer’s tax position after the tax return has been submitted, it should be remembered that information or document must still be ‘reasonably required’ by HMRC for the purpose of the check (FA 2008, Sch 36, para 1).
Unfortunately for the taxpayer in Nijjar, the tribunal held that the information in dispute (which included ‘all bank statements, personal or business, and either jointly or solely held, that business takings were paid into’) was reasonably required for the purposes of HMRC’s check of the taxpayer’s tax position, and in an unredacted form. His appeal was dismissed.
Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is editor and co-author of ‘Tax Planning 2017/18’ (Bloomsbury Professional), and is a consultant to professional firms with Mark McLaughlin Associates Ltd (www.markmclaughlin.co.uk).