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Suspicious minds!

Information notices have been an important and valuable weapon in HMRC’s armoury of compliance powers since the information and inspection provisions were introduced more than ten years ago (all references in this article are to those rules in FA 2008, Sch 36, unless otherwise stated).

The general rule

The most common situation in which HMRC will issue an information notice is where HMRC has opened an enquiry into a taxpayer’s self-assessment return, and HMRC considers that it needs further information and/or documents to progress the enquiry. It must be borne in mind that the information and/or documents requested by HMRC must be ‘reasonably required’ for the purposes of checking the taxpayer’s tax position (Sch 36, para 1).

‘Checking’ is a wide-ranging term, which includes carrying out an investigation or enquiry of any kind (Sch 36, para 58). However, the scope of HMRC’s information and inspection powers is subject to various restrictions (in 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 (Sch 36, para 21(1)).

This general rule looks like a very helpful ‘let-out’ for taxpayers. Unfortunately, the restriction in HMRC’s information powers is subject to certain exceptions (i.e. Conditions A to D in the legislation).

Exceptions to the rule

As intimated above, the most common exception to this restriction (Condition A) allows HMRC to issue an information notice if there is an ‘open’ enquiry into a tax return (Sch 36, para 21(4)(a)).

Taxpayers (and some practitioners!) might be forgiven for breathing a sigh of relief if HMRC has not issued a tax return enquiry notice by the deadline for doing so. In most cases, the statutory 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, the closure of HMRC’s enquiry ‘window’ is not necessarily the end of the matter.

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 (Sch 36, para 21(6)). In other words, the Condition B 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 based on Condition B. However, HMRC would need to be able to correct the tax position within the statutory time limits for making a discovery assessment if a valid 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. However, 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). Separate time limits apply for assessments where the loss of tax involves an ‘offshore matter’ or an ‘offshore transfer’ (TMA 1970, s 36A), which are not considered here.

Reason to suspect?

The ‘reason to suspect’ a loss of tax is a crucial requirement for a valid HMRC check in reliance of Condition B above. HMRC’s information powers potentially enable the HMRC officer to decide whether a discovery assessment needs to be made. However, HMRC recognises (in its Compliance Handbook manual, at CH23560) that the ‘reason to suspect’ requirement imposes a limitation on the scope of the check by HMRC’s officers:

“‘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”.

A difficulty with this ‘reason to suspect’ requirement is that there is no statutory definition of the term. However, in Nijjar v Revenue and Customs [2017] UKFTT 175 (TC), the tribunal judge 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”.

No fishing!

Does the requirement for a ‘reason to suspect’ prohibit HMRC from undertaking a ‘fishing expedition’ in the hope of finding something wrong with the taxpayer’s tax position?

In Newton v Revenue and Customs [2018] UKFTT 513 (TC), HMRC informed the taxpayer that it was checking his tax position and requested various information for three tax years. HMRC subsequently issued an information notice, on the basis that there appeared to be a shortfall between the taxpayer’s income and expenditure. The items requested were: (1) A detailed listing of all shareholdings for the relevant tax years; (2) A detailed listing of all dividends received in those years; and (3) A listing of all bank accounts operated (solely or jointly) by the taxpayer in those years. The taxpayer appealed.

The First-tier Tribunal held that HMRC had not shared grounds or given any evidence that might enable the tribunal to see that HMRC was entitled to have its suspicion that dividends had been omitted from the taxpayer’s tax return and that it was objectively reasonable for HMRC to have it. The tribunal therefore held that Condition B was not met, and HMRC’s information notice was quashed.

Private bank account information, etc.

By contrast, in Matharu v Revenue and Customs [2019] UKFTT 0528 (TC), HMRC wrote to the taxpayer in November 2017 stating that HMRC believed his self-assessment return for the tax year 2015/16 may be inaccurate. The letter included a schedule of information and documents needed to carry out HMRC’s check, including details of any other income received during the year, and “all private bank and/or building society accounts, bank statements, cheque book stubs, and deposit book counterfoils, for any account into which any personal income or expenditure was paid during the period of the accounts”.

As the taxpayer failed to submit the information requested, HMRC issued an information notice (under Sch 36, para 1). The taxpayer did not supply the documents relating to his private accounts. HMRC subsequently issued a penalty notice for £300. The taxpayer appealed. In a separate enquiry into a company of which the taxpayer was a director, on reviewing the company’s bank statements HMRC identified discrepancies. HMRC relied on the discrepancies between the taxpayer’s reported income and the ‘wages’ recorded by the company together with considerable amounts transferred between the company and an account(s) under the control of the taxpayer to cause HMRC to have reason to suspect that the taxpayer’s self-assessment return for 2015/16 might be incorrect.

The First-tier Tribunal concluded that HMRC clearly had evidence which gave it ‘reason to suspect’ in accordance with Condition B in Sch 36, para 21(6). As the tribunal held that Condition B had been met at the time the Sch 36 notice was issued, the taxpayer’s appeal was dismissed.

The tribunal in Matharu distinguished that case from Betts v Revenue and Customs [2013] UKFTT 430 (TC). In Betts, HMRC admitted that before it issued an information notice it did not have information which gave it ‘reason to suspect’. HMRC sought additional information on the basis that it may, when added to the information already held by HMRC, give the ‘reason to suspect’ required by the legislation. However, in the tribunal’s judgment, seeking information or documents in order to try to meet Condition B was simply the wrong way around.

Prove it!

For an information notice to be valid, the burden of proof is on HMRC to provide evidence to demonstrate that they were justified in seeking the information notice (under Sch 36, para 1), and that Condition B was satisfied (if applicable).

As indicated above, if Condition B does allow HMRC to check a taxpayer’s tax position, the information or document must nevertheless be ‘reasonably required’ by HMRC for the purpose of the check.

The TACS Partnership is an independent firm of tax specialists who have been providing expert advice for over 25 years. Its clients include high net worth individuals, taxpayers facing HMRC enquiries, accountancy and legal firms seeking specialist tax advice for their clients, and limited companies, both family owned and fully quoted. Visit www.tacs.co.uk

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