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Proposed changes to HMRC's information powers: a step too far?

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By Susan Cattell, Head of Tax Technical Policy, ICAS

10 August 2018

Main Points

  • HMRC has extensive powers for obtaining information about taxpayers.

  • Changes are proposed to its powers to issue information notices.

  • Do they strike the right balance?

Susan Cattell reviews proposals to amend HMRC’s information powers and remove an important safeguard.

ICAS and its members work to support tax compliance and compliant taxpayer behaviour – to ensure that the right amount of tax is paid. To make sure that HMRC can ‘police’ the system, it needs a degree of access to information about taxpayers: this can be bulk data about large groups of taxpayers or more targeted data, as outlined below. But how far should that access go? What safeguards should be in place? Proposals currently out for consultation raise a few concerns.

Bulk data

For many years HMRC has routinely received bulk data from banks and building societies about interest paid to their customers. However, its bulk data gathering powers go beyond that. For example, in recent years HMRC has obtained powers to collect data from merchant acquirers (i.e. businesses that process credit and debit card transactions); it uses this data for risk analysis to help identify traders receiving income but not registered for tax, or registered traders who understate their income. As digital commerce has expanded it has also gained powers to obtain information from business intermediaries and electronic payment providers.

It is important to note that this is data supplied in bulk, so it is unlikely to affect the data suppliers’ relationships with their customers.

Common Reporting Standard Exchange of Information

By 30 September 2018 more than 100 countries will be exchanging data on financial accounts under the OECD’s Common Reporting Standard (CRS). This involves data held by financial institutions in the participating countries. Under CRS, HMRC supplies information from UK financial institutions to overseas tax authorities about their taxpayers. It will also be receiving information about bank accounts, investments and trusts of UK taxpayers held overseas. F(2)A 2017 introduced legislation requiring taxpayers with undisclosed UK tax liabilities (IT, IHT and CGT) in respect of offshore interests, to correct the position by telling HMRC about the outstanding tax due by 30 September 2018. After that date, a much tougher penalty regime will apply and HMRC will be using CRS data to try to identify those who have not made a disclosure when they should have done.

Information Notices

HMRC also has the power (under Schedule 36 FA 2008) to require information, specified in information notices, directly from taxpayers and from third parties about taxpayers. Currently, only information which is reasonably required to check a person’s tax position can be specified in a notice. There are also some restrictions, for example, around legally privileged or journalistic information.

The UK is a party to international agreements allowing information sharing between tax authorities in the various participating jurisdictions. In addition to issuing notices for its own purposes, HMRC, therefore, issues third-party notices in response to requests for information from other tax authorities.

In contrast to bulk data gathering powers, third-party information notices are targeted and do have the potential to affect the relationship between the data supplier and the subject of the notice. An HMRC consultation published in July 2018 outlines proposals to amend some aspects of HMRC’s Schedule 36 information powers.

What are the proposed changes?

1. Third-party notices

Broadly, under the current rules, HMRC can issue a third party notice either with the agreement of the taxpayer HMRC is seeking information about – or after obtaining approval from the independent tax tribunal. The consultation proposes to remove the requirement for HMRC to seek tribunal approval.  Instead, an authorised HMRC officer would approve the issue of the notice. The third party would have the right to appeal on the grounds that it is too onerous to comply.

HMRC would also retain the right to seek approval for the issue of a notice from the tribunal, where it chose to do so. In these cases, the third party would have no right of appeal.

Normally, HMRC must tell the taxpayer why the information is required from the third party. However, it can apply to the tribunal for permission not to notify the taxpayer if it believes notification could prejudice the collection of tax. In these cases, there is currently nothing to prevent the third party from telling the taxpayer about the notice. The consultation, therefore, proposes that where HMRC has obtained tribunal approval not to notify, the third party will be required not to inform the taxpayer.

2. Financial Institution Notice

According to the consultation document, the majority of third-party information requests received by HMRC from other tax authorities are requests for banking information. As an alternative to the proposal (1) ie removing the requirement for tribunal approval for all third-party notices, the consultation, therefore, suggests that a new notice should be introduced specifically for banking information.

Banking information would include bank statements, information about transactions on the account and information about the legal and beneficial ownership of the account.  In addition to removing the need for tribunal approval (the notice would be issued by an authorised HMRC officer), there would be no right of appeal against the notice.

The consultation proposes that the new notices would be available for both domestic cases and those where an overseas tax authority requests the information.

HMRC’s justification for the alternatives proposed in (1) and (2) is that the current processes for obtaining third party information (looked at in an international context) are unusually formal and lengthy. It states that some overseas jurisdictions find them so onerous that they are discouraged from requesting information. They also require disproportionate HMRC and tribunal resources.

3. Obtaining information for other purposes

The consultation also proposes that rather than being restricted to information required to check a person’s tax position, HMRC should be permitted to obtain information that is reasonably required for all its tax functions, including debt collection.

According to HMRC, this would be useful in cases where taxpayers owe tax and may have hidden assets. It would also overcome difficulties in cases where HMRC wants to consider joint and several liabilities in respect of a company with no tax liability of its own (which is being used in ‘contrived circumstances’).

4. Penalties

The legislation is currently unclear on the procedure for issuing increased daily penalties for failure to comply with certain third party information notices. In some cases, this may mean that neither HMRC nor the tribunal can assess the increased penalty. The consultation, therefore, proposes clarification of the legislation – which seems sensible.

HMRC also want the ability to impose increased daily penalties (which can be as high as £1,000 per day) extended to all Schedule 36 information notices ie to include notices issued to taxpayers. This might appear to be a simple rationalisation of the rules but because there are currently far more taxpayer notices than third-party notices, the impact would be more significant than is immediately obvious.

Striking the right balance?

As noted at the outset, HMRC does require information powers so that it can check tax compliance – and comply with international agreements. However, taxpayers need to have confidence that the powers are being exercised proportionately and that appropriate safeguards are in place. If the need for tribunal approval for third-party notices is removed HMRC will no longer have to demonstrate that the information it is seeking is ‘reasonably required’.

The consultation notes that in the year to 31 March 2017 only 215 requests for tribunal approval for third-party notices were made by HMRC and that HMRC expects the number to remain low. If this is the case it is hard to see why removing the main safeguard would be justified. It seems more likely, particularly if overseas authorities are being deterred by current procedures, that there will, in practice, be far more notices.

Given that the majority of requests apparently relate to banking information, it is also hard to see any justification for removing the safeguard of tribunal approval in all cases. However, proposal (2) for financial institution notices also raises concerns. The consultation makes no mention of the potential adverse effects on UK taxpayers of a third party notice issued to their bank; as a result of a notice, risk-averse financial institutions might make assumptions (and decisions) detrimental to their customers.

No analysis is provided of the split between domestic and overseas notices - but a major concern seems to be the perceived inability of the UK authorities to meet international standards for the provision of information to other jurisdictions. Rather than adopting proposal 2 in its entirety, this could be addressed by introducing financial institution notices, as proposed, where they arise from overseas requests - but retaining the requirement for tribunal approval in domestic cases. Alternatively, in domestic cases HMRC could be required to issue a taxpayer information notice first, giving the taxpayer the ability to supply the information themselves, to avoid a notice being served on their bank.

Let ICAS know what you think

ICAS has held a useful meeting with HMRC to discuss the consultation. HMRC said that no decisions have been taken and they want to hear views. ICAS will be submitting a written response before the 2 October deadline. If you have any comments on the proposals let us know as soon as possible.

Share your views


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