Mark McLaughlin highlights a case in which HMRC was not given its own way when requesting information to check a taxpayer’s tax position.
Taxpayers understandably do not generally relish contact with HMRC, such as receiving requests for information and/or documents in respect of an individual’s tax affairs.
The natural instinct of some taxpayers is to resist such requests, or alternatively to provide only the details that the taxpayer considers HMRC should be entitled to see.
However, HMRC have powers to obtain information and documents, and can issue an information notice requiring the taxpayer to provide information or produce a document if it is reasonably required to check the taxpayer’s tax position (FA 2008, Sch 36, para 1).
There are limits
HMRC’s information powers are wide ranging. However, there are certain restrictions on those powers (FA 2008, Sch 36, Pt 4). For example, if an individual has filed a self-assessment return for a tax year, HMRC may not give an information notice to check the person’s income tax or capital gains tax position for that tax year.
This restriction on HMRC’s information powers is potentially helpful. However, it does not apply if any of certain conditions is satisfied. The first and probably most common condition (‘condition A’) is that HMRC has opened an enquiry into the relevant tax return (or a claim or election), and the enquiry has not been completed.
Another important exception (‘condition B’) is that HMRC has reason to suspect that tax has not been assessed for the period in question, or that there has been an underassessment of tax for that period, or that excessive tax relief has been given.
Where HMRC requests information during an enquiry into a taxpayer’s return, objections are sometimes raised by the taxpayer (or their agent) that HMRC is on a ‘fishing expedition’, i.e. broadly that HMRC’s information request is speculative and with the intention of searching for something wrong with the tax return. If the taxpayer resists the information request, HMRC may issue an information notice (i.e. based on condition A above).
Does HMRC have a statutory entitlement to issue an information notice as part of a fishing expedition? This question was considered by the First-tier Tribunal in Spring Capital Ltd v Revenue and Customs  UKFTT 8 (TC). The tribunal commented: “There is nothing in [Sch 36, para 1] that requires HMRC to suspect that the return is incorrect before issuing an information notice. HMRC are entitled to check [the] taxpayer’s tax position and they are entitled to any documents or information reasonably required for the purpose of doing so. In other words, HMRC are entitled to undertake ‘fishing expeditions’ when checking returns: they do not need suspicion in order to check a tax return.”
While decisions of the First-tier Tribunal do not set a binding precedent, they will generally be persuasive in similar cases.
Reason to suspect
As mentioned, HMRC may issue an information notice for a period in which the taxpayer has submitted a tax return (e.g. where the enquiry window has closed) if it has reason to suspect tax not assessed, under-assessed, etc. (i.e. condition B above). Does this requirement for a ‘reason to suspect’ prohibit HMRC from undertaking a fishing expedition? This point was considered in Newton v Revenue and Customs  UKFTT 513 (TC).
In that case, HMRC informed the taxpayer that it was checking his tax position and requested various information in respect of the tax years 2012/13, 2013/14 and 2014/15. HMRC subsequently issued an information notice, on the basis that there appeared to be a shortfall between the taxpayer’s income and expenditure. The relevant items requested were: (1) A detailed listing of all shareholdings for the above 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 found (among other things) 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 (in FA 2008, Sch 36, para 21) was not met, and HMRC’s information notice was quashed.
The tribunal in Newton considered that the burden of proof was on HMRC to provide evidence to demonstrate that they were justified in seeking an information notice (under FA 2008, Sch 36, para 1). However, it should be noted that a taxpayer cannot appeal against a notice to provide information of documents forming part of the taxpayer’s ‘statutory records’, i.e. broadly information or documents required by tax law to be kept (under the Taxes Acts or any other tax enactment), where the statutory retention period has not expired (Sch 36, paras 29(2), 62).