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HMRC Powers: Schedule 36 and Schedule 23

By admin
01 Aug 2014
Tax Investigation

Do you know what information HMRC are entitled to obtain either directly or otherwise? Do you or your clients know what HMRC information gathering powers are?

Given the increased scrutiny on professionals by their clients, there is a heightened risk of negligent action where a client finds that information was carelessly supplied to HMRC. It may be that the adviser was keen to cooperate and didn’t suspect that protracted enquiries would result, which normally equals higher costs!

Knowing what HMRC are entitled to can assist tremendously in managing an enquiry or investigation. Some cases may be simpler to resolve and less costly where a robust attitude is taken in response to information requests.
Below we consider Schedule 36 Finance Act 2008 notices and Schedule 23 Finance Act 2011 notices.

Information gathering starts ahead of an enquiry or investigation. It is more accurate, as illustrated in our previous articles relating to HMRC’s Connect system, to assume that the initial information gathering actually leads to an enquiry or investigation.

Schedule 36

Schedule 36 Finance Act 2008 was intended to bring together HMRC’s information and inspection powers for all taxes. It is a wide power although there are limitations. An HMRC officer may not always issue a notice that requests information within the parameters of Schedule 36.

There are three types of information notices:

  • Taxpayer: in relation to their tax position

  • Third party: in relation to another’s tax position

  • Third party: in respect of a person or persons whose identity is unknown

The notices are not limited to self-assessment enquiries. However, once the enquiry window has expired, an information notice may not be given unless HMRC have reason to suspect a tax irregularity. It would not be wrong to ask HMRC to explain why they have a reason although care ought to be exercised for those wishing to benefit with penalty mitigation!

The notice must be given in writing and should:

  • Require information or documents which are:

    • Reasonably required for the purposes of checking the tax position of the relevant person

    • Within the person’s power or possession

  • Require the recipient to create new documents, e.g. explanations or data lists

  • Provide the recipient with a reasonable time to respond and comply

What is considered to be reasonably required for the purposes of checking the tax position?

The view of what is reasonable in HMRC’s view may not be reasonable in the view of a client or adviser. Requests should be carefully considered to establish whether it is reasonable. Determining reasonableness could be addressed by:

  • Considering whether an alternative request would be easier and have the effect of enabling the checking of the tax position

  • Asking HMRC to explain why they consider it reasonable to request such information

By way of example: in one case, HMRC requested the personal bank statements of a director (and shareholder) during an enquiry into the company’s tax affairs to check the earnings subject to PAYE. The more reasonable alternative was to prepare an analysis of amounts paid to the director from the company’s bank account and cross reference it to payslips and the director’s loan account.

This request demonstrates how information requests can result in wider investigations (the fishing exercise) and it provided the opportunity to discuss with the director possible reasons why HMRC wanted to look at his personal accounts.

Another more disturbing request was for details of another director’s UK property to check the company’s tax position. Clearly, the request could not be required for checking the tax position of the company unless the company owned the property or were in receipt of income from the property, which it wasn’t. Again, it flagged a need to consider the director’s personal tax position in light of the request.

What is within a person’s power or possession to provide?

What is within a person’s power to provide was considered in the case of Lonrho Ltd v Shell Petroleum [1980]. Lord Diplock found that the term power means “a presently enforceable legal right to obtain from whoever actually holds the document inspection of it without the need to obtain the consent of anyone else”.

Possession means the right to the possession of a document. If documents, which are in the possession of a person (they have the sole legal right to their possession) are or have been in the custody or physical possession of that person then they must be disclosed. This applies even if they are held as servant, agent or as an officer of a company. The term possession includes the right to possession, de facto control, physical possession or ownership.

It is necessary to consider what legal right a person served with a notice has the power or possession to provide information. For example, the directors of a company have different rights to information than the shareholders as do the beneficiaries, settlers and trustees of a trust. Information is often provided between parties who do not have a legal right to it and therefore it may be wrongly assumed by a person or adviser that the person is legally entitled to obtain information and therefore has a power to provide.

What is a reasonable time to respond?

The desire to respond quickly to HMRC could cause poorly prepared communications, provision of incorrect information and the failure to meet the anticipated timescale to respond.

No statutory lower limit is prescribed to respond to HMRC. It is normal practice for HMRC to “allow” 30 days or for complex notices a much longer period is allowed (normally 90 days).

It is, however, for the recipient to establish whether the timescale is reasonable and make appropriate representations. Such representations should:

  • Be made shortly after receiving the notice

  • Explain any rationale why a longer period is reasonable (or conversely why the period “allowed” by HMRC is not reasonable)

  • Propose a revised timescale

One reason for an extended timescale could be that the notice requests the person to prepare extensive documents. Another reason, which HMRC are generally receptive to, is that an adviser and the client wish to consider/analyse/check the information in light of the request and make representation to HMRC of their findings (that’s a nice proactive approach!).

HMRC are unlikely to warmly accept an objection near to a deadline. The revised timescale should be realistic, not optimistic and it should not be unreasonable (a period of six months may be pushing the boundaries!).

Notices must be complied with in a manner as may be reasonably specified in the notice: HMRC may specify the format of the documents e.g. electronic or paper. A document includes anything in which information of any description is recorded. Access to computerised records entitles HMRC to check computers or associated apparatus. The power allows HMRC to potentially access computers as well as have the information held on them.

Where a copy document is provided to HMRC, they may request inspection of the original.

Schedule 23

Schedule 23 of the Finance Act 2011 provided HMRC with historically unprecedented information and investigation powers. The data gathering powers cover virtually all data holders (16 broad categories), including:

  • Employers

  • Banks

  • Insurance companies

  • Financial institutions

  • Brokers

  • Auctioneers

  • Estate agents

  • Charities

The legislation was introduced to assist with the efficient and effective discharge of HMRC’s tax functions and enables HMRC to simply monitor taxpayers!

Unlike the requirements of powers in schedule 36 Finance Act 2008, HMRC can:

  • Exercise the Schedule 23 power simply to be more efficient and effective

  • Issue a Schedule 23 Notice without seeking Tribunal authorisation

The recipient of a notice can appeal on the grounds that it would be unduly onerous to comply although an appeal is not possible where the requested data forms part of its statutory records. The recipient could also appeal on the grounds they are not a ‘relevant’ data holder or that the data is not ‘relevant’ data. No appeal can be made if the Tribunal approved the giving of the notice in the first place.

Tribunal approval requires HMRC first notifying the data holder of their intention and giving sufficient opportunity for representations. A summary of the representations must be given by HMRC to the Tribunal. The data holder has no right to be present at the hearing and therefore it is prudent for representations to be sent directly to the Tribunal.

Now for some interesting points:

Employers: Relevant data is information relating to all employment related payments, but excluding payments totalling less than £500 or from which income tax is deductible.

Interest Payers: Broadly defined to include foreign dividends, building society share dividends and alternative finance returns.

Persons in receipt of money or value belonging to another: Obtain details of merchants claiming payment of credit card sales, which would allow trader’s accounts to be verified.

Persons involved in a settlement: Request of information and documents relating to the settlement, the income or gains arising. The powers are not intended to be limited to UK settlements or UK resident trustees.

Charities: Information relating to gift aid and other relief that is claimed on donations.

In addition to the above, a notice can be used to obtain relevant data, including name, address, beneficial owners, recipients of income or value and information relating to the asset from the following data holders:

  • Custodians

  • Payers of grants and subsidies (public funds)

  • Persons issuing licenses and approvals

  • Estate agents, lessees and occupiers of land

  • Dealers in securities transactions (including clearing houses)

  • Auctioneers and other persons involved in dealings of commodities and tangible moveable property

  • Lloyds managing agents

  • Investment plan managers

  • License holders under the Petroleum Act 1998 and oil field responsible persons

  • Insurance companies and related intermediaries

  • Persons involved in environmental activities

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