Written evidence from Keith Gordon, Temple Tax Chambers (DFE0005)

1. I am very concerned about the proposed changes to Schedule 36 to the Finance Act 2008.
2. The ability of HMRC to obtain bank and credit card information without Tribunal oversight will amount to an extension of the enquiry regime through the backdoor and will lead to taxpayers having to explain transactions many years after the event.  My concerns are exacerbated by my experience in practice where HMRC frequently issue Schedule 36 notices in the hope that uninitiated taxpayers or their advisers will comply with the requests and not be aware that HMRC could not justify the requests were the cases to have gone to a Tribunal.
3. If HMRC truly want these new powers to comply with international obligations then the powers should be limited to cases where requests are being made on behalf of overseas tax authorities. 
4. However, my preference is that taxpayer and third parties’ rights are not cast aside in the name of HMRC expediency.  If the current system is not working then the better response would be to improve HMRC and Tribunal resources.

Introduction

5. The following represents my personal reflections on the proposed changes to HMRC’s civil information powers.  It is based on my experience as a barrister in practice, specialising in resolving disputes between taxpayer and HMRC.
6. My evidence focuses on the situation for taxpayers (principally individuals and companies) who are subject to the Self Assessment regimes (either Income Tax or Corporation Tax). 
7. It must be remembered that, at the heart of the Self Assessment regime, is the following balanced package of safeguards and obligations[1]:
1. HMRC have a limited period (usually 12 months) in which to open an enquiry into a tax return;
2. Once an enquiry is open, HMRC may ask for any information they might reasonably require to check the return and, in due course, on closing the enquiry, may amend the taxpayer’s return to reflect HMRC’s conclusions;
3. Absent any such enquiry, HMRC may assess for additional tax only if:
1. HMRC have discovered additional tax is payable; and
2. HMRC can also overcome one of the following additional safeguards which are intended to promote certainty for taxpayers:
1. (within four years of the relevant tax year) that there was insufficient disclosure to alert HMRC to the possibility of underpaid tax;
2. (within six years) that the taxpayer (or agent) has carelessly caused the previous under-assessment; or
3. (within twenty years) that the taxpayer (or agent) has deliberately caused the previous under-assessment.

Historical background

8. Prior to the introduction of Schedule 36 to the Finance Act 2008, HMRC could request information about taxpayers in the following scenarios:
1. from a taxpayer, if in the course of a statutory enquiry;
2. from a taxpayer, outside a statutory enquiry, if the request has been approved by a General or Special Commissioner (the statutory forerunners to the First-tier Tribunal) or the request has been effected at Board level;
3. from third-parties again if approved by a Commissioner or the request has been effected at Board level.
9. In general, this worked.  It meant that the overwhelming majority of HMRC information requests came in the context of statutory enquiries (which, to be fair, is the whole point of such enquiries).  And, such information notices were capable of being appealed against to the General or Special Commissioners.
10. Applications for a General or Special Commissioner’s pre-approval of an information notice tended to be limited to “big” cases and were in practice the remit of specialist investigation offices (such as the then Special Compliance Office).  Presumably, the need for an officer to prepare an application and then to appear before the Commissioner to justify the request in the face of judicial questioning meant that HMRC officers were careful before using this power.  In any event, it was only the specialist investigators that used this power.

Schedule 36 to the Finance Act 2008 – taxpayer notices

11. In this section, I shall discuss the impact of the Schedule 36 rules on information notices issued to taxpayers.  Although the current proposals concern third-party notices, I consider that the situation for taxpayer notices is relevant background provides the context for the latest proposals.
12. The Schedule 36 provisions have broadly followed the model which preceded it.  In particular, within paragraph 21 of Schedule 36, it is provided that information requests may not be made unless either:
1. there is an open enquiry or
2. HMRC have a suspicion that they are about to make a discovery.
13. Underpinning this is the further overarching requirement that information requests have to be “reasonable for the purposes of checking the taxpayer’s tax position” (paragraph 1).
14. One concern I expressed in 2008 was whether the time limits governing discovery assessments (see paragraph ‎3.c.ii above) would also be honoured by the statute.  To take an extreme example, suppose HMRC were asking for information which related to a tax year 15 years ago, would HMRC also need to show that there was a prospect of being able to show that any under-assessment they might discover was caused by deliberate conduct?  However, at the time, I was given oral reassurance by the relevant team introducing these powers at a “roadshow” event heralding these then new provisions and HMRC’s guidance reflected this sensible approach.  However, in a case that I took to the First-tier Tribunal (and which is now fully resolved) HMRC disregarded that approach and sought to argue that they had an unfettered right to access the information and would need to address the further statutory hurdles only at a later stage if/when they issued a discovery assessment.  The First-tier, however, concluded that the statutory protections were implicit in the Schedule 36 code.[2]
15. However, this does not mean that the changes made in 2008 were modest in practice.  The fundamental change made by Schedule 36 is that, for information requests outside enquiries, it is no longer necessary for HMRC officers to get the Tribunal’s pre-approval of the information notice.
16. Of course, the underlying statutory protections are the same and, theoretically, the change in procedure should have no significant impact on taxpayers.  If only that were the case.
17. It is my consistent experience that the 2008 code has allowed HMRC the freedom to ask for information outside the context of an enquiry and that this freedom is regularly exercised.  Of course, taxpayers have the statutory right to appeal against unreasonable requests.  But not all taxpayers have the resources and stomach for such a challenge and, indeed, most would be unaware of the true extent of their rights.  What particularly bothers me is the fact that HMRC’s standard letters forming part of the information requests are keen to emphasise the need for HMRC to show that the information is reasonably required (a test which is often – but not always – satisfied), but HMRC never point out that (outside an enquiry year) HMRC must also have reason to suspect an underpayment. 
18. Although HMRC will undoubtedly state that Schedule 36 itself contains safeguards limiting certain actions to “authorised officers” and that internal procedures also ensure that there is a system of approval before notices are issued, I have very little faith in the effectiveness of such safeguards.  I might well be wrong, but I see very little (if any) evidence of any proper oversight over the issue of information notices and that, if there is any system of internal approval, the approach is more a case of “do you want this information?” rather than “would we be able to justify the request if the taxpayer were professionally represented and took the case to the Tribunal?”.
19. What seems to have happened in the light of the 2008 code is that power to issue information notices outside the scope of an enquiry was extended to a greater number of officers (outside the specialist investigation units), meaning that a greater number of taxpayers might now receive such notices.
20. The end result is that:
1. Those taxpayers with access to specialist advice[3] will know and regularly exercise their appeal rights to resist excessive demands for information.
2. Others will be at the mercy of unjustified information requests and a wholly inadequate explanation of their rights from HMRC.
21. Indeed, I have seen:
1. many cases where taxpayers/advisers have naively assumed that HMRC have justifiably sought information – with that then leading to yet further information requests and a subsequent discovery assessment (which might or might not be challengeable in the Tribunal); and
2. other cases where a firm “you are not entitled to this information unless you can show reason to suspect an under-assessment” have led to the response “thank you and we no longer require the information requested”.

Schedule 36 to the Finance Act 2008 – third-party notices

22. Before most third-parties can provide information about taxpayers to HMRC, they will need to comply with Data Protection laws.  However, GDPR obligations are suspended once a formal Schedule 36 notice is issued.
23. For most third-parties, the easiest response to a formal Schedule 36 notice is to provide the information requested.  Many will sensibly consider that it is pointless for them to incur the costs and uncertainties of challenging HMRC in the Tribunal, as they have no real financial interest in protecting the taxpayer from an extensive investigation or a subsequent discovery assessment.  That of course could lead to unfairness to taxpayers.
24. This general reluctance for third-parties to challenge Schedule 36 notices (except where requests are burdensome) and the consequential potential unfairness to taxpayers is addressed in the legislation.  In particular, paragraph 3 imposes the following additional hurdle before HMRC can issue an information request to a third-party.  Either:
1. The taxpayer has agreed to the notice being given; or
2. The Tribunal has approved the notice.
25. In short, if the taxpayer is unwilling to consent to the third-party providing the information, HMRC will need to prepare an application for a Tribunal judge and to defend the application in front of that judge.

The proposed extension to third-party notices

26. The proposals concern notices to be given to “a financial institution” (principally, banks).
27. Two conditions are proposed.  I have concerns with both.  These concerns are particularly acute because, under the current proposals, these notices do not confer any right of appeal (either by the taxpayer or by the financial institution itself).  In short, HMRC may issue such notices and, absent judicial review, the financial institution is obliged to comply with the request and the taxpayer is forced to accept the possibility of a long-drawn out investigation.
28. Condition A is that the HMRC officer giving the notice has to have the reasonable opinion that providing the information will not be onerous.
1. Superficially, this is a sensible safeguard.  However, it is not as valuable to financial institutions as it might initially seem.
2. In particular, this safeguard will not help financial institutions in all cases where compliance is in fact onerous.
3. This is because the proposed statutory test focuses on what an HMRC officer (who is unlikely to have any detailed knowledge as to how the particular financial institution retains records) might reasonably perceive the situation to be.
4. Accordingly, there could be an obligation on financial institutions to provide detailed information to HMRC simply because the HMRC officer could not reasonably have foreseen the difficulties that would be occasioned to the financial institution when complying with the notice.  And the financial institution would have no recourse to a Tribunal to have the request cut-down or set aside.
29. Condition B then imposes the standard “reasonably required” test (either for checking the taxpayer’s position or the new alternative for the purpose of collecting a tax debt).
1. My experience to date leads me to worry that HMRC will interpret “reasonably required” as meaning “HMRC would like”.  Furthermore, (as is also common at present) requests will inevitably be made by officers without any regard to the statutory protections inherent in the Self-Assessment code.  In other words, there will be no distinction made in practice between enquiry cases and ones where HMRC would have to issue a discovery assessment in due course.  Furthermore, in the latter cases, I fear no regard will be taken to the current statutory safeguard whereby HMRC will be required to show a reason to suspect an under-assessment before they can request information outside an enquiry and the implicit requirement that there is a reasonable likelihood that the time limits for a discovery assessment would be met.
2. In other words, the likely upshot of the new legislation is that HMRC will be able to demand (without ever having to justify their request before a Tribunal) bank statements for years not covered by a statutory enquiry.
3. This amounts to a partial extension of HMRC’s enquiry powers by the back door, without any protection given to taxpayers.
4. What I then foresee is HMRC then, with access to these bank statements, HMRC will then be able to interrogate taxpayers about every credit entry made, with the threat of a discovery assessment for any amounts that the taxpayer is unable or unwilling to explain.
30. In short, the proposed new paragraph 4A will undermine the one-year time limit on enquiries because it opens the door to HMRC seeking a taxpayer’s bank statements for all earlier years (and, certainly, going back four years).
31. It amounts to a dangerous erosion of the safeguards currently underpinning Schedule 36.  To the extent that HMRC might say that the practical differences between the current position and the proposed position are minimal, I would say that this is probably due to HMRC already operating without proper regard to the statutory safeguards rather than evidence of the new rules bringing a modest change.
32. Furthermore, the fact that HMRC will also be able to access credit card details will mean that HMRC will be able to examine every aspect of a taxpayer’s private spending, even though such intrusion into a taxpayer’s private life is not supported by the case law to date (Taylor v Bratherton (HMIT) (2004) SpC 448). 

Further reasons to be concerned

33. My concerns about the extension of powers are reinforced by the way that HMRC describe the proposals.
34. For example, in their summary, HMRC say:

Who is likely to be affected[?]

This measure will mainly affect financial institutions, such as banks and building societies, who might be asked for information for the purposes of checking the tax position of a taxpayer

35. To say that the measure will “mainly affect financial institutions” is misleading.  Although the information sought will have to be provided by financial institutions, it will enable HMRC to have access to vast amounts of data about taxpayers that is not currently accessible to HMRC, which could lead to costly and lengthy investigations being mounted by HMRC and/or unnecessary intrusion into a taxpayer’s private life.
36. Furthermore, HMRC then suggest that these powers will be balanced “by a number of taxpayer safeguards including”:

• the information sought will have to be reasonably required for the purpose of checking a known taxpayer’s tax position. For international requests the information in the FIN will need to be relevant to the administration or collection of tax and the jurisdiction requesting the information would need to have exhausted all reasonable domestic ways to get the information;

However, this protection will not be capable of being tested in the Tribunal.  Furthermore, the “reasonably required” safeguard is not the only one currently operating in Schedule 36.  Outside statutory enquiries, the more valuable safeguard is the need for HMRC to demonstrate that their investigations could reasonably lead to a valid discovery assessment.  That valuable safeguard is cast aside by these proposals.

• documents subject to legal professional privilege cannot be requested;

This will not stop HMRC from accessing reams of bank and credit card statements.

• HMRC will be required to tell the taxpayer why the information is needed, unless a tax tribunal rules this condition should not apply;

This information is of very little benefit given that paragraph 4A notices will not be capable of appeal.  The taxpayer’s only remedy would be to commence judicial review proceedings (but this is expensive and is unlikely to preclude the financial institution from complying with the information request in the meantime so as to avoid penalties). In other words, the taxpayer will have very little remedy even if HMRC’s stated reasons can be shown to be seriously flawed.

• an authorised officer of HMRC (someone with the relevant experience and training) will need to approve the decision to issue a FIN;

Based on my experience, this is of very little comfort.

• if a Financial Institution does not comply with a FIN and as a result HMRC charges penalties, the Financial Institution will be able to appeal against the penalties

I struggle to see how this is a safeguard for taxpayers.

37. Under “policy objective”, HMRC focus on the fact that they are often required by tax authorities in other jurisdictions to obtain information from financial institutions.  In such cases, HMRC consider the current system to be unwieldy.  I am not personally convinced that the current balances are inappropriate (the fact that it takes longer than HMRC would like is a question of resources and not a reason to curtail taxpayers’ rights).
38. However, I am concerned that HMRC are hiding behind their international obligations when trying to justify a wholesale expansion of their domestic investigation powers.  This is also evidenced by the tone of the consultation response document which fails to explain the impact of HMRC’s proposals on the domestic taxpayer.[4]
39. As already indicated, I am not sure that the international obligations justify the proposed paragraph 4A.  As I have said, any shortcomings in the current system ought to be remedied by proper resourcing of HMRC and/or the Tribunals.  Indeed, to cast aside an entity’s statutory rights of appeal (which is effectively what is happening so far as financial institutions are concerned) should not be done lightly and certainly not for reasons of HMRC’s expediency.
40. However, even if the new measures can be justified in an international context, they should be limited to such a context.  In HMRC’s response document, this is dismissed by the following explanation:

3.21. A number of respondents suggested having a new notice only for international information requests from other tax authorities. We are not able to have a different notice for international requests. UK law, and some international treaties, requires us to obtain information in the same way for both domestic and international requests. Therefore, the government has decided not to pursue that option.

41. I think this needs to be looked at closely. 
42. First, I do not understand how UK law requires domestic and international requests to be aligned.  Perhaps this is a consequence of the European Communities Act 1972.  However, if that is the case, that will cease to be relevant very shortly.  In any event, Parliament is capable of overriding any such legal obstacle should it wish.
43. Similarly, I do not know how extensive the restriction is so far as international treaties.  The implication is that for some/many countries, the law can provide for a special process for international requests.  Accordingly, if paragraph 4A is to be retained, I would suggest that it be limited to cases where HMRC are seeking information in relation to requests from overseas authorities.  If an international treaty precludes that approach being followed in any particular case then HMRC should then be required to pursue the current route for third-party notices where statutory are safeguards are preserved.
44. It is going to be of little comfort to the typical UK taxpayer that HMRC have newly been able to access a historical bank statement without any judicial oversight simply because an international treaty requires information requests from a particular country to be handled in a particular way.

Other comments

45. HMRC also seek to be able to use their information powers to obtain details about tax debts.  This is a further measure that would put them in a better position than other creditors (a further reversal of the decision at the turn of the century when Crown Preference was abolished).  Nevertheless, that is a political decision which might or might not be justified.  However, I am concerned that HMRC jumping ahead of the queue could lead to insolvencies in other creditors who do not have the same rights. 
46. One particular concern relates to the wording of proposed paragraph 63A which refers to “any steps for, or in connection with, the recovery of an[y] amount [] due from the person”.
47. The words “in connection with” could be interpreted broadly (they often are).  There is therefore a risk that these words will be used to justify information requests before the tax debt is even established (i.e. as a preliminary step in an investigation which might then lead to the establishment of a tax debt).  It is my current view that the legislation ought to be interpreted more narrowly than that.  However, I would ask that HMRC give express confirmation that paragraph 63A requires the tax debt to have been established first.  Furthermore, it would be of benefit for this confirmation to be given in the statute itself.
48. I am unsure as to the meaning of proposed paragraph 63A(2).  If X has a tax debt (and HMRC want to check that X has the means to pay it), it should surely be of significance if another person, Y, has been liable to pay the same tax liability.

October 2020

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