Third Party HMRC Information Notice

Overview Of Third Party HMRC Information Notice

In the case of Third Party and Taxpayer v Revenue & Customs [2023] UKFTT 71 (TC) an HMRC Information Tax Notice (“the 3rd Party Case”) was issued to a firm of solicitors who had acted for the taxpayer. The Tax Tribunal agreed to the issuing of such a third party Tax Information Notice.

Under paragraphs 2 and 3 of Schedule 36 of the Finance Act 2008 HMRC can obtain information from a third party about the taxpayer if it is reasonably required for the purpose of collection a tax debt and checking a taxpayer’s return. But it cannot do so unless it has the consent of the taxpayer or approval from the Tax Tribunal to issue the Information Notice.

Restrictions On Schedule 36 Tax Information Notices

Paragraph 18 of Schedule 36 of the Finance Act 2008 states the documents and information sought under a Schedule 36 Tax Information Notice has to be within the possession or power of the person served.

A person cannot be required to provide information that is subject to legal privilege in light of paragraph 23 of Schedule 36 of the Finance Act 2008.

In the 3rd Party case an HMRC Information Notice schedule was sent in draft to a third party enabling them to make representations. The notice related to properties of the taxpayer.

Third Party Objections To The Information Tax Notice

The third party solicitors objected to the notice but the Tax Tribunal said:

Paragraph 3(3)(b) provides that I may only approve the giving of the third-party notice if I am satisfied that the officer giving the notice (Mr Jackson) is justified in so doing.

In order to satisfy me that HMRC are justified in giving the notice, HMRC must satisfy me that the information that they are seeking through the issue of the third-party notice is reasonably required for the purpose of checking the taxpayer’s tax position. In addition, I would not approve the issue of a third-party notice if I was not satisfied that it was a reasonable and proportionate use of HMRC’s powers.

On the basis of the evidence before me, I find that HMRC have reasonable grounds to suspect that the taxpayer may be liable to UK tax on income and gains which he has not declared to HMRC. It is not in dispute that the taxpayer was the settlor of three offshore trusts. It is unclear whether those trusts remain in existence, and the extent to which the taxpayer is a beneficiary of those trusts. The taxpayer has an economic interest in BVICo through the insurance wrapper arrangement. It remains unclear whether the taxpayer has received benefits from those arrangements. I find that HMRC have reasonable grounds to suspect that the taxpayer may have a liability to UK taxes in respect of the income and gains arising through those trust and insurance arrangements (including through subsidiary companies). I find also that the taxpayer may have liabilities to IHT as settlor of the three trusts.

I find that the taxpayer has not provided information and documents reasonably requested by HMRC for the purposes of checking his tax position. I therefore find that it is reasonable and proportionate for HMRC to seek information from third parties, and the Third Party in particular. But I make no finding as to whether the taxpayer’s failure to provide information was done deliberately or with the intent of frustrating HMRC’s enquiries.

In the light of the taxpayer’s level of PAYE income, I find that it is reasonable for HMRC to suspect that (a) a source of funds for the purchase of Property 2 may be from one of the three trusts or BVICo (or a subsidiary), and (b) the destination of funds from the sale of Property 3 may be one of the three trusts or BVICo (or a subsidiary) – notwithstanding that he may have realised cash on the disposal of his previous home. I find that it is reasonable for HMRC to believe that the Third Party may be in possession of information which may indicate whether the taxpayer received funds for the purchase of Property 2 from one of the three trusts or BVICo (or a subsidiary), or whether the taxpayer distributed the proceeds of sale of Property 3 to one of the three trusts or BVICo (or a subsidiary).

Documents Legally Privileged

A notable feature of this case was that the third party solicitors claimed all the documents and information sought was protected by legal professional privilege but the Tax Tribunal said this was unlikely to be the case:

I find that it is highly unlikely in relation to a conveyancing matter that all the information and documents held by a law firm on its files would be subject to legal professional privilege.
In relation to transactional matters (such as conveyancing), only legal advice benefits from privilege. Communications between a solicitor and his client will generally only benefit from advice privilege if they are both:

(a)          Made for the purposes of seeking legal advice from the solicitor or for the purposes of giving legal advice to the client by the solicitor; and

(b)         Confidential as between solicitor and client.

Many of the documents (electronic as well as hard copy) on a solicitor’s conveyancing file will fall outside these requirements. To give three examples, (a) communications between a solicitor and persons other than the client (for example, the transaction counterparty) are unlikely to be privileged, as they are not confidential as between solicitor and client; (b) the fruits of the solicitor’s advice – namely the documents giving effect to the transaction – will not be privileged as they are not communications; and (c) client ledger entries will not be privileged, as they do not contain legal advice.

On the other hand, correspondence between the client and the solicitor which seeks or gives legal advice on (for example) the terms of the contract or conveyance will be subject to privilege.

Although not cited to me, I am aware that in the context of s10 Police and Criminal Evidence Act 1984, the English Divisional Court in R v Inner London Crown Court ex p. Bains & Bains (a firm) [1988] Q.B. 579 held that records of a conveyancing transaction (including the conveyance and the record of how the client financed it) were not “items subject to legal privilege”. The court distinguished such documents from the solicitor’s advice on the wisdom or otherwise of proceeding with a conveyancing transaction which is privileged, and in DAC Beachcroft LLP v HMRC [2018] UKFTT 502 (TC) this Tribunal held that various documents created in the course of conveyancing transactions (such as a signed form of authority and a deed of declaration of trust) were outside the scope of legal advice privilege. Whilst these decisions are made in relation to advice privilege under English law (and the decision of the Divisional Court is a decision of an English court in relation to English criminal law), Northern Irish law relating to privilege has similarities to English law, and these decisions give an indication of the limitations of advice privilege in relation to conveyancing transactions.

Alleged Onerous Nature Of The Information Request

The third party also suggested that the Information Notice would put it to a lot of work and be oppressive. Again the Tax Tribunal was unimpressed:

From my experience as a solicitor, I would expect that the Third Party will keep distinct and separate files (whether electronic or hard-copy) for each conveyancing matter on which it acts. The files that are the subject of the information notice relate to domestic and not commercial properties. I would therefore expect each file relating to Property 2 and Property 3 to contain a manageable set of documents. Whilst these documents will need to be reviewed in order to consider the impact of privilege, I would not expect that this would be an unduly onerous exercise.

The Third Party’s submission is not particularised, and no indication is given by the Third Party of the number of documents involved, the manner in which they are filed, or the time it would take to review them – and in the absence of detailed submissions setting out precisely why compliance would be onerous, I place little weight upon this submission.

I find that any effort required by the Third Party to retrieve its files and review the content in order to identify privileged documents and information is not disproportionately onerous in all the circumstances of the case.

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Disclaimer: Third Party HMRC Information Notice

This page is not legal advice and should not be relied upon as such. This article Third Party HMRC Information Notice is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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