Overview Of Information HMRC Is Entitled To
When considering what information is HMRC entitled to, it is not the case that HMRC can simply snap its fingers and request information at will.
If information is sought by HMRC then its ability to compel the taxpayer to provide information that it is entitled to arises from Schedule 36 of the Finance Act 2008 (“Schedule 36”) by serving on the taxpayer an HMRC Information Notice.
HMRC has the right to check the tax return of the taxpayer to ensure that it is accurate and that the correct amount of tax is declared within the same.
However, that right is not unfettered. In order to ensure HMRC does not embark upon an unfair and disproportionate investigation, there are restrictions.
What Are The Restrictions On Information HMRC Can Demand?
The restrictions on the information that HMRC is entitled to consist of various safeguards for the taxpayer. The starting point is that the information is reasonably required by HMRC to check a taxpayer’s tax return. A tax inspector cannot embark on a frolic of their own accord when seeking information from a taxpayer.
What Is Reasonably Required Information For HMRC To Seek?
The starting point is that the information sought by HMRC must be reasonably required to check the tax return in question.
The key point about whether HMRC reasonably requires the information is down to what is considered objectively reasonable in the pursuit of a legitimate purpose:
In the case of Marathu Delivery Service Limited v HMRC [2019] UKFTT 553 (TC), where the Tribunal said at [40]:
40. No analysis was put to us as to the meaning of “reasonably required” within paragraph 1 of Schedule 36. However, in our view “reasonably required” must impose a limitation on HMRC’s issue of notices to the extent that each item of information requested must be required for the purposes of an enquiry into the taxpayer’s tax affairs and that it is objectively reasonable for HMRC to do so. If HMRC had the information already it would not be required nor would it be reasonable for HMRC to ask for it again. Similarly HMRC must be pursuing a legitimate purpose in issuing the notice, so HMRC cannot undertake a fishing exercise where HMRC have no reason to believe tax has been understated.
In addition to the cardinal principle of the reasonable requirement test there are other requirements:
- Notice of tax investigation has been provided by HMRC to the taxpayer.
- The tax inspector at HMRC must have reasons to suspect that there is a tax loss involved in the taxpayer’s return.
What Is Reasonable Suspicion?
The question of whether an HMRC Tax Officer has reason to suspect that there has been a tax loss suffered from a taxpayer’s tax return declaration was summed up in the case of Hegarty and Flora Hegarty v HMRC [2018] UKFTT 774 (TC), where the Tribunal said at [95]
95. It is, as Judge Thomas in Newton suggested, not a high bar for HMRC to surmount. On reflection Judge Thomas thinks that the bar here may be somewhat higher than that in s 29(1) TMA where a discovery is concerned. But if a statutory provision requires a particular person to show their reasons for suspicion, the Tribunal must be in a position to decide whether the officer did in fact genuinely hold that suspicion, and whether the suspicion was objectively justified by reference to the facts put forward. It may be that in a very straightforward matter the facts do speak for themselves, but if an officer is relying on evidence they have that enabled them to form their suspicion, it seems to us to be an irreducible necessity to expose it to the scrutiny of the tribunal and to enable the officer giving their reasons for suspicion to be crossexamined by the appellant and to answer any questions the tribunal might have.
Reason to suspect a tax loss suffered from a return is the opening to an HMRC obtaining further information. However, what is not permissible is for information to be sought to justify the suspicion. This was explained in the case of Kevin Betts v HMRC [2013] UKFTT 430 (TC):
90. But it is clear, in our judgment, that in order for condition B to be met, there has to be reason to suspect that an amount that ought to have been assessed to relevant tax for the chargeable period may not have been assessed as regards the appellant. That is the plain and ordinary meaning of paragraph 21(6)(a), and we see no reason to go behind that. Seeking information or documents in order to try to meet condition B is simply the wrong way round in our judgment.
(Condition B is the reason to suspect a tax loss has arisen position)
