It is perhaps not surprising that HMRC can request information from taxpayers that they are not strictly entitled to – sometimes by threatening to use their formal information powers under Schedule 36 Finance Act 2008 (“Schedule 36”) to extract it.
In our experience, HMRC will be reasonable and drop requests for information that is not relevant or in the person’s power or possession before formal Schedule 36 notices are issued. This would be where HMRC are unable to satisfy the conditions prescribed in the legislation in order to issue such notices. There are occasions, however, where HMRC persist and formally request information even though the request is not justifiable.
This has been highlighted in the First Tier Tribunal (“FTT”) case of Kevin Betts v CRC  UKFTT 430 (TC), (decided on 30 July 2013) whereby a taxpayer succeeded in having his appeal upheld against a Schedule 36 notice issued by HMRC on the grounds that the requisite conditions for issuing the notice were not met.
In brief, the taxpayer submitted his 2008/09 tax return on the basis that he was non UK resident. HMRC purported to open an enquiry into his return and requested, amongst other things, information in relation to his credit card, bank and building society statements. The taxpayer refused to provide this information and HMRC issued a Schedule 36 notice stating that the notice was valid as Condition A of Schedule 36 was satisfied – i.e. information was required during the course of an open enquiry. However, it later transpired that HMRC had not actually opened an enquiry, so HMRC later contended that the notice was valid by virtue of meeting Condition B – i.e. there were reasonable grounds to suspect a loss of tax.
The FTT held that Condition B of Schedule 36 had not been met by HMRC and thus found in favour of the taxpayer. The FTT held that in order for Condition B to be satisfied, HMRC needed reason to believe that there had been a loss of tax and not, as counsel for HMRC contended, that the information was required in order to show that there was a reason to believe an amount ought to be assessed which had not been (and that as a consequence of receiving this information Condition B under Schedule 36 was met).
The tribunal went on to explain that the arguments put forward by HMRC, even if taken as a whole, were not enough to show that HMRC had ‘reason to suspect that an amount that ought to have been assessed to relevant tax for the chargeable period may not have been.’
It is clear from the judgement in this case that an ‘interest’ in a taxpayer’s affairs is not a sufficient ground for HMRC to issue a Schedule 36 notice under Condition B, and the decision highlights that HMRC can and do get it wrong sometimes. It also demonstrates that advisors need to review information requests, both informal and formal, and consider whether HMRC have a valid reason for intruding into a client’s affairs and are acting within their information gathering powers. By nipping unreasonable requests for information in the bud at an early stage the advisor can not only save the client a great deal of stress and anxiety but also fees.