HMRC have published a consultation document setting out how they propose to increase the civil information powers, as set out by Schedule 36 Finance Act 2008. The stated purpose is to bring HMRC information powers in line with other worldwide tax jurisdictions, and to help HMRC meet deadlines when receiving requests for information from overseas jurisdictions.
Gabelle believe that the proposed changes will shape the way HMRC carry out investigations, and potentially lead to unprecedented and unfettered access to private and confidential information.
The proposed are as follows:
- The alignment of third party notices with taxpayer notices, meaning that tribunal approval will not be needed in all cases, with only the approval of an authorised officer required.
- A separate financial institution notice, as requests to banks are identified as the most common type.
- The use of Schedule 36 powers to obtain information for other functions of HMRC, such as tax collection.
- Daily penalties of up to £1,000 per day for 30 days to be extended to failure to comply with all Schedule 36 notice types.
- An obligation on the third party not to inform the taxpayer about the notice
The Jiminez decision in the High Court confirmed that Schedule 36 powers are confined within the UK. As a result, HMRC now relies more on exchange of information agreements for enquiries where parties are resident overseas, and have seen a corresponding rise in incoming information requests.
The consultation document proposes wide-ranging changes off the back of a specific problem relating to overseas information requests. A more proportionate solution would be to remove the need for tribunal approval only in cases arising from overseas information requests. This also avoids the potential of such intrusive requests being made routinely.
The consultation document acknowledges a likely future increase in requests arising from the Common Reporting Standard (CRS), as this information will initiate enquiries that will lead foreign tax authorities to ask the UK for information on assets held by their residents.
There is scope, however, for a further significant increase in these requests. The briefs currently submitted to tribunals by officers of HMRC are lengthy, time-consuming and a barrier to tribunal approval being sought in many cases. A likely consequence of removing this barrier would be a stark increase in third party requests.
In the worst case scenario, where HMRC no longer need to seek Tribunal approval, there is the likelihood that the relationship between the taxpayer and the financial institution could be damaged and the taxpayer would have no knowledge why. Furthermore, the increased burden could have the effect of souring relationships between the third party and HMRC.
Alongside the extended powers, HMRC also wish to increase the penalty for non-compliance to £1,000 per day for up to 30 days (£30,000 in total), per notice.
The negative consequences of being subject to a Schedule 36 third party notice should not be overlooked. In some cases, financial institutions will terminate or alter their relationship with an individual as a result of receiving a formal information request.
The increased powers to approach a financial institution, instead of a taxpayer, can provide HMRC with information not available directly from the first party, such as the bank’s customer records. A financial institution will keep detailed records on a customer, their habits and business affairs, and these are routinely requested as part of a Schedule 36 request to a bank.
It is also worth noting the proposal to extend HMRC’s Schedule 36 for purposes other than to check a tax position. This is a significant extension of the powers, but the proposed changes are set out in 2 paragraphs in the document, with no real detail provided to explain why HMRC should be able to gain access to financial information to collect tax, for example.
Gabelle specialises in assisting professionals and their clients with all aspects of tax enquiries and dispute resolution. If you would like to discuss how the proposed changes may affect you or your clients, please contact TaxDesk on 0845 4900 509 and ask for Riocard Hoye or John Hood.