Taxpayers who are unfortunate enough to be the subject of an enquiry by HM Revenue & Customs (HMRC) into their tax returns may sometimes also be the recipient of an information notice by HMRC (in fact, HMRC can issue information notices in other circumstances as well, but this article focuses on information notices issued during HMRC enquiries).
In broad terms, HMRC can issue an information notice requiring a taxpayer to provide information or produce a document which is “reasonably required” by HMRC for the purpose of “checking the taxpayer’s tax position” (FA 2008, Sch 36, para 1). Failure to comply with an HMRC inspection notice can result in penalties being imposed.
HMRC’s information and inspection powers are wide ranging, and include the power to inspect business premises. There are certain (albeit limited) restrictions on HMRC’s powers. For example, if a person has already submitted a tax return, as a general rule HMRC may not issue a taxpayer information notice in respect of the chargeable period covered by the tax return (Sch 36, para 21(1), (2)).
However, this general rule is subject to certain exceptions. One such exception is broadly where there is an HMRC enquiry into the return, which has not been completed (Sch 36, para 21(4)).
Another important restriction on HMRC’s powers is that an information notice only requires a document to be produced if it is in the person’s “possession or power” (Sch 36, para 18).
The “possession or power” and “reasonably required” conditions potentially offer important protection against HMRC’s information and inspection powers, including where a person’s tax return is subject to an HMRC enquiry. These safeguards have been the subject of recent appeals against information notices before the First-tier Tribunal (FTT). Taxpayers have had mixed fortunes in these cases.
Must do better!
In H A Patel & K Patel (a partnership) v Revenue & Customs  UKFTT 167 (TC), HMRC issued an information notice to the appellants. The appellants claimed that items requested by the information notice were not in their “possession or power”, and appealed to the FTT.
The appellants had established a remuneration trust. Their appeal against the information notice was on the basis that certain items in the information notice were not in their possession or power, because those items were held by the trustee of the remuneration trust. The appellants had sent a letter asking the trustee to provide and comment on the information and documents requested in the information notice, but the trustee did not respond. Following a subsequent reminder by the appellants, the trustee replied, but stated that the information requested was “highly sensitive and confidential and therefore not privy to third party inspection or review”.
The FTT considered that as the appellants were the ‘founders’ and ‘protectors’ of the remuneration trust, in practice they must have power to influence and require the trustee to comply with their lawful and reasonable requests. However, the FTT commented that “…the appellants do not appear to have made any effort to persuade the trustee to reconsider its refusal to provide the documents and information”. The FTT concluded from the appellants’ “passive acceptance of the trustee’s refusal” that they had not made any “serious attempt” to obtain the relevant information and documents from the trustee.
The FTT was not satisfied (on the ‘balance of probabilities’) that the information and documents specified in the information notice were not within the appellants’ possession of power. The appeal was dismissed.
HMRC’s view is that it does not matter who the document belongs to, or who holds it. A person’s ability to get a document can exist through a legal entitlement to make another person give it to them, or through the ability to influence the other person holding the document (CH22120). Taxpayers without such a legal right or ability to influence may therefore be able to persuade HMRC (or the FTT) that the document is not within their possession or power.
Not ‘reasonably required’
Whilst the appeal by the applicants in Patel was unsuccessful, the taxpayer’s appeal in Long v Revenue & Customs  UKFTT 199 (TC) fared rather better.
In that case, HMRC opened an enquiry into a doctor’s tax return, and requested information and documentation to check the self-employment figures in the return. The documentation requested included the taxpayer’s business appointment diaries. The taxpayer pointed out that the diaries contained confidential patient information, but HMRC issued an information notice requiring the business appointment diaries to be produced. The taxpayer appealed.
HMRC considered that the appointment diaries would help HMRC to check the taxpayer’s income and expenditure. However, the FTT found (among other things) that the diaries contained clinical and personal details, but no financial information whatsoever. The information included in the diaries did not enable a calculation of income to be made from the patients identified in them. It was impossible to hold that the business appointment diaries were reasonably required in order to check the taxpayer’s position.
HMRC had suggested that some sort of calculation could be made by reference to the number of patients mentioned in the taxpayer’s business appointment diaries, to identify a minimum turnover. However, the FTT considered this to be a “remote and speculative possibility” in the circumstances. The taxpayer’s appeal was allowed; she did not have to produce her business appointment diaries to HMRC.
It is always worth checking that HMRC’s information request is valid. For example, a notice may not be used to require the supply of opinion or speculation (see HMRC’s Compliance Handbook at CH23240). Information notices should only properly require the supply of facts.
In R D Utilities Ltd v Revenue & Customs  UKFTT 303 (TC), the appellant company appealed against an information notice by HMRC, requiring (among other things) two pieces of ‘information’ to be provided in connection with the company’s accounts, which showed a contribution to a remuneration trust. The appellant argued that the information notice was defective in asking for subjective opinion, which was not lawfully required to be provided.
The FTT considered that the assumptions on which HMRC’s requests for information were based made it impossible for the parties to know whether the notice had been complied with, because the accuracy of the assumptions was disputed by the appellant. The FTT concluded that it would be “fair and just” to set aside the ‘information’ requested in HMRC’s information notice (under FA 2008, Sch 36, para 32(3)(c)), on the basis that information which is impossible to supply cannot be ‘reasonably required’ by HMRC.
However, appealing against an information notice on this basis is not necessarily a complete antidote to them. In the R D Utilities case, the FTT made it clear to the appellant that setting aside the information notice did not preclude HMRC from serving another one which might be better worded, or alternatively that HMRC might raise an assessment for the appellant to appeal against.
An information notice is a considerable weapon in HMRC’s armoury of powers. However, if you receive one during an HMRC enquiry, ensure that the information or documentation is ‘reasonably required’ to check your (or your client’s) tax position; it is in your ‘possession or power’; and it is not subject to one of the statutory restrictions on HMRC’s information powers. If necessary, seek expert professional advice to protect your position.
The above article was first published by Tax Insider (www.taxinsider.co.uk).