Out-Law Guide | 05 Dec 2022 | 10:36 am | 9 min. read
The UK’s tax authority, HM Revenue and Customs (HMRC), has statutory powers under Schedule 36 to the Finance Act 2008 to issue an information notice which requires a person to provide information or produce a document if that information or document is ‘reasonably required’ for the purpose of checking the taxpayer’s tax position or for the purpose of collecting a tax debt of the taxpayer.
There are five main types of information notice:
This guide focuses predominantly on taxpayer notices.
Before using its statutory powers, HMRC will usually informally ask for the information it requires. In our experience, informal dialogue with HMRC can go on for months, with the taxpayer providing parts of information requested in a piecemeal manner and discussing which elements of the information request it can and cannot comply with. In most cases, provided the taxpayer continues to cooperate with HMRC, the authority is usually happy to continue informal dialogue rather than progressing to a Schedule 36 notice.
However, sometimes the taxpayer's response to HMRC following an informal request is considered unsatisfactory. This can be because the taxpayer has delayed too long in responding to the informal request or because HMRC is not satisfied by the quality of the information provided. In such circumstances, HMRC may decide to then use its statutory powers under Schedule 36.
HMRC is not required to make an informal request prior to issuing a Schedule 36 notice, so in some circumstances, HMRC may consider it more appropriate to simply issue a Schedule 36 notice straight away. In our experience this is rare, but it might be a course of action HMRC decides to take because the taxpayer has a history of non-cooperation, because it believes there is a risk that relevant information may be deleted or where tax evasion or fraud is suspected.
Other reasons HMRC might decide to issue a Schedule 36 notice without first making an informal request for information could include because it is the taxpayer’s preference. This might be the case, for example, where information needs to be obtained by a subsidiary taxpayer from its parent company or from a third party and the taxpayer feels that the formality of the Schedule 36 notice will assist with obtaining such information. However, in circumstances like this, where historic non-compliance is not present, HMRC will sometimes provide prior notice of its intention to issue a Schedule 36 notice to the taxpayer. Depending on the case officer, it may be possible to obtain a draft copy of the Schedule 36 notice in advance so that any ambiguity or uncertainty can be ironed out prior to official notice.
Where a taxpayer has submitted a tax return, HMRC can normally only issue a taxpayer notice if there is an open enquiry or HMRC has reason to suspect that for the relevant period tax may not have been assessed, may have been under-assessed or excessive relief may have been given. Where no return is submitted HMRC can use a Schedule 36 notice more freely, subject to the conditions described below.
HMRC can issue a Schedule 36 notice where it is ‘reasonably required’ for:
Determining what is ‘reasonably required’ is an objective test which considers the balance between the burden on the taxpayer to provide the information and the importance of the information to HMRC in checking the individual’s tax position or collecting the tax debt.
This is very circumstantial and the application of the ‘reasonably required’ test has been highly contested over the years. However, in cases ruled on in 2021 and 2022, the first-tier tax tribunal held that the burden of proof for establishing that documents are ’reasonably required’ under a Schedule 36 taxpayer notice lies with HMRC.
The tribunal has been particularly critical of HMRC where they have made broad information requests that stretch further than necessary. In the 2022 case of Jenner v HMRC, the tribunal highlighted the differences between a reasonable information request falling under HMRC’s Schedule 36 powers and a pure ‘fishing expedition’ – allowing the taxpayer's appeal against the elements of the notice that required him to divulge details of personal expenditure. Therefore, taxpayers should be alert to any requests they receive which seem particularly wide or burdensome and consider whether they wish to appeal against them.
HMRC can require a taxpayer to provide information or produce documents. This can include electronic documents, such as CCTV footage.
Under paragraph 18 of Schedule 36, a taxpayer only needs to produce documents that are in its ‘possession or power’. According to HMRC guidance, ‘possession’ means having physical control over a document – regardless of who the owner of the document is – and ‘within their power’ means that the person has the ability to get the document, or a copy of it, from whoever holds it. This can be through legal entitlement or influence.
In the 2022 case of One Call Insurance Services Ltd v HMRC, the first-tier tax tribunal considered what is meant by within someone’s ‘power’ further. In that case, the taxpayer had written a single letter to trustees requesting the information HMRC had asked for but had argued it had no power or influence over them so could not require them to transfer the documents. The tribunal said that a single letter to the trustees was ‘far from an effort to persuade’ them to provide the information and held that the taxpayer had not made any serious attempt to obtain the information and had not engaged with its de facto power to obtain the information, thereby rejecting the contention that the documents were not in the power of the company.
That ruling of the tribunal highlights the need for taxpayers to make ‘serious efforts’ to obtain documents, where documents are not in their physical possession. It would therefore be prudent to keep records of all such attempts made to request information to demonstrate to HMRC, or a tribunal, that documents are not in the taxpayer's power, should that be the case.
Information notices must be complied with by a date set by HMRC in the notice, otherwise penalties can be applied, as described below. The deadline for requests must be ‘reasonable’. HMRC’s guidance suggests that 30 days will normally be reasonable, albeit this is dependent on the information requested and scale of the request.
HMRC is reasonably receptive to requests to extend time to provide responses where a taxpayer is being co-operative, even in circumstances where such extensions last a long period. This is particularly so where the taxpayer has been able to provide some but not all of the information requested and is able to set out the steps they have taken to obtain the information and the reason for any delays.
Schedule 36 taxpayer notices can be issued either with or without tribunal approval. It is for the HMRC officer to choose whether to seek approval from the tribunal before issuing the notice. However, it is only usually in exceptional circumstances that tribunal approval is sought for taxpayer notices. This is much more common, and sometimes compulsory, with other types of notice.
The appeals process is different depending on whether or not the notice has been approved.
If the tribunal has approved the notice prior to issue, the taxpayer has no right to appeal the notice to the tribunal. Therefore, the only recourse for the taxpayer is to challenge the decision-making by means of judicial review. While there have been judicial review cases, it is not common.
If the notice is issued without approval from the tribunal, which is often the case with taxpayer notices, the taxpayer has a right to appeal the notice under paragraph 29 of Schedule 36. Under paragraph 32, notice of appeal must be given to the relevant HMRC officer within 30 days of the notice being issued.
The tribunal has the power to confirm, vary or set aside the notice in its entirety or specific parts of the notice. It may also amend deadlines for compliance. As prescribed in paragraph 32(5) of Schedule 36, the decision of the tribunal is final and there is no further right of appeal to higher courts.
The main areas of dispute are whether the documents or information are:
In considering an appeal, the tribunal will only make a decision on the validity of the notice, not the substantive issues in dispute. However, there remains some uncertainty around whether or not the tribunal can decide parts of the substantive case when deciding whether a notice is valid.
In the Derrin case in 2016, the Court of Appeal in England and Wales refused an application for judicial review of a third-party information notice. In so doing the court highlighted that the Schedule 36 scheme should not be frustrated by 'lengthy or complex adversarial proceedings'. There are differing decisions of the first-tier tax tribunal on the application of this principle.
In the Perlman case in 2021, the tribunal decided this principle meant that the preliminary issue of domicile could not be decided in an appeal against a taxpayer notice. However, in the Henkes case in 2020, the tribunal said the Derrin principles did not apply to the circumstances of that case since the Derrin case concerned third-party notices and that case did not. It concluded instead that it could decide the issue of domicile in order to decide whether the information was 'reasonably required'. Given the tribunal decisions cannot be appealed, clarity on this issue may only be reached through judicial review.
Where an appeal has been made to HMRC, although in most cases HMRC will stand by their decision and proceed to defend the appeal, HMRC may choose to amend or withdraw the information notice, removing any need for further appeal. This may be because, on review, HMRC considers that it may have overstepped with their request, but may also be for reasons such as preserving a cooperative relationship with a taxpayer and its advisers with a view to closing off the substantive issues more efficiently. Therefore, taxpayers should always consider if there are elements of the notice worth challenging at the outset even if they do not wish to pursue a full statutory appeal.
As with most tax-related obligations, there are penalties for failures related to them. There are broadly four types of penalty:
There are appeal rights against these penalties.
One of the interesting questions relating to appealing against penalties is the extent to which the first-tier tax tribunal can consider the contents of the notice at the point of appealing the penalty. Following the Court of Appeal decision in the 2018 case of PML Accounting, the general consensus has been that questions of validity of the notice must be determined before any appeal against a penalty is decided. However, the Court of Appeal noted that a number of penalty appeals have held that a person cannot be penalised for not complying with an invalid information notice, highlighting, however, that in those cases – in contrast to PML – there had not already been a determination or deemed determination that the notice was valid.
The ‘possession or power’ argument also resurfaces on penalty appeals – the notice is expressed not to require the delivery of information or documents that are outside the possession or power of the recipient. If HMRC imposes a penalty, the recipient of the notice may therefore raise the argument against the penalty that the document was not within their possession or power and therefore they have not failed to comply with the notice.
In our view, however, given the uncertainty of the scope of the first-tier tax tribunal’s jurisdiction on penalty appeals, taxpayers would be well advised to consider this question on receipt of the notice, raising their concerns at the outset rather than seeking to rely on it as a defence against a penalty.
Written by Amy Roe of Pinsent Masons. A version of this article was first published by Taxation.