Third party notices require a person to provide information to HMRC or produce documents that are reasonably required for checking the tax position of a known taxpayer or for collecting a tax debt of the taxpayer. The issue of a notice must be approved in advance by the First-tier Tax Tribunal (FTT) unless the taxpayer consents to the issue of the notice.
The third party will usually be notified in advance that an application for the issue of a notice is going to be made and will have an opportunity to submit representations regarding the information required. The taxpayer will also usually be notified. However, the application will be held ‘ex parte’, with only HMRC present. If the FTT is satisfied that the assessment or collection of tax might be prejudiced, it can disapply the requirement to notify the third party or the taxpayer in advance.
Steven Porter, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law, said that the decision was “unsurprising and reflects the established view of the law in this area”. However, he said the decision highlights how few rights a taxpayer has to prevent HMRC issuing a notice to a third party to get information for an investigation into the taxpayer’s affairs.
“The third party has the right to make representations, but the taxpayer has no such right and may not even know the notice is going to be issued,” he said. “A third party will not usually have any interest in whether HMRC is justified in asking for the information in the first place, it will be concerned with the practicalities of how onerous it will be to comply with the proposed notice,” he said.
“Going forward taxpayers will not even be able to rely on the FTT checking whether HMRC is justified in requesting the information, where the recipient of the notice is a financial institution,” Porter said.
This year the government has introduced a new ‘financial institution notice’ (FIN) which enables HMRC to request information about a financial institution's customers without having to obtain the approval of the FTT or the taxpayer. The changes are intended to enable HMRC to deal more efficiently with requests for information from foreign tax authorities but will apply also to purely domestic situations.
In the case on third party notices considered by the Court of Appeal HMRC had been investigating the tax affairs of three companies and applied to the FTT for approval of third party information notices to be sent to individuals who were directors or shareholders of the companies concerned. The taxpayers and the third parties argued that they should be told when the application for the notice was going to be heard by the FTT, they should be sent a copy of HMRC’s submissions and they should be entitled to attend the hearing and make representations.
Giving the judgment of the Court of Appeal, Lord Justice Singh said that a power to hold an oral hearing with the taxpayers or third parties present would be “inconsistent with the nature of the scheme which parliament has created”.
The judge said: “The nature of that scheme is for HMRC to seek the approval of the FTT for a third party notice which is made in the context of their investigation of a taxpayer. As the authorities make clear, this is a ‘judicial monitoring’ of a step in an investigation by the executive; it is not like an adjudication in a dispute between parties to litigation. It is not intended to be an adversarial process.
The Court of Appeal also confirmed that the question of whether a hearing should be heard in public was a case management decision of the FTT. However, in most cases Lord Justice Singh said that such hearings would not be held in public as “very often it would not be in the public interest” for the private affairs of taxpayers to be discussed in public at a preliminary stage in an investigation, not least because HMRC’s investigation may lead to no further action being taken against the taxpayer.
“It is interesting that the Court of Appeal has not ruled out a hearing into an application for a third party notice ever being heard in public, but it is very difficult to think of any circumstances where this would be appropriate,” Porter said.