Finance Act 2008, Sch. 36 gives HMRC the power to obtain information or a document from third parties that are reasonably required for checking the tax position of another person whose identity is known to HMRC. This is known as a third party notice.

An officer should not issue a third party notice unless there is no other way of obtaining the information or documents. They will first of all try to obtain it from the taxpayer themselves. They will not agree to use a third party notice to save the taxpayer the trouble or expense of obtaining the information or documents themselves.

Unless there is considered to be the danger of collusion, the third party should normally be given the opportunity to provide the information and documents informally, without the issue of a third party notice. If the third party is not prepared to comply with an informal request, the officer will ask the third party to comment on the burden of providing the information and documents and balance this against the need for it to check the taxpayer’s tax position. It is particularly important that the third party gives this careful consideration since, apart from a requirement to produce statutory records (against which there is no appeal), they can appeal the notice on the grounds that compliance with it would be unduly onerous.

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Accountant’s Working Papers

HMRC can require access to an accountant’s working papers, other than auditor’s papers and communications giving or obtaining tax advice (unless they are documents containing linking information, when limited access is permitted).

The working papers are the documents prepared by the accountant in the course of preparing the taxpayer’s accounts or tax return. Linking documents are the papers that show how the figures in the tax return have been derived from the taxpayer’s books and records.

HMRC have undertaken that they will not ask to see an accountant’s working papers, including linking documents, as a matter of course. They will normally be requested only when it is not possible to see how the figures in the records are linked to figures in the accounts. This permits HMRC to see only how a figure was arrived at, not why.

The protections given by statute continue to apply so that the power to request the accountant’s working papers is still subject to the restrictions applying to:-

  • personal records
  • journalistic material
  • legally privileged documents
  • documents relating to a pending appeal

 

HMRC’s Compliance Accountants will assist the officer if the accountant refuses to co-operate or disputes the papers that the officer can see. They will also be consulted in the case where it appears to the officer that the working papers contain deliberate errors and the case will be referred to Criminal Investigations if fraud is suspected.

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Banks

As a first step, HMRC will always request bank account details from the taxpayer. If the taxpayer fails to comply, the officer will issue a formal taxpayer notice requiring their provision. Although HMRC will not accept the offer of a bank mandate as a way of avoiding personal compliance with the notice, they will consider it if they think it is the best way to get the required information. They may themselves suggest that the taxpayer provides them with mandates if they think that this is the best way to proceed.

If documents relating to an account operated by a spouse or partner are required, the officer will consider issuing a third party notice to the spouse or partner before considering the issue of a third party notice to the bank.

Only if this fails to produce the information will a third party notice be issued to a bank. The taxpayer will be advised that the bank will make a charged for providing the information and that this charge will be the responsibility of the taxpayer. This has not yet been tested in law. In view of the cost involved, the onus will be on the officer to show that the request is reasonable and proportionate.

It would not normally be reasonable for the officer to request the bank’s correspondence files and information on credit-worthiness, nor documents that can only be provided after expensive and time consuming work, such as paid cheques. The types of documents that may be requested as a matter of course are:-

  • Bank account statements
  • Deposit receipts
  • Standing orders
  • Securities, valuables, etc. held for the customer
  • Details of accounts at other branches or banks
  • Credit cards
  • Safe deposits
  • Purchase and sale of shares and securities
  • Insurance transactions

HMRC accept that none of this information will be provided by banks without a formal third party notice.

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Conditions for Issue

HMRC must know the identity of the taxpayer whose tax position is being checked before they can issue a third party notice.

The information and documents requested in the notice must be for the purpose of checking the person’s tax position and the burden of providing them must be reasonable and proportionate. A third party notice should be considered only if the taxpayer cannot provide the information and documents themselves and there is no other way of obtaining them.

Before HMRC can issue a third party notice they must have obtained either:

  • the agreement of the person whose tax position they are checking, or
  • the approval of the Tribunal.

The approval of the Tribunal can only be sought by, or with the agreement of an Authorised Officer.

An information notice given for the purpose of checking the tax position of a person who has died may not be given more than four years after the person’s death.

Where the Tribunal approves the issue of a third party notice, it may also disapply the requirement to name the taxpayer in the notice if it is satisfied that the officer has reasonable grounds for believing that naming the taxpayer might seriously prejudice the assessment or collection of tax.

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Copy to Taxpayer

Normally, when HMRC issue a third party notice they must also send a copy of the notice to the named person. It is possible, however, for them to issue a notice without naming the person if doing so would prejudice the assessment and collection of tax.

Either the officer, with the agreement of the Authorised Officer, or the Authorised Officer can ask the Tribunal to:-

  • approve the notice, and
  • disapply the requirement to name the person.

The Tribunal will only agree to this is they are satisfied that naming the person would prejudice the assessment and the collection of tax.

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Groups of Companies

For groups of companies the position with regard to third party notices differs depending on whether:-

  • the notice is to check the tax position of the parent and a subsidiary or subsidiaries
  • the notice is issued to the parent to check the tax position of a subsidiary or subsidiaries.

Notice to check the parent and subsidiary

If the third party notice is issued to check the tax position of the parent and a subsidiary or subsidiaries:-

  • it must state that it is for checking the tax position of the parent and any of its subsidiaries – it does not need to name the subsidiaries
  • only the parent’s approval is needed for a taxpayer-approved third party notice
  • the notice only has to be sent to the parent
  • if the approval of the Tribunal is sought, the summary of reasons for requiring the information or documents need only be sent to the parent.

The above does not apply if the notice is not for checking the parent’s tax position but only if that of a subsidiary or subsidiaries.

Notice to the parent to check a subsidiary

If the third party notice is to check a subsidiary or subsidiaries, but not the parent’s tax position:-

  • the conditions for giving a taxpayer notice to the subsidiary must be met
  • no approval is required
  • all the subsidiaries must be named
  • no reasons for seeking the information or documents has to be given (although HMRC generally will)
  • if the approval of the Tribunal is sought, all the subsidiaries will have to be provided with a summary of the reasons for requiring the information or documents
  • a copy of the notice does not have to be sent to the subsidiaries.

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No Approval Required

HMRC does not have to have approval for a third party notice that requires the provision only of information or documents forming part of the taxpayer’s statutory records relating to:-

  • the supply of goods or services
  • the acquisition of goods from an EU member state
  • the importation of goods from outside the EU for the purpose of carrying on a business.

Nor is approval required for third party notices to:-

  • a partner to check the tax position of another partner in their capacity of partner
  • a parent company for the purposes of checking the tax position of its subsidiaries.

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Relevant Lawyers

There are restrictions contained in Finance Act 2008, Sch. 36, Part 4 that prevent HMRC requiring the provision of professional legal advisers and clients. To avoid breaching these provisions, officers must refer to their Head Office cases where consider it appropriate to send a third party notice to a ‘relevant lawyer’.

A relevant lawyer includes:-

  • a barrister
  • a lawyer
  • an advocate (a member of the Faculty of Advocates in Scotland)
  • a solicitor
  • a registered foreign lawyer or a European lawyer
  • any other legal representative, communications with whom may be the subject of a claim to professional privilege in accordance with the Legal Services Act 2007, S. 190 (such as a licensed conveyancer, a trade mark or patents attorney, a legal executive or a law costs draftsman).

HMRC cannot insist that a relevant lawyer provides or makes available any documents covered by legal professional privilege without first obtaining the client’s consent.

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Spouse or Partner

HMRC will always hope to obtain information from spouses or partners on a voluntary basis. Obtaining such information is a sensitive matter and must not be done in such a way that breaches the person’s rights under Art. 8 of the European Convention of Human Rights (ECHR).

The ECHR gives everyone the right to respect for:-

  • their private and family lives
  • their home
  • their correspondence

However, a degree of intrusion is permitted of the intrusion is:-

  • in accordance with the law
  • necessary in democratic society
  • in pursuit of a legitimate aim.

HMRC’s action must therefore be proportionate to the need. This means that the nature and extent of the intrusion must be reasonable in the circumstances of the particular case and it must be restricted to the minimum necessary to achieve HMRC’s aim.

Information and documents held by a spouse or partner are confidential to them and can only be requested from them, not from the taxpayer, without breaching their right to privacy. A high expectation of privacy attaches to them so that the justification for asking for them must be very strong.

To be proportionate, in a smaller case HMRC should restrict their request to asking the taxpayer for a statement of gifts or loans between the spouses or partners. Where the private side is considered to be more important to the enquiry, details will be requested of the spouse or partner’s income and gains, assets and personal expenditure.

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Taxpayer Approval for Notice

There are situations where no approval is required for issuing a third party notice. In other cases, however, HMRC must obtain either:-

  • the agreement of the person whose tax position they are checking, or
  • the approval of the Tribunal.

HMRC’s preferred option is to obtain the taxpayer’s agreement, particularly where the relationship between the taxpayer and the third party is close, as in the case of a sole director of a close company. They will not use this option however if, to defend any appeal against a taxpayer-approved third party notice, they might have to reveal information in front of the third party that they would wish to keep from them. In that case, they will proceed by way of a Tribunal-approved notice.

When seeking the taxpayer’s approval, HMRC will:-

  • explain the reasons why they need the information and documents and provide a copy of the proposed notice
  • make it clear that if the taxpayer does not give their approval they will seek the approval of the Tribunal
  • ask the taxpayer for any representations they might wish to make.

The notice sent to the third party must be in exactly the same form as the notice approved by the taxpayer.

When explaining the reasons for wanting the information and documents HMRC will usually give details of the liability being investigated and explain why the documents or information are needed. This allows the taxpayer to make proper representations after giving the matter due consideration.

If the taxpayer refuses to approve the notice, HMRC will try in the first instance to obtain the information informally from the third party. If this is not successful they will seek approval from the Tribunal.

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