HMRC can use their powers under Finance Act 2008, Sch. 36 to issue a formal notice to a taxpayer (a taxpayer notice) requiring them to provide information and documents reasonably required to check their tax position. These will usually be requested informally in the first instance but a formal notice will be issued if the taxpayer:-
Where HMRC suspects tax avoidance, they are likely to issue a formal notice at the outset without making an informal request for the information and documents.
If the taxpayer needs more time to provide the information than that specified by the informal request they should immediately, or as soon as this is realised contact the officer to agree a realistic timescale. Delay in contacting the officer will lead to complications and possibly the imposition of a penalty for delay. It should be noted, however, that if the officer does not consider that there is a good reason for requesting extra time a formal notice will be issued as soon as the time-limit in the informal request has expired.
The notice can ask only for information and documents reasonably required for checking the taxpayer’s tax position. There is a right of appeal against a notice requiring the production of supplementary information and documents (but not against the requirement to produce statutory records) if the taxpayer does not agree that they are reasonably required. But it should be kept in mind that reasonably required is not the same as definitely required.
Supplementary information could include such things as:-
A taxpayer notice will set a time-limit for complying with the information request. The officer should carefully consider how much time is needed to comply but they will not necessarily know all the circumstances. If their time-limit is too short, it is important to contact them immediately, or as soon as it becomes clear that more time is needed, to agree a longer time. If the officer refuses to accept that more time is needed an appeal can be made to the Tribunal on the grounds that the officer allowed insufficient time.
If the information cannot be obtained or documents do not exist, the officer can set aside the relevant part of the notice. They may, however:-
HMRC will not accept that a legal or professional adviser’s duty of confidentiality towards their client is sufficient reason for not complying with a taxpayer notice addressed to themselves for the purpose of checking their own tax position. They have given assurances that information obtained:-
So, for example, they will not use information about a patient’s expensive dental work, obtained in the course of checking a dentist’s tax position, to start an enquiry, or as part of an enquiry, into the patient’s tax affairs. HMRC take the view that Finance Act 2008, Sch. 36 overrides the duty of confidentiality. They say that:-
‘In HMRC’s view, Schedule 36 FA08, like its predecessor TMA70/S19A, overrides the duty of confidentiality. This view was accepted by the Special Commissioners in Guyer v Walton, SPC 274/01, an appeal by a solicitor against a notice issued under section 19A TMA70 [note that the part of this decision relating to disclosure of legally privileged documents has been overridden by the House of Lords judgment in the case of R v Special Commissioner and another, ex parte Morgan Grenfell & Co. Ltd – but the finding on client confidentiality stands].’
In view of the sensitivities the officer will normally issue a formal notice at the start so that the professional can point to this as their justification for providing otherwise confidential information. They will also be particularly careful to ensure that the notice cannot be challenged under the European Convention on Human Rights (ECHR), Art. 8 for not being proportionate. Any request must be for information or documents that are relevant to the compliance check and the least intrusive way of resolving any doubts or queries.
If the taxpayer fails to comply with a taxpayer notice HMRC may impose an initial penalty of £300 and a daily penalty of up to £60 until it is complied with.
Before doing so, the officer should try to contact the taxpayer to find out why the notice has not been complied with and, if necessary, agree more time. They should also explain that a penalty will be charged if they do not comply with the notice.
No penalty should be imposed while the appeal period is still open or if an appeal has been made against the notice and the appeal is still open.
Common law, the Data Protection Act 1998, Art. 8 of the ECHR and Finance Act 2008,Sch. 36, para. 23, give protection to legally privileged documents. HMRC cannot obtain any documents in respect of which the legal professional is entitled to legal professional privilege. If the legal professional asserts that the documents requested are protected by their client’s legal privilege, HMRC will quote the part of the judgment in the case of R v Special Commissioners and another ex-parte Morgan Grenfell & Co Ltd  BTC 223 where, Lord Hoffman, when commenting on the case of R v IR Commrs ex parte Taylor (No. 2)  BTC 281, said:
‘In consequence, I do not think that the disclosure of the documents by Mr Taylor [the solicitor] in confidence for the limited purpose of determining his own tax liability infringed any LPP vested in his clients. If I am wrong about this and technically it did, then I think that to that limited extent she statute can be construed as having authorised it.’
The information powers in Finance Act 2008, Sch. 36 cannot be used to obtain medical records. Where the records mix both medical and financial information, HMRC take the view that they can be requested but that a request for patient’s records (or other records containing patient information) should only be made if:-
Because of the sensitivities involved in asking to see medical records, the officer will not issue a notice without first consulting Central Policy, Tax Administration and Advice.
For these purposes a medical professional is a:-
A medical record is:-
HMRC can use their information powers to request private records, including bank and building society statements, paying-in slips and details of property or other assets. The information or documents requested must, however, be reasonably required for checking the taxpayer’s tax position. HMRC state that reasonable equates to ‘fair and sensible in the circumstances’. Whether a request is reasonable is, therefore, dependent on the circumstances in each case.
The opening letter of a compliance review or enquiry will normally include a request for the business records to be sent to HMRC. Any request in the opening letter for private records to be sent should be resisted, unless it is clear then that the accounts for a business are not based on sound and well-kept records, and that they include unvouched or unverified sums. If the records are clearly inadequate, HMRC will be justified in asking to see private records.
HMRC explicitly state that they accept that depositing in a private account correctly and contemporaneously recorded drawings from a business is not sufficient grounds for asking to see the private records for that account.
HMRC also accept that where any unvouched or unverified items relate only to minor matters it would be inappropriate to ask to see private records. They consider minor matters to be such things as the business proportion of household expenses when the home is used for business purposes, laundry bills, etc.
As private records do not form part of the statutory records they are supplementary information. If the taxpayer does not consider that they are reasonably required for checking their tax position, an appeal can be made to the Tribunal. There the officer will have to satisfy the Tribunal that the information is reasonably required.
Matters which HMRC have indicated that they consider would make it reasonable to request sight of private records include where:-
When requesting private records, HMRC acknowledge the need to take account of:-
There are various restrictions on what information and documents can be required by a taxpayer notice. It cannot require the taxpayer to provide for inspection:-
Normally a statutory auditor cannot be required to produce their audit papers or a tax adviser their advice papers.
Although most taxpayer notices will be issued without the approval of the Tribunal, HMRC will seek their approval where:-
There is no appeal against a taxpayer notice that has been approved by the Tribunal.
If HMRC want to inspect documents and business premises at the same time, they can ask the Tribunal for their approval for both the inspection visit and the taxpayer notice.