To allow HMRC to check that the correct amounts of tax have been paid by taxpayers, they have been afforded formal legal powers to request information and documents from taxpayers. These powers are contained within Schedule 36 to Finance Act 2008.
Schedule 36 provides a framework that dictates what information HMRC is entitled to; when they are entitled to ask for that information and who they may request that information from. Failure to provide the information requested can lead to financial penalties for non-compliance, which starts with a basic penalty of £300, plus further daily penalties of up to £60 per day if the taxpayer’s non-compliance continues.
However, HMRC Schedule 36 notices can be appealed if there is no legal basis for the recipient to comply with the notice. These taxpayer safeguards are detailed in Part 4 of Schedule 36, and the most important ones are included within Paragraph 21.
Paragraph 21 lists only four scenarios where HMRC are able to make an information request under Schedule 36. These apply where a taxpayer has submitted a relevant tax return and are as follows:
a. Where there is a valid open enquiry into the tax return or claim/election.
b. Where HMRC has a “reason to suspect” an under-assessment in relation to the period in question.
c. Where the information is required so HMRC can check the taxpayer’s tax position in relation to another tax other than income tax, CGT or corporation tax, or
d. The information is required to check the taxpayer’s tax position in relation to deductions or repayments of tax, or the withholding tax.
In practice, Conditions A and B are the ones which HMRC are most likely to cite as the justification for issuing a Schedule 36 notice. The “reason to suspect” requirement in Condition B can be particularly contentious, but what this means is that HMRC cannot use Schedule 36 notices to try and find a problem, something often referred to in practice as a fishing expedition, the suspicion must already pre-exist.
Schedule 36 places other restrictions on HMRC to obtain information, such as only being able to request a document from someone if it is within their possession or power. This means, for example, it may be unreasonable to issue a Schedule 36 notice to a company, and within that notice request copies of the director’s personal bank statements. In that example, if HMRC thought obtaining the director’s bank statements was necessary to check the tax position of the company, they must issue a separate notice for this.
In addition to the above, information notices cannot ordinarily request that a document be provided that originated more than 6 years before the date of the notice.
Requests must be “reasonably required”
Under Paragraph 1 of Schedule 36, HMRC must ensure any request for information or documents from a taxpayer is made in writing, and that request must be “reasonably required” for the purpose of checking the taxpayer’s tax position. As the test of reasonableness is subjective, it is unsurprising that a significant number of appeals against Schedule 36 notices reach the Tax Tribunal on the basis the taxpayer and HMRC disagree over what is “reasonably required”.
Types of information notices
There are now five types of information notices:
- Taxpayer notices
- Third-party notices
- Notices relating to a person whose identity is unknown
- Notices relating to a person whose identity in unknown, but ascertainable, and
- Financial Institution Notices (FINs).
The most common types of notices seen in practice are Taxpayer notices (i.e. a notice issued to a taxpayer about their own tax affairs), or a Third-party notice (i.e. one which requires the recipient to provide information or documents about another taxpayer). The key difference between the two is a Third-party notice requires either the taxpayer or a Tribunal’s consent before it is issued. If HMRC request the approval of a Tribunal before issuing a Taxpayer notice, then it removes the possibility of the taxpayer being able to appeal against the notice.
FINs were introduced under Finance Act 2021 but unlike other third-party notices, they do not require the prior approval of either the taxpayer or the Tribunal. This important safeguard has therefore been removed and in theory it is much easier for HMRC to obtain documents, likely a taxpayer’s bank statements, provided they have first satisfied themselves that it is reasonably required.
Appeals against Schedule 36 notices
Appeals against a Schedule 36 notice must be made in writing within 30 days and state the grounds for appeal. Where appropriate, the taxpayer will have the opportunity to request an internal review of the decision to issue a Schedule 36 notice, and appeal to the Tax Tribunal if necessary.
It should be noted that there are no grounds of appeal if the Tribunal has previously approved the information notice, in which case the only option available to the taxpayer would be to request a judicial review.
Taxpayers are also unable to appeal against a request by HMRC to produce a statutory record under a Taxpayer notice.
Third parties may be able to appeal against an information notice if it would be unduly onerous to comply with the notice. Both taxpayers and third parties can also appeal against penalties for non-compliance with an information if they have a reasonable excuse for non-compliance.
If you would like to discuss HMRC’s information powers and HMRC Schedule 36 notices further, please contact Menzies’ Tax Disputes and Disclosures team on our free confidential helpline: