Financial Information Notices

Financial Information Notices

Financial Information Notices are essentially an extension to HMRC’s information powers. They allow the department to request information about a taxpayer directly from a bank. In this article also published on the Bloomsbury Professional Tax blog, Mala Kapacee reviews the new powers and what they mean for the taxpaying public.

All legislation references are to s.122, (draft) Finance Bill 2021, unless otherwise stated.

Background

HMRC’s civil information powers are found in Schedule 36, Finance Act 2008. They include the power to request information (from the taxpayer or a third party) in relation to a taxpayer’s tax position if there is an open enquiry or if HMRC has a “reasonable suspicion” that there has been an under-declaration of tax.

To date, if a notice was issued to a third party, HMRC either had to have permission from the taxpayer or from the Tribunal. The point of HMRC having to go to Tribunal is that it would have to demonstrate that there was a legitimate reason HMRC could not ask the taxpayer for the information or permission to get it (for example, that it would seriously jeopardise an investigation).

The amendment to these powers means that HMRC will no longer have to obtain permission before issuing a third-party notice to a Financial Institution (FI). In the legislation, a FI is, broadly speaking, a bank, any custodial or depository institution, an investment house and or certain types of insurance company.

According to the House of Lords review[1], published in December 2020, HMRC’s case for removing the approval process is that an OECD report “claimed that the UK’s processes unduly delayed the effective exchange of information”. HMRC considers this is due to the time taken to obtain approval from Tribunal.

However, HMRC also stated that “When we looked at the timeline for obtaining the information, the step of getting the additional information required from the other tax jurisdiction was taking over eight months on average. Even on its own, that step means that it is not possible for the UK to meet the international standards”.

On this basis, it is unclear how adding to HMRC’s powers will help its goal of reducing the time taken to respond to information requests from overseas. One can be forgiven for thinking that the basis for the extension of HMRC’s civil information powers may be a little more sinister.

The new legislation

The new legislation states (para. 2, 4A(1)) that an HMRC officer “may by notice in writing require a financial institution” to provide information or produce documentation as long as the request is not unduly onerous “in the reasonable opinion of the officer giving the notice” (para. 2, 4A (2)) and that “the information or document is reasonably required by the officer…for the purpose of checking the tax position of” a known taxpayer or for “collecting a tax debt” (para. 2, 4A (3)).

Straight away, we see that HMRC has been given a lot of discretion to decide when a Financial Information Notice (FIN) is appropriate. Further, the FI must comply with the notice unless it can show that the request is onerous. Given that a lot of FI data has been electronic for some time, in practice this will be a difficult one to prove unless (e.g.) the FIN requests information from say 20 years ago.

The next thing we see is that the legislation allows HMRC to request information for collecting a tax debt. It is unclear how this fits with HMRC’s purported reason for requiring these additional powers (see above).

The legislation refers to an “authorised officer of Revenue and Customs” (para 2, 4A (5)), though the title is undefined. HMRC’s Compliance manual CH261000 confirms the duties of an authorised officer and says that “An authorised officer is an HMRC officer who has the authority to undertake certain actions and to agree for other officers to use certain information, data-gathering and inspection powers.” We are left to rely on HMRC that the authorising officers are of sufficient experience and integrity that these notices are used only when absolutely necessary.

As the courts have in the past criticised HMRC’s understanding of terms like “deliberate” and “reasonable”, this is something that needs to be monitored.

Naming the taxpayer?

At para.2, 4A (6), the legislation states that “A financial institution notice must name the taxpayer to whom it relates.” While this makes sense – how can a FI provide information when it does not know whose information it is – invasion of privacy becomes an issue. When HMRC asks a FI for information about an individual, the FI may infer that HMRC is investigating that person. This in turn can lead to issues of the FI reviewing credit terms and the potential for reputational repercussions if there are leaks to the media. While HMRC might have a duty of confidentiality to the taxpayer, a bank may not.

One safeguard written into the legislation is that HMRC “must give a copy of a financial institution notice to the taxpayer to whom it relates” together with “a summary of the reasons why” HMRC requires the information (para.2, 4A (7)). There is however no right for the taxpayer to appeal the information notice being issued.

However, HMRC can apply to the Tribunal to issue the FIN without notifying the taxpayer or without advising the FI to which taxpayer the information relates (para. 8). The Tribunal must grant this application “if it is satisfied … that naming the taxpayer might seriously prejudice the assessment or collection of tax.” (para.2, 4A (9)) or “if it is satisfied that complying with the requirement [to give the taxpayer a copy of the FIN] might prejudice the assessment or collection of tax.” (para.2, 4A (10)).

If the Tribunal confirms that there is no requirement to advise a taxpayer of the notice, then the “notice may include a requirement that [the FI] must not disclose the notice, or anything relating to it, to the taxpayer to whom it relates.” (Sch33, Finance Bill 2021) i.e. the FI cannot advise the taxpayer of the information requested by HMRC. Further, they are not permitted to disclose anything relating to the notice for 12 months, which can be extended in theory indefinitely provided HMRC notifies the FI in writing on the last day of each 12 months extension. Failure to adhere to the instructions on the notice is a £1,000 penalty. These provisions also apply to other third-party notices.

Now from HMRC’s point of view, this is reasonable and similar to the “tipping off” provisions in anti-money laundering regulations. We must trust that HMRC will not use these powers to go on fishing expeditions and that the Tribunal will prevent the department from doing so.

The legislation does not require HMRC to provide a copy of the Tribunal’s decision with the FIN and it is possible therefore that FINs could be sent out requiring the FI not to tell the taxpayer, without Tribunal approval. There are no checks on HMRC’s behaviour in relation to the use of the information notices and precious few safeguards for taxpayers. If this legislation is misused, it could spell disaster for building trust in the department (one of the aims of the report evaluating HMRC’s use of powers).

There are already provisions in HMRC’s civil information powers, which enable HMRC to send third-party notices without notifying the taxpayer if HMRC has Tribunal approval. They can also already send notices requesting information in relation to a class of taxpayers i.e. without identifying each one. The need for these new powers remains unclear.

Changes to existing legislation

Further changes to the civil information powers affect the existing legislation. These extend the reasons for which HMRC can issue information notices. Previously, they were to check a taxpayer’s tax position. Now, they are also permitted “for the purpose of collecting a tax debt of the taxpayer” (s123) including foreign tax debts (s.123 (7)). For the avoidance of doubt, the legislation defines a tax debt as “an amount of tax due” or “any other amount due from the person in connection with any tax” with the possible implication that information notices could be used to identify whether a person has sufficient funds to pay interest or penalties.

Note to advisers

Exercising a healthy professional scepticism as we do, advisers must be aware of the implications of the legislation. If there appears to be any indication from a bank (e.g. sudden withdrawal of credit), consider whether an FIN may have been issued and whether it could be justified.

Tactfully! discuss the matter with the client and if there is reason to be concerned, consider whether a disclosure might be necessary.

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