HMRC: An Enquiring Force To Be Reckoned With
HMRC can undertake informal enquiries and investigations into a taxpayer outside of section 9A of the Taxes Management 1970, following a High Court ruling1 that has surprised and concerned many.
What’s the background?
The UK-domiciled taxpayer, an individual, had a beneficial interest in five companies – supermarkets in Spain and Portugal. He and the companies were the claimants in their application for judicial review of a decision by HMRC to conduct informal enquiries into their tax affairs. It suspected the individual had not paid enough tax on his offshore interests.
No formal enquiries under section 9A were commenced but it made a number of requests to him and to third parties for information including to the tax authorities in Spain and Portugal
The claimants argued that:
· HMRC’s informal enquiries were ultra vires as HMRC had no general power to conduct informal enquiries;
· they deprived the claimants of access to justice; and
· the requests made to the Spanish and Portuguese taxing authorities are unlawful.
The claimants also asked the court to exercise supervisory jurisdiction over HMRC's “irrational and disproportionate decision to investigate all of Mr Robertson's tax affairs”. The individual had (this was not disputed by HMRC) filed his self-assessment tax returns for each relevant year and within the relevant deadlines.
What did the court decide?
The High Court found that even where HMRC has not opened formal enquiries under section 9A it can still exercise its statutory information-gathering powers. However, this is subject to a number of important safeguards, notably:
· The statutory pre-conditions must be met. That means that whether it is a taxpayer notice or a third party notice, the information or document requested must be "reasonably required for the purpose of checking" the taxpayer's tax position.
· There are statutory restrictions on the use of these powers, eg. HMRC must satisfy one of four specific conditions it if wishes to make enquiries in relation to a chargeable period where a tax return has been filed, including if an HMRC officer has reason to suspect that an amount that ought to have been assessed to relevant tax for the chargeable period may not have been assessed.
· HMRC’s use of powers under Schedule 36 Finance Act 2008 (taxpayer notices and third party notices) is subject to the scrutiny of the First-tier Tribunal (FTT) by way of prior approval or on appeal. A third party notice cannot be issued unless the taxpayer agrees or the FTT gives prior approval. The FTT must be satisfied that the officer giving the notice is justified in doing so.
However, the court sided with HMRC who contended that as a statutory body, it can only do the things it is empowered to do by statute. But it argued that such a constraint did not create any difficulty in this case because its functions also include the collection of taxes and conducting an investigation into whether a taxpayer has declared all his income and paid the correct amount of tax.
The court agreed that HMRC’s functions include its primary function (the collection of tax) and that carrying out informal enquiries is ancillary to its functions to collect the correct amount of tax. It differentiated between its statutory scheme (to collect taxes) and its ancillary range of tools enabling it “to investigate, discover and collect tax that has not been, as it should have been, declared by way of self-assessment."
Consequently, as there is no formal statutory scheme underlying HMRC's informal enquiries its enquiries were not rendered ultra vires as claimed.
The court also found that the claimant's access to justice was not infringed by HMRC conducting informal enquiries, as HMRC was seeking cooperation and information on a voluntary basis. This did not deprive the individual from exercising his rights.
What does this mean?
HMRC has informal powers to conduct investigations, and taxpayers on the receiving end of taxpayer notices or third party notices may have to cooperate. The ruling could lead to an increasing number of informal enquiries given that a) they can be conducted without a formal section 9A enquiry being opened and b) they are unlikely to be found ultra vires or to restrict the taxpayer’s access to justice.
It may also lead to an increasing number of applications to the FTT in an attempt to challenge the HMRC to prove that the information it requires is reasonably required.
JJ Management LLP & Ors, R (On the Application Of) v HMRC & Anor [2019] EWHC 2006
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