UK: HMRC seeks powers to force third party disclosure without judicial oversight

HMRC has begun a consultation on what it describes as ‘the relevance of the third-party information powers enacted by schedule 36 of the Finance Act 2008‘. However, tax enforcement experts say it proposes ‘unprecedented powers’ to obtain information about taxpayers, including non-residents, without independent tribunal oversight.

According to HMRC, the ‘massive change’ in the information systems landscape since 1970, when its current powers to demand third-party information were originally legislated, suggest that they may no longer be relevant in some cases. It also proposes ‘a small number of other minor changes to ensure that HMRC’s powers remain effective and in line with international standards’. These include ‘being able to use information for a wider range of functions and to correct errors in the penalties regime’.

However, according to Jason Collins of law firm Pinsent Masons, the proposals could allow HMRC to submit information requests to financial institutions, accountants, lawyers, estate agents and other third parties that hold information about taxpayers, without first seeking approval from the tax tribunal, as it must at the moment. Third-party notices would still have to be authorised by a senior HMRC officer, and the taxpayer would be given a summary of why the information or documents are being sought from the third party, though the third party itself would be forbidden to tip off the taxpayer. The third party receiving the notice would be able to appeal to the tribunal, but only on the basis that complying with it would be too onerous.

The current requirement for prior consent to be sought from the tax tribunal is an ‘essential check to help safeguard taxpayers against fishing expeditions’, said Collins. It is not used often: there were 215 requests for tribunal approval of a third-party notice in the 2016-2017 financial year, according to HMRC. Only one was rejected.

HMRC now wants to remove even this check, using as justification that the coming of the Common Reporting Standard (CRS) will allow overseas tax authorities to automatically receive data on UK residents’ accounts financial without any supervision. It cites the delays caused by tribunal hearings as a reason for abandoning them entirely. The OECD – which has sponsored the worldwide introduction of CRS information exchange – believes these delays discourage some jurisdictions from making requests.

A slightly less intrusive proposal in the consultation document would instead give HMRC a right to request information such as bank statements and transaction histories from financial institutions without tribunal approval, if they were ‘reasonably required’ to check a taxpayers’ tax position. This approach would mean other requests for third-party information would remain subject to tax-tribunal approval.

HMRC also proposes to extend Schedule 36 to allow it to demand information that is reasonably required for any other tax purpose – such as debt collection.

Consultation on the proposals closes on 2 October.

Source: Step