HM Revenue & Customs’ powers to obtain information from financial institutions are set to increase, with the requirement for taxpayer or tribunal approval to be removed. Although not yet in force, the legislation is at an advanced stage and will be of interest to family offices.
What the new powers mean
Currently, HMRC must either request information from the taxpayer or from a third party institution, such as a bank. The aim of any request must be to check the tax position of the taxpayer. When requesting information from a third party, HMRC must provide a summary of the reasons to the taxpayer and apply for approval of the tribunal, where the taxpayer has an opportunity to challenge HMRC.
The main change is the removal of the need for tribunal approval, meaning that HMRC will be able to approach financial institutions directly. “Approval” will instead be overseen by an authorised HMRC officer. A new permitted aim behind a request has also been added, namely to collect a tax debt.
The right for the taxpayer to make representations as part of the process will be removed. The taxpayer must be provided with a copy of the request, unless a Tribunal decides otherwise. Only information which is not onerous for the institution to provide can be requested.
Circumstances in which HMRC would use these powers
HMRC would usually issue a notice where informal notices have failed or are unlikely to succeed. The manual for its inspectors (at CH223100) says most information requests will be informal, which may be made in writing, over the telephone or during a visit. It also says an information notice should only be considered when:
• The person whose tax position you are checking has not responded to an informal request for information or documents, or
• It is not appropriate to ask the person to supply the information voluntarily
Inspectors are not legally bound to follow HMRC Manuals, but usually do so.
At the moment, information notices aim to check the tax position of a taxpayer, including to assist tax authorities in other countries with requests. Under the reforms, requests will also be made where HMRC is seeking to collect a tax debt.
Big Brother or not a big deal?
The impact on well-run family offices and ultra-high net worth individuals ought to be minimal, if the rules are taken at face value. Compliant taxpayers should continue to receive informal requests in the first instance, rather than the new notices.
For those with international connections, as many family offices and UHNW individuals do, information on overseas investments will be automatically sent to HMRC by local tax authorities as part of the Common Reporting Standard. In that sense, the proposed rules simply bring domestic UK accounts up to speed.
One area of concern is the additional aim of collecting tax debts. In our experience, HMRC's debt collection team on occasion pursue tax whilst another team has agreed to review the position and defer collection. If this continues, one may see an increase in requests to financial institutions for “debts” which may in fact ultimately be waived.
The wider justification for the changes is difficult to assess and is tied-up with questions concerning proportionality. Criticised by the Chartered Institute of Taxation for being overly severe, the changes grant more power to the authorities. The Government’s Policy Paper states that this will “support HMRC's domestic compliance”. That said, the same paper assesses the economic impact on the Exchequer as nil, which may lead some to question the extent of such support.
Another fundamental issue with the policy paper is the assertion that savings in the justice system will be made by removing the need for tribunal approval, as well as dealing with international authority requests more quickly. It concludes that there will be no cost to HMRC, despite authorised officers taking up the supervisory mantle. It will be something of a tightrope for HMRC to deal with matters more quickly than the courts, without incurring additional costs, whilst ensuring appropriate safeguards are in place. There is also the wider question of whether it is appropriate to move legal supervision “in house” to government authorities, rather than improving funding for the justice system.
Steps to take
As ever, we would encourage taxpayers to review their affairs proactively. HMRC's penalties can be reduced if a disclosure is unprompted and made in a timely fashion. Information gained via such requests can be used to initiate enquiries for prior tax years. Approaching HMRC with a comprehensive disclosure, having taken advice from a professional, can reduce the length of the process and reduce the amount payable.