Taxpayer Notices — not a fishing expedition

Speed read: Perring v Commissioners for HM Revenue and Customs [2021] UKFTT 110 concisely illustrates the parameters of HMRC’s powers to issue taxpayer notices. Taxpayers and their advisers should pay careful regard to the decision if faced with such a notice.

The facts

Thomas Perring and Michael Perring (brothers) were the appellants. In March 2019, HMRC opened an enquiry into their 2017–18 tax return, having noted that an asset had been disposed of but no corresponding gain recorded. The HMRC officer also made a wide-ranging request for information for tax years 2012–13 onwards to “check [their] tax position”. Whilst there were concerns that, historically, rental income had been omitted and declared earnings were insufficient to fund property investments made, the officer did not suspect tax evasion. Messrs Perring appealed the information notices and related penalties.

The law

Paragraph 1, Schedule 36, Finance Act 2008 (“Schedule 36”) allows an HMRC officer to require a taxpayer to provide information or produce a document, if the information or document is “reasonably required” by the officer for the “purpose of checking the taxpayer’s tax position”.

Paragraph 21(1), Schedule 36 provides that, where a person has filed a tax return for the purposes of income tax and capital gains tax, “a taxpayer notice may not be given for the purpose of checking that person’s income tax position or capital gains tax position” for that tax year, unless certain conditions are satisfied. This includes where there is an open enquiry into the relevant return (Condition A), or where the officer “has reason to suspect” that it is deficient (Condition B).

The decision

The First-tier Tribunal set aside parts of the taxpayer notices and varied others, giving the appellants 30 days to comply with the revised versions. The appellants conceded the arguments on penalties.

In coming to her decision, Gething J decided six key issues:

  1. The burden of proof falls on HMRC to satisfy the tribunal that a taxpayer notice is validly issued. It is not the case that HMRC simply has to show a prima facie case, following which the burden shifts to the taxpayer to show that notices were non-compliant.
  2. Suspicion. Information notices are not to be used for the purposes of a “fishing expedition”. The Condition B test requires not only that the officer has formed the view that the assessment is deficient, but it must also be objectively reasonable to hold that view. That means there must be some evidence to indicate such a deficiency.
  3. Statutory records. Paragraph 29(2), Schedule 36 provides that no appeal may be made against a request for production of information or a document that forms part of a taxpayer’s statutory records. The Tribunal held that this includes “the information necessary to compute a person’s tax liability and file a return”. For CGT purposes in relation to an asset disposed of, this would include the purchase price, sale price and deductible expenses. For a rental business, it would include records of receipts and expenses. The Tribunal also addressed the status of specific items (ranging from personal bank statements, to the directors’ loan accounts — see paragraph 24 of the decision).
  4. Reasonably required. Documents cannot be “reasonably required” for the “purpose of checking the taxpayer’s tax position” where there is no evidence of dishonesty and (a) they relate to a year in which HMRC may not raise an assessment, or (b) HMRC already has the information and documents in its possession.
  5. Legal professional privilege. Paragraph 23, Schedule 36 states that a taxpayer notice does not require a person to provide privileged information or documents. The Tribunal held that all correspondence between the appellants and their solicitors in connection with the purchase of property, and the fact that advice had been taken itself, was protected by legal professional privilege. In the absence of fraud in which the solicitor is implicated, details of a taxpayer’s solicitor cannot be reasonably required.
  6. Old documents. The Tribunal confirmed that a taxpayer notice would not be valid to the extent it required documents created more than six years before the date of the notice (see paragraph 20, Schedule 36), where there was no evidence or suspicion of dishonesty.

Final thoughts

The decision in Perring provides a tidy route map for taxpayers facing the Schedule 36 regime. It also delivers a welcome reminder of the well-established principle that HMRC may not use taxpayer notices for the purposes of a fishing expedition.

However, the decision must also be treated with a degree of caution.

  • First, the appropriate response to any taxpayer notice will always turn on the circumstances. It may be that in certain cases, a taxpayer wishes to hand over more than is strictly required (and even waive privilege) to show co-operation, and potentially facilitate a settlement. However, the legal consequences of such disclosure must be carefully considered, as they may prove irreversible (see R (oao PML Accounting) v Commissioners for HM Revenue and Customs [2018] EWCA Civ 2231).
  • Second, the Tribunal’s conflation of “deliberate” and “dishonest” behaviour must be read in the context of the recent decision in Commissioners for HM Revenue and Customs v Tooth [2021] UKSC 17. In that decision it was held that for there to be a “deliberate” inaccuracy in a document, there must be an intention to mislead HMRC or, perhaps recklessness.
  • Finally, as the government introduces further powers (for example, the ‘Financial Institution Notices’, detailed in the Finance Bill 2021) it remains to be seen whether the route map set out in Perring will be adhered to across all information powers. It is possible that Financial Institution Notices could provide a back-door to information currently unobtainable by the Revenue. The precise drafting of any new powers will need to be carefully considered — Perring is unlikely to be the final chapter.