There are circumstances where HMRC has a legitimate need to directly approach financial institutions to obtain tax related information where taxpayers are unwilling or unable to do so. As things stand, HMRC has the power to issue a Schedule 36 notice to third parties such as banks and other financial institutions, requiring them to provide information or produce a document relating to a taxpayer. That information must be ‘reasonably required’ for checking the taxpayer’s tax position. Under current law, it must have either the taxpayer’s consent or approval from the First-tier Tax Tribunal.
By contrast, the new power will enable HMRC to issue third-party notices to certain financial institutions without the agreement of the taxpayer or the tribunal. It also introduces a rule to prevent the third party telling the taxpayer about the notice, where the tribunal thinks that is appropriate. However, the draft legislation provides no statutory right of appeal against such Financial Institution Notices. Any institution which wishes to resist a notice, or ask for its terms to be amended, will consequently have to challenge it through the laborious process of judicial review.
As the Chartered Institute of Taxation points out, this applies even if it would be unduly onerous for the institution to comply with the notice.
‘It appears that the first opportunity that the financial institution will have to appeal is at the point a penalty for non-compliance with the notice is imposed’. ‘It is a wholly unsatisfactory position that the financial institution must first be non-compliant with the notice before it potentially has a legal route to argue against the legitimacy of the information notice.’
It also points out that it may not even be permissible to argue about the legitimacy of an information notice at a penalty appeal hearing.
‘This lack of a formal appeal route in the draft legislation combined with the lack of independent tribunal oversight for issuing the notice in the first place is concerning’, says the Institute. It suggests that financial institutions are given a formal right of appeal if it would be unduly onerous for them to comply with the notice, as is the case at present.
HMRC’s justification for the absence of an appeal process is that the legislation is intended to speed up the UK’s response to foreign countries’ requests for assistance in tax investigations. If so, says the Institute, HMRC should explain in their guidance how it will deal with complaints from financial institutions where obtaining the information is unduly onerous.
In any case, says the Chartered Institute, the draft legislation does not restrict the new Financial Institution Notices to requests for information from overseas jurisdictions about non-UK taxpayers, so it is likely that it will be used to obtain information about UK taxpayers during the course of a domestic tax enquiry. Potential uses might be where taxpayers have inadvisably entered into tax schemes and where those who sold and implemented the schemes are shy or reluctant to offer clarification when the arrangement is challenged by HMRC.
The new power could also apply to overseas third parties, given the England and Wales Court of Appeal’s judgment in the Jimenez case (2019 EWCA Civ 51).
The fact that trusts are not ‘financial institutions’ for the purpose of the Common Reporting Standard means that HMRC will be unable to issue Financial Institution Notices in respect of non-UK trusts themselves. However, it may try to circumvent this by issuing notices to professional trust companies, custodian banks, and investment managers that hold and manage the assets of a non-UK trust. As the law is currently drafted, there would be no scope to appeal the notice, though it might be plausible to claim a reasonable excuse while a trustee seeks advice as to the application of the notice. A non-UK trustee receiving a Financial Institution Notice is likely to need a combination of UK tax advice, together with local advice on data protection and the applicable trust law.