There are some few instances in which it can be helpful to give HMRC absolutely anything and everything they somehow conclude they reasonably need. However, in almost all cases handing over voluminous information simply extends an investigation. It encourages ever more intrusive and historical questions, including discovery assessments.

Consequently, the rule of thumb is to, normally, hand over the bare minimum, being only statutory records and that which is reasonably required for the purposes of the enquiry.

If you’re not convinced so far, you should know that a colleague once asked a Senior Inspector why HMRC persists in asking for information to which they are clearly not entitled. 

The answer that came back was ‘because 90% of the time, the taxpayers provide it’  Clearly, blind trust in the belief that HMRC will voluntarily observe the limits of its (information) powers is not a course of action that any competent adviser should take.

In turning to Schedule 36 notices (aka Information Notices), a too infrequently used protection is section 21, Sch 36, Finance Act 2008. The protections here offered by this paragraph concern where a taxpayer has made a tax return, and the information that has informed that return. Indeed, Information Notices may not be issued unless:

a.     there is a valid enquiry open into a return, claim or election, or

b.     HMRC have reason to suspect an under-assessment in relation to the period in question;

c.     the information or documents are also required for the purposes of checking the taxpayer’s tax position in relation to a tax other than income tax, CGT and corporation tax; and

d.     the information or documents are required (or also required) for the purposes of checking the taxpayer’s tax position in relation to deductions or repayment of tax or the withholding of income.

To be clear, the default is that an Information Notice cannot be issued. To overcome this default position, A, B, C, or D, above must be satisfied.

 A further, crucial component to the above is its application to every period for which a return has been submitted.

For example, let’s take information Q. Information Q informed a return in 15/16, and is now being requested via an information notice related to an enquiry into 22/23. Information Q does not inform the return for 22/23.

In this scenario, unless there is (A) a valid enquiry into 15/16 or (B) essentially already the ability to make a discovery assessment on the year to which the information relates (15/16 in this case), the request for Q will not be valid. Q, therefore, does not have to be sent to HMRC, with the request for information Q being appealable.

The utility I found in a recent case was this. We had an enquiry into a return for 22/23 in which HM Revenue & Customs requested documents and information going back as far as 12/13.

The tax at stake was high. Somehow there was an unexplained mortgage of almost £1million, and while family wealth did in fact seem to offer a great deal of explanation, HMRC had decided to keep digging in the hope of discovering a problem.

A successful defence was available in the form of the following:

1.     A return was made for 12/13 and every subsequent year;

2.     The basic limitation to a discovery assessment is 4 years, being extended to 6 for carelessness (there was no suggestion of anything more serious);

3.     A valid discovery assessment could, therefore, not be made as far back as anything like 12/13, and

4.     As per Hegarty [2019] TC06908, ‘it cannot be reasonable to make a futile enquiry’.

In other words, unless HMRC can actually enquire into or discovery assess the period in question (condition A and B above), information informing returns for those historical periods enjoys protection.

In this case, since a return had been made for 12/13 (and all subsequent years), and since HMRC were not in a position to discovery assess, they could not meet condition A, or indeed substantiate their satisfaction of condition B.

Any information could not, therefore, be reasonably required as it would have been futile.

So long as a return has been filed, HMRC must be in a position to enquire into, or discovery assess the year(s) in question. Otherwise, any information requested concerning such periods is futile and therefore unreasonable.

Where a valid assessment cannot be made for a certain period, information informing a return for that period cannot be reasonably required. And with that, section 21 then protects the taxpayer.

Croner-i successfully defended a recent enquiry on this basis. And, not just one enquiry. With one letter, several enquiries were closed. Our client confirmed that not only were several enquiries into his client’s returned closed, but so too were enquiries into his client’s father, and his father’s company.
This serves as another example of where (1) checking what taxpayer protections are on your side is a valuable and worthwhile exercise and (2) sending less and not more information to HMRC can (and normally will) pay dividends.

About the author 

Rocky Webb CTA, HMRC enquiries consultant at Croner-i

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