HMRC opened enquiries into the corporation tax returns of three companies, referred to in an anonymised judgment as X Limited, Y Limited and Z Limited. HMRC wanted to examine the financial position of the directors and shareholders and their spouses because it suspected that cash may have been extracted from the companies.
HMRC issued informal requests for information to the directors and shareholders of the companies and their spouses, seeking information about personal bank accounts, credit card accounts, land, property and other investments owned during the period from 1 April 2012 to 31 March 2013. Those people refused to supply the information voluntarily. Their adviser asked HMRC to notify the adviser of the time and date of any hearing so that they could attend and make representations as to why approval should not be granted. HMRC refused but wrote to the individuals giving them an opportunity to make written representations.
A third-party notice allows HMRC to require a person to provide information or documents so that HMRC can check the tax position of another person. HMRC can normally only issue a third-party notice with the agreement of the taxpayer, or the approval of the first-tier tribunal.
The usual procedure is that the person who is to receive the notice will be told that HMRC is applying to the tribunal, and given an opportunity to make representations about why the notice should not be given, unless the tribunal is satisfied that informing the person in this way would prejudice the assessment or collection of tax. The third party or taxpayer will not be told when the hearing is and will not be invited to attend.
Earlier this year, the first-tier tribunal dismissed another request to be notified of the hearing of an application by HMRC for approval of a third party notice in an anonymised case referred to as 'Mr E and three corporate applicants'.
In the X, Y and Z case, Judge Poole therefore accepted the reasoning of Judge Mosedale in the earlier case and said there was no right for the individuals to be given notice of or to attend an oral hearing.
"To the extent a taxpayer or a third party wishes to make representations for the consideration of the Tribunal, they are at liberty to do so to HMRC, and HMRC are in my view undoubtedly obliged, under their general duty of 'full and frank disclosure' to convey those representations to the Tribunal at the hearing of the application," Judge Poole said.
"I would consider it a gross breach of HMRC’s duties were they to withhold from the Tribunal any bona fide written representations received from either the taxpayer or a third party in response to the notifications sent to them," he said.
"It is true that... Schedule 36 only requires that a 'summary' of any representations from a third party need be given by HMRC to the Tribunal, and there is no express requirement in Schedule 36 for representations from the taxpayer to be conveyed at all; but if written representations have been received from either, I cannot currently envisage a situation in which it would be appropriate for HMRC to omit to mention that fact to the Tribunal and to provide a copy of the material received," the judge said.
The judge also refused an application for the taxpayers and their advisers to be given an advance summary of the representations HMRC proposed to make at the hearing, together with copies of any documents supplied to the tribunal. He said the application was "largely parasitic" on the application to attend the hearing and that the need for the material fell away if, as he had already decided, the taxpayer was not entitled to attend the hearing.
Plans set out in a consultation published in July could allow HMRC to submit information requests to third parties without first seeking approval from the tax tribunal. The government proposes streamlining the process so that it is easier to obtain information from third parties as it there are an increasing number of requests from overseas authorities and the UK processes were out of step with those in other countries.
"Obtaining prior consent from the tribunal is an important safeguard to protect taxpayers from fishing expeditions by HMRC" said Josie Hills, a tax investigations expert at Pinsent Masons, the law firm behind Out-Law.com. "Oversight by the tribunal ensures that HMRC is not overstepping the mark."
An alternative proposed by the UK government is to have a special procedure to obtain basic account information from banks which would not require tribunal approval and to retain tribunal consent for notices to other third parties.
The consultation closed in October, but the government has not yet announced whether it will be taking the proposals forward.