Plans set out in a consultation could allow HMRC to submit information requests to financial institutions, accountants, lawyers, estate agents and other third parties that hold information about taxpayers without first seeking approval from the tax tribunal, according to tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com.
Collins said that information requests covering basic bank account information were likely to become more frequent following the introduction of the Common Reporting Standard (CRS), through which overseas tax authorities will automatically receive data on taxpayers' UK accounts. However, obtaining prior consent from the tribunal in other cases was an "essential check" which "helps safeguard taxpayers against fishing expeditions", he said.
As an alternative, the consultation also proposes the introduction of a new 'financial institution' information request right, which would allow HMRC to obtain bank statements, transaction histories and other basic banking information "reasonably required to check a taxpayers' tax position" without tribunal approval. Should HMRC adopt this approach, other requests for information would remain subject to tax tribunal approval.
"It may be logical to have a separate information request for banks covering basic bank account information given the likelihood that these requests will be more routine, especially now that overseas tax authorities will be automatically receiving data on taxpayers' UK accounts through the CRS," he said.
"However, information requests to other types of third party should remain subject to approval by the tribunal as they are likely to be rarer and will probably involve less routine information. Oversight by the tribunal will be more important in these cases to ensure that HMRC is not overstepping the mark," he said.
The consultation seeks views on potential improvements to HMRC's power to obtain relevant information about taxpayers from third parties, contained in schedule 36 of the 2008 Finance Act. HMRC is concerned that this power, which can be traced back to the 1970s, is no longer fit for purpose given the extent to which financial information is now held electronically. It also believes that the rules should be modernised to account for the CRS and other international agreements to facilitate the exchange of bank data between countries.
The current rules require HMRC to seek approval from either the tax tribunal or the taxpayer before it can issue a third party notice. This "can add a great deal of time to the information gathering process, and ultimately prolongs the course of a domestic enquiry or the time taken to exchange information internationally". Doing away with the need to seek approval before issuing a third party notice would "align" the process with that for issuing information notices to the taxpayer, according to HMRC.
Should the proposal be adopted, an authorised HMRC officer would still be required to authorise the issue of a third party notice and the taxpayer would be given a summary of why the information or documents are being sought from the third party. The third party receiving the notice would be able to appeal it to the tribunal, but only on the basis that complying with it would be too onerous.
There were 215 requests for tribunal approval of a third party notice between 1 April 2016 and 31 March 2017, according to HMRC. Of these, only one request for approval was rejected.
"This shows that third party notices are not issued in large numbers," HMRC said in the consultation. "However, due to the lengthy processes involved in obtaining tribunal approval, they require a disproportionate amount of resource from both HMRC and the Tribunal Service."
"Even after a possible increase due to the CRS, the numbers of third party notices issued is expected to remain low. Therefore HMRC [does] not anticipate that third parties will see a material increase in administrative burdens as a result of any changes."
However, Jason Collins said that these figures did not reflect the likelihood that, in a number of cases, "tribunal judges will have trimmed down requests which went back too many years or were too wide".
"As the taxpayer may not even know about the information request, removing advance approval of the notice by the tribunal does not adequately safeguard the taxpayer," he said.
"The fact that the third party can appeal the notice if complying with it is too onerous does not help the taxpayer. The third party is likely to be more concerned about the logistics of complying with the notice than protecting the taxpayer from an HMRC fishing expedition," he said.
The consultation, which closes on 2 October 2018, makes a number of other proposals for reform of the schedule 36 power which are intended to "ensure that HMRC's powers remain effective and in line with international standards". These include extending the power to allow HMRC to access any information reasonably required for its tax functions, potentially extending to information that would enable HMRC to seize assets or make a taxpayer insolvent; and streamlining the process for imposing penalties on third parties which do not comply with requests.