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New powers for HMRC: fair and proportionate? Contents

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Chapter 4: Civil information powers

99.Draft legislation was published on 21 July 2020 introducing a new power for HMRC to issue a Financial Institution Notice (FIN) requiring financial institutions to provide information about a specific taxpayer to HMRC when requested. The information will be used for checking the tax position of the taxpayer and for debt collection purposes. HMRC already has powers to obtain such information for checking a person’s tax position (though not for debt collection purposes), but at present it first has to seek the agreement of the taxpayer or the approval of the tax tribunal. The proposed measure would remove that safeguard, except in cases where HMRC wishes to obtain the information from a financial institution without the taxpayer being aware of it.

Background

100.There was a consultation on this proposal, Amending HMRC’s civil information powers, published in July 2018.150 The consultation document explained that HMRC receives a large number of requests for third-party information from other countries’ tax authorities; where an application to the tax tribunal is necessary it takes an average of 12 months to deal with the request, compared with the target under international standards of 6 months. This was attributed largely to the need to get tribunal approval. The contemporary report of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes, covering the UK’s compliance with international standards, claimed that the UK’s processes unduly delayed the effective exchange of information, imposed additional information requirements on other tax authorities and did not cover debt collection. Overall, the OECD ranked the UK as ‘largely compliant’ but for this aspect the UK’s performance was ranked ‘partially compliant’.151 The Government considered that requests should be dealt with more promptly in order for the UK’s OECD ranking to improve.

101.In the section of our 2018 report The Powers of HMRC: Treating Taxpayers Fairly, in relation to the Government’s proposals on civil information powers we concluded:

“Oversight by the tax tribunal of HMRC attempts to obtain information from third parties is an important taxpayer safeguard, which should not be removed without good reason. HMRC has not offered a convincing rationale.

“We recommend that the proposal is withdrawn until full consultation can take place on how new legislation could be better targeted.”152

102.After nearly two years, with no further consultation, the draft legislation for this proposal was published, along with a response to the 2018 consultation.153 The response aimed to make a positive case for the measure the Government is introducing but indicated that views of stakeholders were mixed, with some expressing considerable concerns. Those opposed to the loss of this taxpayer safeguard made various suggestions for how it might be retained, querying why HMRC and the Ministry of Justice could not streamline the tax tribunal approval process to reduce the delay in processing applications. Other stakeholders suggested restricting the proposed new rule to international information requests. All these suggestions were dismissed. The response explained that different rules for international and domestic cases are not allowed for legal and treaty obligation reasons, and added that HMRC and the Ministry of Justice had already made the process as efficient as possible: “any remaining efficiencies are likely to be marginal”.

103.The response said that HMRC would put various internal procedures in place aimed at ensuring that the new powers were used appropriately. These included FINs having to be approved by a specially trained officer of HMRC and (in most cases) copied to the taxpayer, and internal checks to ensure that information is needed. The Government rejected a suggestion that HMRC sets up an internal review panel. It pointed to the availability of judicial review if taxpayers wanted to challenge the use of the power. However, our 2018 report noted that judicial review “is expensive and effectively inaccessible to ordinary taxpayers”.154

104.The Government committed to keeping the measure under review through communications with affected taxpayer groups, and to requiring HM Treasury to issue an annual report to Parliament setting out the number of notices issued in a financial year.

Proportionality

105.To explore whether the Government’s draft legislation was a proportionate response to delays in dealing with international requests for information, we asked HMRC for relevant figures. These showed that the number of international requests going to the tax tribunal was small in relation to the total requests the UK receives. Notices to financial institutions going to the tax tribunal for approval which involve international requests is a small minority of financial institution notices going to tribunal.

Table 1: International requests

Year	Number to tribunal	Involving international requests	Total international information requests
2016/17	215	31 (14.4%)	1,848
2017/18	296	41 (14.1%)	1,838
2018/19	462	45 (9.7%)	1,649
2019/20	426	49 (11.5%)	1,780

Source: Written evidence from HMRC (DFE0035)

106.The case for this removal of safeguards for taxpayers and financial institutions has not been made. It is wrong in principle and not justified by the small proportion of international information requests which require tribunal approval to obtain the information. The overwhelming majority of cases which go to the tax tribunal are domestic. It is disproportionate to deny UK taxpayers the tribunal safeguard for the sake of speeding up a small minority of cases involving international requests.

Removal of safeguards

107.A number of witnesses expressed concerns about the removal of safeguards for the use of HMRC powers. Tom Henderson of LITRG summed up these concerns:

“The removal of the tribunal safeguard is just one of three safeguards that are being removed here. We have the removal of the tribunal safeguard, the removal of the right of appeal, and the extension of the purposes for which the notice can be issued. It is hugely concerning to think that HMRC could combine all three new powers—if I can equate a new power with the abolition of a safeguard—and issue these financial institution notices simply as a matter of course or routine whenever a taxpayer has a tax debt.”155

Removal of the tribunal safeguard

108.Many witnesses were opposed to the removal of the need to obtain tribunal approval for FINs. As ICAS put it:

“No internal HMRC process would be an adequate replacement for the independent scrutiny of the tribunal … it is not acceptable to dispense with taxpayer safeguards. If no distinction can be made between overseas and domestic cases, we believe that independent oversight of FINs should be retained in all cases because it is essential to maintain taxpayer confidence in the tax system and ensure HMRC exercises its powers proportionately.”156

109.Joint evidence from the Investing and Saving Alliance, Building Societies Association and UK Finance emphasised the need for all parties to have confidence in the fairness of the tax system: “HMRC’s use of these powers must be proportionate and confined within the limits set by the UK Parliament. The removal of tribunal approval and the replacement arrangements will not provide the current level of assurance”.157

Extension of powers

110.Investing and Saving Alliance, Building Societies Association, UK Finance and LITRG were concerned about the extension of information requests to financial institutions to tax debt. They thought it was unclear how the draft legislation would interact with the Direct Recovery of Debt (DRD) regime.158 LITRG felt that the safeguards for FINs related to debt should be comparable with those for Direct Recovery of Debt. Joanne Green of Building Societies Association said:

“When you look at direct recovery of debt and the number of safeguards in place compared with the number of safeguards that will come out of this, the number is a lot higher. If it was deemed necessary for direct recovery of debt, it is a worry to financial institutions that this process, with the removed safeguards, puts customers and members at a much higher risk of incorrectly recovering debt.”159

111.Witnesses were concerned about how HMRC would use FINs once the need to justify their use to the tax tribunal was removed. Although the information must be “reasonably required” for checking the person’s tax position or collecting tax debt, Keith Gordon said: “My experience to date leads me to worry that HMRC will interpret “reasonably required” as meaning ‘HMRC would like’”.160 Investing and Saving Alliance, Building Societies Association and UK Finance described it as giving “the appearance of HMRC ‘marking its own homework’.161 Others felt that HMRC resources were under pressure and making notices too easy to issue would encourage a laxer approach. Tom Henderson of LITRG said: “If you remove the safeguard you also remove the incentive to take care over the cases that you choose to pursue”.162

112.On the proposal for a report to Parliament on the use of FINs, Sarah Wulff-Cochrane of UK Finance said: “A report is not a substitute for real-time safeguards that operate on a request-by-request basis. We had experience in the past with the direct recovery of debts regime that a requirement to report to Parliament does not necessarily mean that HMRC will consult with relevant stakeholders and ensure that their experience is reflected in the report. I do not think the report to Parliament will be an equivalent safeguard to tribunal oversight”.163

113.The Law Society of Scotland pointed out that the consultation document had suggested that if the requirement for tax tribunal approval was to be removed, the third party would have a right of appeal against the notice “on the grounds that it is too onerous” but this was not included in the draft legislation, which provided a right of appeal for a financial institution only against any penalties levied.164 Instead there was a requirement “that the information or document is, in the opinion of the officer giving notice, of a kind that it would not be onerous for the institution to provide or produce”.165 A number of witnesses thought that an employee of HMRC is unlikely to have the detailed knowledge to form such an opinion,166 though HMRC said that officers trained in this work often had “decades of experience of these notices and of discussion with financial institutions about onerousness”.167 Investing and Saving Alliance, Building Societies Association and UK Finance had heard from HMRC that its guidance might provide an opportunity for financial institutions to make representations about onerous requests, but this “would not give the same level of comfort to our members as a statutory right”.168 They regretted the loss of the precursor notice which gives financial institutions an opportunity to express concerns to HMRC before decisions are made.169

Alternatives

114.We considered whether there were ways of dealing with international requests more quickly. The Government’s response to the consultation dismissed the alternatives which had been suggested. We were not convinced that nothing could be done and our inquiry therefore covered the cause of those delays and how they might be addressed.

115.The tax tribunal introduced greater flexibility in its proceedings in response to COVID-19 with telephone and video hearings. Judge Sinfield, the President of the Tax Chamber, told us that all third-party information notices had moved to video hearings and that this was expected to continue: “In total I would expect the whole process to take about a month or maybe six weeks … we have agreed a new guidance for the format of the application. These applications are now made entirely electronically”.170 He added that “for all domestic applications, those that arise from an HMRC internal inquiry as opposed to a foreign tax authority request, we have agreed exactly what the package will contain. I think we have also reached agreement for the foreign tax authority request, but that needs a final bit of tweaking”.171

116.The new arrangements for video hearings should remove the need for HMRC officers to travel to London for hearings.172 Lydia Challen of the Law Society of England & Wales told us: “Not only are the tribunals adopting virtual hearings, but more judges have been trained in dealing with the applications and there has been the development of a standard form of application. … that should streamline the process considerably”.173

117.We heard from Investing and Saving Alliance, Building Societies Association and UK Finance that financial institutions are allowed 30 days to respond to requests once approval has been given, so there is no undue delay there. Despite this, they considered that there was scope for streamlining the process, albeit in minor ways, such as HMRC communicating electronically rather than by second-class post, and standardising information requests to financial institutions.

118.It appears that the bulk of the time taken to deal with international requests is accounted for by work in HMRC and correspondence with overseas tax authorities. HMRC told us:

“When we looked at the timeline for obtaining the information, the step of getting the additional information required from the other tax jurisdiction was taking over eight months on average. Even on its own, that step means that it is not possible for the UK to meet the international standards”.174

119.Yet HMRC also told us it believed that, with the new FIN, the UK would be able to meet international standards.175 It is difficult to see how this could be, other than by making the process for authorising an FIN less rigorous than it is now.

120.On this subject, Lydia Challen of the Law Society of England & Wales said: “There needs to be a certain amount of education of our treaty partners about the kinds of information that the tribunals require before they will make orders, and ensuring that it is provided by those tax authorities in a timely way”.176 She added that “HMRC has already developed a document setting out information that requesting jurisdictions can provide to support HMRC’s application for tribunal approval. Reading between the lines of the [OECD] review document, there may be further scope to explore whether that process could be improved in collaboration with international partners.”177

Conclusions and recommendations

121.The civil information powers proposals are poorly targeted, disproportionate in their effect on UK taxpayers and lacking necessary safeguards and rights of appeal. They remove safeguards for taxpayers and financial institutions which prevent arbitrary use of the information powers, and are not supported by the evidence. We regret that the Government did not take the opportunity following its 2018 consultation to consider alternatives to these measures before taking them to this stage.

122.We recommend that:

• The requirement for tribunal approval for a third-party information request to a financial institution should remain;
• Financial institutions should have a right of appeal against any request they consider unduly onerous;
• The Government should clarify the interaction between the use of Financial Information Notices for debt collection and the direct recovery of debt provisions, and ensure that the safeguards for Financial Information Notices relating to debt are no less stringent than those for direct recovery of debt;
• HMRC should review the whole process for dealing with international information requests requiring tribunal approval, working with financial institutions, the tax tribunal and others, to find other means of streamlining the process; and
• Given the lack of consultation, HMRC should reconsider the implementation date. In doing so, they should undertake further consultation and communication to ensure that financial institutions are fully appraised of the implications of the measures and have sufficient time to prepare for them. Any revised implementation date should be determined in light of this consultation.

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