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Schedule 36 & HMRC: A Breach of Power

05 February 2010

In a recent Tax enquiry, the Inspector decided to use the powers available to him under Schedule 36.  In particular, the Inspector wanted to obtain information and documents from third parties that my client had conducted business with.

As the matter concerned VAT, the Inspector issued the Notice under Paragraph 34 of Schedule 36.  This meant that in his opinion the records came within the definition of statutory records which gave the Inspector the advantage of not needing to seek the permission of the Tax Tribunal to issue the Information Notice. It was clear to me that at least three of the items requested did not come within the concept of statutory records. For instance, the Inspector deemed the notes of a meeting between a customer and my client as statutory records.

The party under enquiry has no way of appealing against a notice requiring statutory records.  Indeed statutory records are poorly defined. Having telephoned and written to the Inspector to challenge the notice, this correspondent met with a dogmatic and unhelpful response.

So what can be done?

I decided to write to HMRC’s Policy Office and the director of Specialist Investigations, the department within which the Inspector worked.  Not surprisingly the involvement of Policy Office brought about a significant change in attitude.  In the initial letter from the director there was a tacit admission that not everything that had been requested came within the definition of statutory records.  Not satisfied with the response I wrote back asking for a more definitive explanation and acknowledgement that, since the Inspector had not obtained authority from the Tax Tribunal for the third party notice, the notices were invalid.

HMRC’s response confirmed that the notice had requested information that did not come within statutory records and that HMRC’s guidance notes would be amended to reflect these points. However, the director advised me that because the notices had been complied with by the third parties that whether they were invalid or not was irrelevant.

This view is, in my opinion, incorrect and misses the point. In this case, had the Inspector gone via the Tax Tribunal, what he was asking for could be said to be relevant to the overall enquiry and I am sure the Tribunal would have granted it. What if, however, the Inspector had used these powers without Tribunal approval to ask for something that was not appropriate?  Had the third party provided it, would this still be okay and the fact that the Inspector had abused their powers irrelevant? It appears that we have to rely on the HMRC Officer following correct guidance and intentions. But what safeguards are in place to protect taxpayers in situations of ambiguity? How many would pursue the matter as far as I did in a non statutory manner?

We are seeing a more aggressive stance being taken by HMRC in its demands for information and it is up to advisers to ensure this does not include an abuse of powers.

Author: Jeff Millington

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