No suspicion needed!
No suspicion needed!
Mark McLaughlin points out that HMRC’s power to request information or documents may be wider than some taxpayers appreciate.
Where a taxpayer is unfortunate enough to be subjected to an enquiry into their tax return, it is not uncommon for HM Revenue and Customs (HMRC) to issue a formal notice requiring the taxpayer to provide information or produce documents which HMRC considers is ‘reasonably required’ to check the return (FA 2008, Sch 36, para 1).
For example, in Holmes & Anor v Revenue and Customs  UKFTT 678 (TC), the taxpayers (directors of the same company) filed self-assessment returns for 2015/16 disclosing identical income from employment and dividends from the company. HMRC opened enquiries into both returns and subsequently issued information notices requiring the taxpayers to provide information and documents including personal bank statements, details of investment accounts, and explanations as to movements of capital and sources of deposits in relation to those investment accounts for the year of enquiry.
Is it ‘reasonably required’?
The taxpayers appealed on the grounds that the documents and information: (1) Were not ‘statutory records’ (there is no right of appeal against an information notice requiring statutory records); and (2) were not reasonably required to check the taxpayers’ tax positions. On ground (1), the First-tier Tribunal (FTT) was not satisfied that the information and documents required by the information notices were statutory records.
However, on ground (2) the FTT considered that HMRC can check a tax return without needing to have any suspicions in relation to that return before checking it. There was evidence before the FTT of a disparity between the taxpayers’ declared income and their personal expenditure. There may have been a perfectly proper explanation for the apparent disparity between income and expenditure, consistent with the tax returns made, but HMRC was at the stage of gathering documents and information. In the FTT’s view, the taxpayers could be reasonably required to produce the documents and information in the information notices.
The tribunal in Holmes and Anor noted an earlier case, Spring Capital Ltd v Revenue and Customs  UKFTT 8 (TC), in which the taxpayer company appealed against an information notice and argued (among other things) that the information and documents requested by HMRC were not reasonably required on the basis that the information notice was a ‘fishing expedition’ (i.e. seeking to investigate the taxpayer’s return without having any reason to suspect it was wrong).
However, the FTT in that case dismissed this argument, stating: ‘HMRC are entitled to check the taxpayer’s tax position and they are entitled to any documents or information reasonably required for the purpose of doing so. In other words, HMRC are entitled to undertake ‘fishing expeditions’ when checking returns: they do not need suspicion in order to check a tax return.’
From the horse’s mouth
Nevertheless, in some cases it may be helpful to refer HMRC to the internal guidance in its Enquiry manual (at EM1570): ‘…you should only ask to see private bank statements at this stage [on opening the enquiry] if you can demonstrate their relevance to the return and that you reasonably require them for the purpose of checking its accuracy’ (emphasis added).