Information Disclosure to HMRC - are your efforts adequate?

HMRC can acquire information from taxpayers in a number of ways. Some requests for information can be informal and may just involve a telephone call from HMRC to the taxpayer or their adviser and others are more formal where a formal information notice is issued demanding documents or information. Non-compliance with the demand comes with penalties. 

To establish whether there is an obligation to provide information under a formal notice the information or documentation must be within the taxpayer’s “power or possession”. A recent case in the First Tier Tax tribunal (FTT) One Call Insurance Services Limited v HMRC [2022] UKFTT 184 (TC) shows that the taxpayer must now have clear evidence of them making “serious efforts” to obtain documents and a positive attempt to persuade third parties to provide them to the taxpayer.

In this case, One Call's grounds for objecting to HMRC's request for information and documents was denied and the FTT set out a greater burden on a taxpayer to provide information required under an HMRC information notice.

Whilst the decision of the FTT is not binding it demonstrates the direction of travel.  There is an expectation on a taxpayer to make rigorous enquiries for information and retain proof that they have made such adequate enquiries.

LBMW have provided other solutions for tax payers who wish to protect their privileged information and we set out below a review of the statutory powers of HMRC and the privilege afforded to the taxpayer of seeking advice from a lawyer.

The Finance Act 2008[1] confers a wide range of statutory powers on HMRC to investigate the tax affairs of both businesses and individuals. This includes the ability to issue ‘information notices’ in order to compel tax payers and third parties to share information and documents required for checking one’s tax position.

Before issuing statutory information notices, HMRC will usually request information on an informal basis. In those circumstances, the recipient is under no legal obligation to comply until a formal information notice is issued.  Once a formal information notice has been issued, failure to provide information or carelessly providing incorrect information can give rise to financial penalties.

Any taxpayer being investigated by HMRC will want to strike the right balance between protecting themselves and their confidential information whilst also complying with HMRC’s requirements.

Are there restrictions on information HMRC can request?

The Finance Act 2008[2] imposes numerous restrictions on HMRC concerning the type of information and documents that can be requested:

1. The request for documents and information must be ‘reasonably required’ for the purpose of checking the relevant taxpayer’s tax position. What is considered reasonable will vary according to the circumstances of each case.
    
2. The documents and information must be in the 'possession or power' of the notice recipient. The FTT suggested in One Call v HMRC that anyone who receives a formal document request from HMRC must make a "serious effort" to acquire the documents before they can say that the documents are not in their power or possession. The FTT suggested that the test for 'possession or power' concerns whether a taxpayer has de facto control over a document - i.e., how much influential control they have so that if an individual can receive a document from a third-party by asking for it, they should do so, regardless of who legally owns the document.

3. HMRC's powers cannot be used to compel taxpayers or third parties to provide information and documentation that is subject to 'legal professional privilege'.[3] Properly asserting privilege should never be seen as being uncooperative. In cases where tax avoidance is alleged, HMRC have other extensive information gathering powers under the Proceeds of Crime Act 2002[4] and the Serious Organised Crime and Police Act 2005[5] which contains express language prohibiting the compulsion of material subject to legal professional privilege.

Legal Professional Privilege

Material covered by Legal Professional Privilege does not have to be disclosed to HMRC. Legal professional privilege arises under two limbs:

• Legal Advice Privilege

Legal advice privilege (LAP) concerns confidential communications (written or oral) between a client and their legal advisers which form part of the ongoing relationship of giving and obtaining legal advice.

A legal adviser is a Solicitor or Barrister or someone who is under their supervision such as a Trainee or a Paralegal.

Tax advice given by lawyers to their clients is confidential and will be protected by LAP.[6]

The protection of LAP is denied to the same legal or tax advice emanating from any other profession, such as accountants and other tax advisers.[7] Consequently, a taxpayer might be better off going to a law firm for confidential tax advice.

• Litigation Privilege

Litigation privilege attaches to confidential communications, including third-party communications (including potentially client/accountant and accountant/client) created for the dominant purpose of litigation, whether that litigation is ongoing or whether it is reasonably contemplated.

Mistakes when asserting Legal Professional Privilege

1. Legal advice privilege will not apply to advice given by a tax advisor
   There is a minor exception to this rule which exists within the Finance Act 2008[8] and provides that a tax adviser cannot be required to produce documents that are his or her property, and which consist of ‘relevant communications’.
    
2. Communicating with third parties
   Unless litigation privilege applies, taxpayers should be wary of the pitfalls when communicating with third parties.

3. Multi-addressee communications where litigation privilege does not apply
   Recent Court of Appeal guidance[9] conceded that a response from a lawyer containing legal advice will almost certainly be privileged, even if it is copied to more than one addressee. Conversely, in cases of multi-addressee communications from the client to the lawyer and others, each communication is to be considered as separate bilateral communication between the sender and each recipient. Whereas the email to the lawyer will be protected by LAP, the same email to the non-lawyer will not.

4. Waiving privilege
   Where a party waives privilege in one document, the party also loses the right to assert privilege in relation to other material relating to the same subject matter.
   
   A purely narrative reference to the giving of legal advice does not constitute a waiver, whereas reference to reliance on the advice given does constitute a waiver.[10]

Waiving privilege is fact dependant: it is determined by the degree of reliance on the privileged material, the purpose of that reliance, and the particular context of the case in question.

Our private client team is experienced in tax advice and estate planning. If you have any questions about this article or would like advice on tax or disclosure of documents to HMRC, please do not hesitate to contact Catherine Pugsley at Catherine.Pugsley@LBMW.com or Nancy Purle at Nancy.Purle@LBMW.com.