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Key points
- Financial institution notices were first proposed in July 2018 although they were opposed.
- It is one of five information notices that can be issued by an HMRC officer.
- There is no statutory appeal right for either the taxpayer or the financial institution.
- The definition of ‘financial institution’ is expansive and will catch a large number of institutions.
- HMRC remains unable to demand privileged documents.
HMRC has long had far-reaching powers to demand information from taxpayers and third parties. FA 2008, Sch 36 permits it to issue four kinds of ‘information notice’ to demand information or documents reasonably required for the purpose of ‘checking’ the taxpayer’s tax position.
As part of the package of measures introducing the financial institution notice (FIN), amendments will also be made to Sch 36 to allow HMRC to request information for the purposes of collecting a taxpayer’s tax debt.
For current purposes, the most relevant existing power is the third-party notice (FA 2008, Sch 36, para 2). This allows an HMRC officer to require a ‘third party’ to provide information or documentation reasonably required for the purposes described above. This is subject to a number of safeguards; most importantly, there must be permission from the taxpayer or, where appropriate, a tribunal judge. Most of the third parties concerned are, inevitably, banks and the new measures seem to derive from frustrations with navigating safeguards (especially tribunal approval) in this context.
HMRC first proposed the FIN in July 2018. The consultation lamented that it was taking, ‘on average’, twice as long as in similar jurisdictions to issue third-party notices. HMRC claimed that removing the safeguards was essential to allow the UK to honour its OECD commitments to exchange information with other tax authorities. This was rather dubious as, in the preceding tax year, only 41 of the 1,838 international requests received by HMRC had actually ended up in the tribunal. The proposal was strongly condemned in the Economic Affairs Select Committee of the House of Lords in December 2018 and, after a further consultation, again in December 2020. Although significantly delayed, there have been few, if any, substantive modifications.
What is the FIN?
The FIN comes into force on Royal Assent to Finance Bill 2021. It is a fifth kind of information notice which can be issued with the agreement of an ‘authorised officer’ at HMRC to a ‘financial institution’ to require it to provide documents or information where conditions A and B are met:
- Condition A is that the information or document is, in the reasonable opinion of the officer giving the notice, of a kind that would not be onerous for the institution to provide or produce.
- Condition B is that the information or document is reasonably required by the officer for the purpose of checking the tax position of a known taxpayer or for the purpose of collecting a known taxpayer’s tax debt.
This is unlikely to offer much comfort. Condition B merely echoes the requirement of the other information notices while condition A is really only a ‘safeguard’ for the financial institution.
The taxpayer does retain rights to receive a copy of the FIN and a ‘summary of the reasons’ unless these are waived on the basis of a without-notice application to the tribunal if doing so might prejudice the assessment or collection of tax. HMRC remains unable to demand privileged documents. No prior taxpayer or tribunal permission is needed.
Importantly, there is no statutory appeal right for either the taxpayer or the financial institution against the issue of the notice itself. The financial institution does, however, have a right of appeal against any penalties levied for non-compliance.
Who is a ‘financial Institution’?
The bite of the new measures depends largely on the scope of the term ‘financial institution’. HMRC has claimed that the measures will affect only ‘around 20’ institutions. Unfortunately, the reality may be very different.
The new para 61ZA defines a ‘financial institution’ as:
- Any person classed as a ‘financial institution’ under the OECD’s Common Reporting Standard (CRS) other than certain investment entities.
- Any person who issues credit cards.
This is potentially quite expansive. The CRS, Art viii(A)(3) defines ‘financial institution’ as anything which is a ‘custodial institution’, a ‘depository institution’, ‘investment entity’, or ‘specified insurance company’. As well as several hundred banks and building societies, it will doubtless include professional trust companies, life insurance companies, employee benefit trusts and many others besides.
The upshot of this is that the new powers are very far-reaching and may render the old third-party notices practically redundant.
What next for taxpayers?
When the new power comes into force, HMRC can be expected to issue FINs much more regularly than the existing third-party notice. The structure of the new rules means that it will be significantly harder for taxpayers to challenge HMRC’s use of these powers and HMRC are likely to gain far greater access to taxpayers’ sensitive financial and banking information as a result. This could potentially lead to a marked increase in investigations into taxpayers’ personal affairs.
However, it will not be impossible for the taxpayer or the financial institution to bring a challenge in cases where HMRC has clearly overreached, for example, by demanding privileged documents.
For the taxpayer, the only real option will be to bring proceedings for judicial review in the High Court. This raises difficult public law issues on which specialist legal advice will need to be sought and the cost and complexity of such challenges should not be underestimated.
A financial institution, by contrast, can choose not to comply with a FIN it believes to be unlawful and then appeal any penalties levied in the First-tier Tribunal.
Of course, neither is ideal. One might also wonder whether the interests of the financial institution in challenging such a notice are aligned with those of the affected taxpayer – while a taxpayer might strongly resist a direct request from HMRC for private bank statements; for example, a financial institution might have less incentive to do so.
The new FIN is certainly a significant new weapon in HMRC’s armoury.
