- Churchill Tax
Can HMRC Fish For Information?
The First-tier Tribunal (FTT) recently ruled on the tricky matter of HMRC’s rights to request personal information from a taxpayer during a tax enquiry. The issue was whether it had overstepped its powers. What did the FTT decide?
Enquiries and information
While it might not seem that way, there are strict rules which govern HMRC’s conduct during its enquiries (investigations). There are time limits for opening an enquiry and limitations on what information it can ask for. These allow HMRC a lot of latitude so that it can unearth evidence of tax evasion but it isn’t allowed to demand information or documents willy-nilly in the hope of finding wrongdoing. This point was the crux of the dispute in Mathew Jenner v HMRC 2022 (J v HMRC).
Tax enquiry
HMRC started enquiries into J’s 2016/17 and 2017/18 self-assessment returns, apparently suspecting him of not declaring income. HMRC requested documents and details of J’s personal incoming and outgoings, e.g. household bills, expenditure on holidays and other personal costs. It formalised these requests by issuing so-called information notices . J appealed against them on the grounds they exceeded HMRC’s powers.
HMRC’s arguments
HMRC argued that based on information reported in J’s tax returns his income wasn’t sufficient to meet his living costs and other personal expenditure, and that the shortfall was significant. It was therefore necessary to have detailed information about J’s personal income and outgoings.
Taxpayer’s counter argument
J’s argument was that HMRC was simply fishing for information and that the limitations on information notices prevented this. The rules say that the information must be “reasonably required”. A fishing expedition doesn’t meet this test.
No fishing allowed
The First-tier Tribunal (FTT) agreed with J that HMRC was not permitted to make requests for broad information in the hope of finding evidence to support its suspicions. Further, no taxpayer can be required to divulge details of their personal expenditure unless there was no alternative way to establish the facts. However, the FTT looked more closely at each element of the information notices.
Personal expenditure
As already mentioned, the FTT decided this information was not reasonably required by HMRC. Therefore, on this point it decided the appeal in favour of J.
Income sources
The FTT accepted HMRC’s argument that it was reasonable to request information about money received by J other than that from his business (which it automatically had a right to). It therefore ruled that the information notices were valid in this regard.
Personal bank etc. accounts
Similarly, the FTT decided that HMRC reasonably required this information so that it could check J’s income tax position. This element of the information notice was therefore also valid.
Consequences
We won’t know the outcome of HMRC’s enquiry when it gets the information from J. It might be that he has capital or non-taxable income to fund his living standards. If so, he would have been wise to mention them in the “Any other information” part of his tax returns. This could have prevented HMRC from starting its investigations and creating the information notices .
Conclusion
HMRC is entitled to request and expect you to provide information about your personal finances, e.g. income and capital that doesn’t need to be reported on your tax returns, if it is reasonably required to establish your tax position. However, this does not usually extend to information about your personal expenditure and other outgoings.