Opinion of financial institutions: is the scope of HMRC’s new power wider than suggested?

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From June 2021, the HMRC has the power to issue “financial institution notices” (END) without the usual key guarantees for beneficiaries and taxpayers. Although the relevant legislation makes it clear that FINs can be issued to a wide range of financial institutions, HMRC has previously said that the new power would have only a negligible impact on a very small number of entities such as banks. and construction companies. A recent response to an access to information request submitted by the CMS Tax Disputes & Investigations team indicates that the practical scope of FINs as applied by HMRC may be broader than suggested.

The information powers of the HMRC

The HMRC has a wide range of statutory powers to investigate the tax matters of businesses and individuals. This includes the possibility of issuing “information notices” under Annex 36 of the 2008 Finance Law (Annex 36) to compel the sharing of information or documents so that HMRC can verify the tax situation of UK taxpayers.

Under Schedule 36, information notices can be issued directly to taxpayers (notice to taxpayers) or, failing that, to third parties in order to obtain information on identified taxpayers (third party notice) or even unknown taxpayers (unknown identity notice). Taxpayer Notices, Third Party Notices, and Unknown Identity Notices are subject to different rules, but in each case there are strict controls and safeguards that must be followed before they can be issued.

For example, HMRC may issue notices to third parties to require any person (including, for example, financial institutions) to provide information or documents “reasonably required” for the purpose of verifying the tax situation ( including foreign taxes) of a known taxpayer. The 2021 finance law extended this power to also cover information or documents reasonably required for the purposes of collecting a taxpayer’s tax debt.

The first key guarantee, therefore, is that any information or documents requested by third party notices must be “reasonably required” by HMRC for the purposes described above. A second and more important guarantee is that third-party opinions must be approved in advance by the court of first instance (fiscal chamber) (the Court), unless the taxpayer concerned consents. The Tribunal is not authorized to approve the issuance of a third party notice unless various conditions have been met, including that HMRC would be justified in issuing the notice in the first place (i.e. that the information or documents requested are indeed reasonably required and that HMRC is not simply on a “fishing expedition”).

If the taxpayer has given his consent, the recipient of the third party opinion can only appeal to the Court to the extent that it would be “unduly onerous” to comply with the opinion (except when the information or documents requested do part of the statutory file). However, in the most likely case where the taxpayer has not given consent, the Tribunal’s decision is final – neither the third party nor the taxpayer can appeal the opinion for any reason. In contrast, notices to taxpayers can be issued without the prior approval of the Tribunal (although HMRC may choose to seek approval in all cases), with the result that the taxpayer is given a substantial appeal basis. wider.

In addition to the rights of appeal and other safeguards described above, there are certain restrictions on the type of information or documents that HMRC may request (for example, information or documents subject to professional secrecy would not be no need to be provided).

END

The FINs were introduced by the 2021 finance law as a new type of information notice (amending Annex 36 so that it is added to notices to taxpayers, notices to third parties and notices of identity unknown).

Like third party notices, HMRC can issue FINs to require a “financial institution” to provide information or documents “reasonably required” for the purpose of either verifying a taxpayer’s tax situation. known, or to recover a tax debt from the taxpayer.

However, the main difference with FINs is that no prior approval is required from the Tribunal and no consent is required from the taxpayer. At the same time, there is no right of appeal (neither for the financial institution nor for the taxpayer). Instead, the assessment of what is “reasonably required” is only carried out by the HMRC. Likewise, there is no possibility of appeal on the grounds that it might be “unduly onerous” for the financial institution to comply with the advice – such a decision is left to the “reasonable opinion” of the financial institution. the HMRC officer who issued the notice.

There are other conditions built into the new authority, such as that FINs must be approved by an authorized officer of HMRC, but in practice such approval is not difficult to obtain, and it does not provide the same level of objective review as the Tribunal. FINs are also subject to the same restrictions as other information notices in Annex 36 as to the type of information or documents that must be provided to HMRC (for example, regarding professional secrecy).

Therefore, while there are some hurdles that HMRC must pass before it can issue FINs, none of the key safeguards normally associated with Schedule 36 information notices will apply to protect financial institutions or taxpayers. .

What is a “financial institution”?

Faced with much criticism from tax practitioners and the financial services industry, the HMRC attempted to justify the removal of judicial oversight described above on the grounds that it was apparently taking too long to comply with requests for third party financial information from foreign tax authorities. authorities (12 months on average compared to the six-month target set by international standards). The HMRC highlighted the fact that the UK was the only G20 member to require judicial / taxpayer approval for issuing third party information notices.

In its guidance document “Amending the Civil Information Powers of HMRC” released on March 3, 2021, HMRC also downplayed the importance of the measures, stating that FINs were to have “negligible impact on around 20 financial institutions, such as banks and building societies ”. .

In contrast, however, the new legislation defines a “financial institution” very broadly to include:

  • a financial institution under the OECD Common Reporting Standard (SCR), with the exception of certain investment entities such as family trusts and charities; and

  • anyone who issues credit cards.

In turn, the CRS definition of “financial institution” includes “depositary institutions”, “depositary institutions”, “investment entities” and “specified insurance companies” (each as defined in the CRS) . It is therefore clear that HMRC has the power to potentially issue FINs to a wide range of entities, and not just to a small number of banks and building societies as originally suggested (including, as a for example, some insurance companies and employee benefit trusts).

The practical scope of FINs as applied by HMRC will likely remain uncertain until more time has elapsed and, in particular, until the release of the Treasury’s first annual report to Parliament on HMRC’s use of his new power (scheduled for spring 2022). However, in a recent response to an access to information request submitted by the CMS Tax Disputes & Investigations team, HMRC confirmed that a number of FINs have already been issued since their introduction a few months ago in sentence, potentially indicating that the application of FINs by HMRC may be broader than initially suggested.

Comment

The FINs represent an important and potentially extended power in the arsenal of HMRC. While the practical scope of FINs as enforced by HMRC remains uncertain, all potentially affected financial institutions – and not just a handful of banks and building societies – should ensure that they are properly prepared.

Many financial institutions probably already have procedures in place to deal with requests for information from law enforcement authorities, such as the HMRC, to ensure that data confidentiality and other relevant obligations are properly met. . These institutions may wish to consider whether these procedures should henceforth be reviewed in the light of the significant development represented by the FINs.

While there is no reason to appeal against FINs, there may be room for other potential methods of challenge (including, where appropriate, judicial review or an appeal against sanctions for noncompliance).

CMS Litigation & Tax Investigations

As a member of the global CMS network with tax capacity in over 70 offices, the CMS Tax Disputes & Investigations team is well placed to advise on all forms of tax litigation (direct and indirect). Our dedicated specialists have extensive experience supporting individuals and businesses (across a wide range of industries) through all aspects of tax dispute prevention, management and resolution.


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