HMRC abuse Schedule 36 Information Notices and penalty powers

Rhian Lloyd, Senior Manager at Aspire Business Partnership, blogs on a recently released First-tier Tax Tribunal case in relation to penalties for non-compliance with a Schedule 36 Information Notice (‘Notice’).

In the case of Sadiq Ahmed and the Commissioners for Her Majesty’s Revenue and Customs TC07817 [2020] UKFTT 0337 (TC), the taxpayer’s appeal against HMRC’s penalties succeeded because Judge Anne Redston found;

1. HMRC were out of time to issue a penalty for failure to comply
2. HMRC issued three identical Notices
3. HMRC failed to prove that the taxpayer had not met the remaining requirements in the Third Notice
4. Ultimately, HMRC failed to prove their case

Background to the legislation

The provision to issue a Notice is contained within Schedule 36 of the Finance Act 2008. This provides HMRC with the power to obtain information and records from taxpayers.

Importantly, the information or documents must be “reasonably required” for the purpose of checking the taxpayer’s tax position and can only be produced if they are “in the person’s possession or power”.

HMRC provide a deadline to comply (typically 30 days) and failure to comply can lead to penalties of £300. The penalty must be assessed within the period of 12 months beginning with the date on which the person became liable to the penalty.

Background to the case

HMRC was investigating the taxpayer’s position over a number of years because they believed he had purchased and disposed of properties and failed to declare these to HMRC.

The taxpayer had three HMRC officers looking into his case between 24 July 2017 and April 2019. He was issued three Notices.

• HMRC issued the First Notice on 11 October 2017 and then issued a penalty for failure to comply on 20 December 2017. This was subsequently cancelled because HMRC accepted it was sent to the wrong address
• A Second Notice was issued on 20 July 2018. An extension of time was agreed to comply and on 17 September 2018 the documents were sent via email. The cover email clearly stated some documents had been lost and the attachments constituted “all the documents” – this was the taxpayer ultimately saying this was everything in his “possession and power”
• On 23 January 2019 the Third Notice was sent to the taxpayer which combined the text of the two previous Notices, word for word.
• On 19 March 2019 HMRC issued the penalty notice.

HMRC are required, by paragraph 46(2) of Schedule 36, to assess a penalty within 12 months of that liability arising. Therefore, HMRC had to issue the penalty by 20 November 2018 (12 months after the date to comply with the First Notice). The Judge ruled HMRC had no legal power to issue a penalty on 19 March 2019 for failure to comply with the Third Notice which simply restated those requirements in the First Notice, because the 12-month deadline had already passed.

The burden of proof rests with HMRC in penalty cases and proving that the taxpayer did not comply with the Notice(s). The Judge summarised that;

• HMRC did not provide the documents sent by the taxpayer where he had responded to Notices
• HMRC did not file witness evidence explaining why, in their view, the document provided did not constitute compliance with the Notices
• The only relevant evidence did not assist HMRC
• HMRC failed to prove the taxpayer had not complied with the information requirements in the Third Notice, which repeated those in the Second Notice

HMRC’s failure to prove their case meant that the penalty could not be upheld.

See the full case here.

Summary

HMRC enquiries can be extremely time consuming and confusing to deal with. As demonstrated in this case, the taxpayer had three HMRC officers looking at this case over the course of two years. It is not surprising that the taxpayer expressed his frustration that he had provided various information and documents to a number of officers over a period of time. We see this all too often.

We have vast experience in reviewing Schedule 36 Information Notices, assisting our clients in complying with them and, where necessary, appealing them. Often, there are aspects of a Notice that can be challenged and good reason to do so. For example, if a request is not specific enough and you provide information thinking you have complied, HMRC may disagree that this met their request and may raise a penalty.  

It is frustrating to see for the time, money and effort spent by the taxpayer in getting to the FTT, HMRC were not prepared to defend their case and did not even provide the Judge with basic information in relation to the case.

In HMRC’s day to day duties, they may assess whether a taxpayer has acted “carelessly” - the law defines ‘careless’ as failure to take reasonable care. Unfortunately, in cases like this the shoe may be on the other foot!

If you receive an Information Notice, give Aspire a call on 0121 445 6178 to discuss how we may assist.