HMRC’s access to audit files rejected under Schedule 36

• HMRC wanted to access audit papers as part of their tax investigation and issued a third party notice to the auditor who was also the taxpayer’s tax adviser

• Schedule 36 paragraph 24 of the Finance Act 2008 states that an auditor doesn’t have to provide information in connection with their audit functions

• HMRC’s third-party information notice was rejected

The anonymised case heard at the First-tier Tribunal (‘FTT’) proved that HMRC has limits to their information gathering powers. The same company was used to provide tax advice, submit company accounts tax returns and audit the company.

The audit team discovered that intergroup balances and other transactions had not been correctly stated. Therefore, the auditors produced a qualified audit opinion on the accounts. Once HMRC read the auditor’s report they applied to the FTT for a third party information notice to obtain the details of the audit checks and the audit files.

However, HMRC failed to consider paragraph 24.  An auditor doesn’t have to provide information in connection with their audit functions or documents created as part of their functions. Also, schedule 36, paragraph 25 states that tax advisors are not obliged to produce evidence of communication between them and their clients. This is as long as the documents are for the purpose of giving or receiving advice regarding tax affairs.

The judge informed HMRC that HMRC failed to consider the schedule 36 restrictions and instructed them to contact the taxpayer and the auditor to offer the opportunity to make submissions to the FTT regarding paragraph 24.  

HMRC argued that it was entitled to the information under paragraph 26(1) which provides that the exemption does not apply to:

(a) information explaining any information or document which the person to whom the notice is given has, as tax accountant, assisted any client in preparing for, or delivering to, HMRC, or

(b) a document which contains such information.

Therefore, HMRC argued that the auditors had already provided the documentation to HMRC albeit in their capacity as a tax advisor. HMRC claim the tax advisors delivered the audited accounts to HMRC, therefore, they were entitled to review, ask questions and extra require documentation.

The FTT rejected this argument as the audited accounts were not prepared for HMRC. The audit report was for the shareholders of the business and comments on accounts that the directors have prepared. Therefore, the FTT held that the report was sent to HMRC but not delivered as such. This means that any document which was sent to HMRC does not necessarily fall within the scope of schedule 36, paragraph 26.

HMRC’s request for a third party information notice was rejected.   

Aspire Comment

HMRC have wide powers that enable them to obtain information from taxpayers, in particular under schedule 36 of the Finance Act 2008, albeit HMRC must be specific in what they request and it must be “reasonably required.” Unfortunately, there is no definition of what constitutes being reasonably required.

HMRC’s consultation on “Amending HMRC’s Civil Information Powers’ (which closed on 2 October 2018) sought to make it easier for HMRC to access information to assess a taxpayer’s position by removing the need to seek tribunal approval. See more information on this consultation here.