Schedule 36 to the Finance Act 2008 grants HMRC the authority to issue an information notice to a taxpayer, requiring them to provide evidence for the purpose of checking their tax position. A recent decision of the First-tier Tribunal provides a useful reminder of some of the main principles on the validity of such notices.
In Simpkins v HMRC [2024] UKFTT 924 (TC), HMRC was concerned that the appellant taxpayer (a consultancy employee) had entered into arrangements with her employer which reduced her liability to income tax on her earnings, so as to avoid tax. HMRC initially made an informal information request to which the taxpayer did not respond; the taxpayer appealed when HMRC subsequently issued a Schedule 36 notice.
Anastasia Nourescu explains what taxpayers can learn from the First-tier Tribunal (Tax Chamber)’s decision in this case.
The legal arguments
The appellant challenged the validity of HMRC’s notice on various grounds, including:
- The notice requested information in respect of a then-current tax year, but no enquiry had been opened in respect of the previous tax year;
- The request was onerous, replicated across other employees of the same business, and the information should more properly have been requested directly from the employer;
- The notice was “used as a vehicle to intimidate and instil fear in” the taxpayer;
- The information request was unreasonable because there was “no sensible or reasonable possibility of HMRC imposing any liability to pay tax”.
HMRC’s primary concern was that the taxpayer’s and other employees’ employment and remuneration arrangements had resulted in those individuals underdeclaring income tax. In its evidence, HMRC also stated that it had initially requested the information it sought through an informal request, and that issuing the notice was not a means to intimidate the taxpayer.
Was the Schedule 36 notice valid?
The Tribunal dismissed the appeal and upheld the notice. In doing so, it set out a few points that apply to all such notices and that taxpayers in similar situations should bear in mind.
In a Schedule 36 notice, the information requested must be “reasonably required” for the purposes of checking the taxpayer’s tax position. This will depend on the statutory context – for example, in Simpkins, HMRC needed to understand not only the taxpayer’s employment situation but also whether the individual in question was aware of any tax avoidance arrangements in place and the extent of that awareness, as that would inform HMRC’s position on penalties.
There is no requirement on HMRC to open a formal enquiry into a tax return in order to issue a Schedule 36 notice. Paragraph 58 defines “checking” the taxpayer’s position as “carrying out an investigation or enquiry of any kind”, not necessarily a formal enquiry.
The notice must reasonably specify the period and form in which the information or documents are to be provided. In Simpkins, HMRC only granted the taxpayer a month to provide the information requested, but this was considered sufficient given the period covered by the notice was relatively short (13 months) and the fact that the taxpayer should have the information readily to hand and/or could request copies from her employer.
In some cases, a third-party information notice will be more appropriate – for example, where the third party holds documents that are relevant to HMRC’s enquiry and that the taxpayer does not have a right to request from the third party. Simpkins was not one of those cases, as HMRC was looking to check the taxpayer’s position in addition to her employer’s tax position.
Conclusions
While there is nothing new or controversial in this decision it is a good reminder that, depending on their circumstances, taxpayers should aim to cooperate with HMRC to avoid a formal Schedule 36 notice by engaging at the point of receiving an informal notice. It is easier and less costly to negotiate the scope of, and period for compliance with, the initial informal outreach than to formally challenge a Schedule 36 notice.
If a Schedule 36 notice cannot be avoided, it is worth the taxpayer giving careful thought to whether it should be appealed or if compliance is easier and/or less expensive.
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