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HMRC’s information powers: the restriction for working papers

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Parliament, whilst giving HMRC extensive civil information powers, intentionally restricted HMRC’s access to auditors’ and tax advisers’ working papers. HMRC v A taxpayer (ex parte) [2018] FTT 541 confirms that HMRC cannot circumvent the restrictions on its access to audit working papers merely because the same firm submitted the company’s audited accounts to HMRC with the tax return which it prepared.

HMRC has wide ranging civil powers to obtain information and documents under FA 2008 Sch 36. However, Parliament limited HMRC’s ability to obtain information and documents from auditors and tax advisers. The FTT’s recent decision in HMRC v A taxpayer (ex parte) [2018] UKFTT 541 (TC) considers how the restrictions apply where the same firm audits and prepares tax returns for the taxpayer.
Any references in this article to ‘para’ are to paragraphs in FA 2008 Sch 36 unless otherwise stated.

HMRC’s powers

HMRC can issue a written information notice to a third party requiring it to give HMRC information or documents which are reasonably required for checking the taxpayer’s tax position (para 2). HMRC must ask the taxpayer or the FTT to approve the giving of a notice to a third party (para 3). The FTT may not approve the third party notice unless:
  1. the application to the FTT is made by or with the agreement of an authorised officer;
  2. the notice is justified;
  3. the third party was told and given a reasonable period within which to make representations to HMRC;
  4. the FTT was given a summary of those representations; and
  5. the taxpayer was given a summary of the reasons why the information and documents are needed.
Requirements (3), (4) and (5) may be ignored if the FTT is satisfied that taking these steps may prejudice the assessment or collection of tax (para 3(4)), although this may change in future following the recent consultation on amending HMRC’s civil information powers.
HMRC faces some restrictions on accessing auditors’ and tax advisers’ papers and privileged documents. The general restrictions on powers (Sch 36 Part 4) may also apply depending on the facts of the case.
The third party can appeal against an information notice approved by the FTT on the grounds that it is unduly onerous (para 30) but not against requirements to provide information or documents which form part of the taxpayer’s statutory records. Appeals must be made in writing within 30 days of the date on which the notice is given (para 32(1)).
Failing to comply with an information notice without a reasonable excuse will result in penalties (paras 39 and 40), as will providing inaccurate information or documents (para 40A). Tax-geared penalties may also be imposed (para 50). Concealing, destroying or disposing of documents (or arranging for this) after the tribunal approves a notice, or after being told that the tribunal is being asked to approve a notice, is a criminal offence (para 53 and 54).


The taxpayers were companies within a group. HMRC sought the FTT’s permission to issue a third party information notice to a firm which audited the taxpayers, as well as preparing and submitting their tax returns. The auditor qualified the companies’ accounts in relation to intra-group balances and turnover.
HMRC was concerned that the qualification may indicate that the companies’ corporation tax (CT) returns were incorrect as the entries were based on the figures in the qualified accounts. It sought copies of audit working papers in order to understand the audit checks relating to the two areas of concern, including details of the tests that could not be completed and the results of those that were done. HMRC considered that this could help it to understand the extent to which the CT returns were incorrect.

Without notice application

The FTT may disapply the requirements in para 3(3)(c)-(e) if it considers that the assessment or collection of tax may be prejudiced (para 3(4)). HMRC’s Compliance Handbook (at CH24220) states that:
‘Such situations could include, but will not be limited to, risks of:
  • collusion with or intimidation of a third party;
  • the person’s flight or disappearance;
  • the alienation of assets; and
  • destruction of evidence.’
In this case, the FTT observed that HMRC, when making a ‘without notice’ application, is subject to a duty of candour. It should therefore point out all relevant factors, including those which may dissuade the tribunal from approving the notice. The tribunal is responsible for ensuring that the full situation is considered and information notices only issued where appropriate, not least due to the potential criminal offence that may be triggered. The hearing is ex parte, so the taxpayer and third party cannot attend or participate.
After considering the comments of Charles J in paras 67–69 of R (on the application of Jimenez) v HMRC [2017] EWHC 2585 and the legislation restricting access to firms’ working papers, the FTT asked HMRC to contact the taxpayers and the firm to offer them the opportunity to make written representations on the scope of para 24.

Reasonably required?

The FTT checked that an authorised officer approved the application for the notice and it was given a copy of the auditor’s representations and the notification to the taxpayers. The FTT therefore focused on whether the notice was justified (para 3(3)(b)) as the other conditions in para 3(3) were met.
Corporation tax is calculated on a single company basis, not a group wide basis. A company’s CT computation, and therefore its tax return, is based on the profits set out in its accounts. If the accounts are incorrect, then the return may also be wrong.
The audit qualification in respect of turnover clearly could affect taxable profits. The qualification to intercompany balances was also relevant as companies were supplying goods and services to other group companies, so an error with this aspect of the companies’ accounts may also affect their taxable profits. Overall, the FTT was satisfied that all the information and documents sought by HMRC were reasonably required to enable it to check the companies’ tax position.

Can HMRC access the documents?

It is important to note that auditors’ and tax advisers’ duty of confidentiality means that they must ensure they are legally obliged to deliver information and documents to HMRC in the first instance. Formal information notices, rather than informal requests, are required to override their duty of confidentiality, no matter how willing they are to co-operate with HMRC.
Parliament gave HMRC the power to obtain information and documents from third parties where they are reasonably required to check the taxpayer’s tax position. The public interest clearly requires HMRC to be able to carry out its functions, assess and collect the correct amount of tax. However, Parliament also restricted those information powers in respect of auditors’ and tax advisers’ papers. Therefore, as Judge Richards said at para 30 of A taxpayer, Parliament obviously concluded that, in some situations, the public interest in protecting those papers outweighs the public interest in ensuring the correct tax is paid.
A firm cannot be required to provide information held in connection with its work as an auditor; or to produce documents which are its property and which were created by the auditor for or in connection with the audit (para 24). Information notices cannot require tax advisers to provide information or produce documents that are the adviser’s property and which are ‘relevant communications’ (para 25). Para 25(3) defines ‘relevant communications’ as communications between the tax adviser and its client or the client’s other tax advisers, the ‘purpose of which is the giving or obtaining of advice about any of those tax affairs’. However, para 26 limits the protection given by paras 24 and 25. The question is how this works in practice when the same firm is both auditor and tax adviser.
In this case, the firm audited the group company’s accounts, prepared its tax returns and submitted both documents to HMRC. Strictly, accounts are prepared for shareholders, not HMRC, but a copy is submitted with a CT return. The FTT noted that para 26(1) disapplies para 24 in relation to:
  • ‘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
  • ‘a document which contains such information’.
As the meaning of ‘tax accountant’ is not defined, the tribunal decided that a tax accountant is ‘someone who assists another with the preparation of tax returns’.
HMRC accepted that the information and documents sought fell within para 24, so it should not be able to access them unless para 26 applied. HMRC argued that the documents it sought would explain the information in the accounts that the firm, as tax accountant, delivered to HMRC. In other words, HMRC argued that the exclusion in para 26 applied so as to circumvent the restriction preventing it from obtaining audit working papers as the same firm submitted both the accounts which it had prepared, and the CT return that it had assisted the company in preparing.
The FTT considered that it was important to realise that the tax accountant, using professional knowledge and skill, assists the client in preparing or delivering the document. Clients need professional help to prepare the content of documents such as tax returns, and not merely to send them to HMRC. The FTT considered that para 26 focuses on documents ‘that a tax accountant is making, not documents that it is required to send together with those returns or statements’. On that basis, whilst the accounts ‘are certainly “sent to” HMRC, they are not “delivered to” HMRC in the requisite sense’.
The documents and information sought by HMRC related to the statutory audit. They were not documents that the firm held in its capacity as tax accountant. If the company used different firms to do the audit and to prepare its tax returns, then para 24 would apply; and so HMRC would not be able to obtain information and documents of the type sought in this case. Judge Richards saw ‘no reason why HMRC should be entitled to disclosure of the documents and information simply because the auditor also happens to act as the taxpayers’ agent for the preparation and submission of corporation tax returns’. If the documents that HMRC sought were instead the tax accountant’s working papers explaining entries in the CT returns, then HMRC could obtain them.

What does this mean in practice?

This case shows that it is important to stand back and consider the information notice and legislation carefully to establish whether the restrictions to its powers block HMRC from seeking certain information or documents from auditors and tax advisers. However, it must also be remembered that these restrictions on HMRC’s powers do not apply if HMRC requests information (e.g. copies of tax advice) from the taxpayer.
If an adviser or auditor is given the opportunity to make representations in relation to a proposed third party information notice, representations should be made within the time permitted. (The statute does not prescribe a deadline but HMRC should give the firm a ‘reasonable opportunity’.) Specialist advice on the representations may be needed and the firm should consider including comments on points such as:
  • whether and why any of the information or documents sought are not reasonably required by HMRC to check the taxpayer’s tax position, if possible;
  • whether any of the information or documents are not within their possession or power;
  • why the request is unduly onerous (if that is the case);
  • the restrictions on auditors’ and tax advisers’ papers in paras 24 and 25, given para 26 and the case’s circumstances;
  • para 23 and SI 2009/404 if any documents are privileged;
  • any of the other restrictions in FA 2008 Sch 36 Part 4, if they apply in the circumstances; and
  • how long may be needed to comply with the notice (so the FTT can consider what deadline is appropriate).
If a third party receives a final notice with which it disagrees, consideration should be given to appealing it (if possible, given the limited permissible grounds) and/or to challenging it via judicial review. In practice, opening a dialogue with HMRC may enable the disagreement on the notice’s scope to be resolved without resorting to litigation, particularly if it is to resolve issues around ‘unduly onerous’ requirements or an unrealistic deadline for compliance with the notice.