HMRC frequently contacts taxpayers to ask questions about their tax returns on an informal basis rather than under a statutory enquiry process. As the questions are informal, taxpayers can choose whether to engage with HMRC and it is perhaps this voluntary aspect that sometimes leads them to take a more relaxed approach than they would in a formal enquiry.
However, the Court of Appeal has recently confirmed in JJ Management Consulting LLP and others v HMRC [2020] EWCA Civ 784 that it is within HMRC’s powers to assess tax on the basis of voluntary disclosures made by taxpayers in the course of such informal investigations. It was held that HMRC’s function is to collect the correct amount of tax and that Commissioners for Revenue and Customs Act 2005 s 9(1) empowers HMRC to do anything which is necessary, expedient, incidental or conducive to the exercise of that function. HMRC therefore has wide discretion as to the best means of collecting tax, and may do so based on a discovery made in the course of asking informal questions of the taxpayer where no official enquiry has been raised.
Such informal investigations are not subject to the 12 month enquiry window time limitations placed on HMRC’s powers in the statutory enquiry process and there is also no closure notice procedure (as that only applies where investigations have been conducted within the statutory framework). The court accepted that an informal investigation is potentially subject to court oversight via judicial review but considered that in practice it would take a wholly exceptional case on its legal merits to justify judicial review of a discretionary decision by HMRC to conduct an informal investigation of the kind conducted in the case.
Taxpayers should take care when responding to informal questions raised by HMRC. Voluntary disclosures made during this period can have significant consequences in the course of a dispute with HMRC, and the outcome of JJ Management Consulting LLP may encourage HMRC to increasingly utilise this informal method of investigation where its powers are less fettered by statute and courts are reluctant to intervene.
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Informal enquiries and voluntary disclosures
HMRC frequently contacts taxpayers to ask questions about their tax returns on an informal basis rather than under a statutory enquiry process. As the questions are informal, taxpayers can choose whether to engage with HMRC and it is perhaps this voluntary aspect that sometimes leads them to take a more relaxed approach than they would in a formal enquiry.
However, the Court of Appeal has recently confirmed in JJ Management Consulting LLP and others v HMRC [2020] EWCA Civ 784 that it is within HMRC’s powers to assess tax on the basis of voluntary disclosures made by taxpayers in the course of such informal investigations. It was held that HMRC’s function is to collect the correct amount of tax and that Commissioners for Revenue and Customs Act 2005 s 9(1) empowers HMRC to do anything which is necessary, expedient, incidental or conducive to the exercise of that function. HMRC therefore has wide discretion as to the best means of collecting tax, and may do so based on a discovery made in the course of asking informal questions of the taxpayer where no official enquiry has been raised.
Such informal investigations are not subject to the 12 month enquiry window time limitations placed on HMRC’s powers in the statutory enquiry process and there is also no closure notice procedure (as that only applies where investigations have been conducted within the statutory framework). The court accepted that an informal investigation is potentially subject to court oversight via judicial review but considered that in practice it would take a wholly exceptional case on its legal merits to justify judicial review of a discretionary decision by HMRC to conduct an informal investigation of the kind conducted in the case.
Taxpayers should take care when responding to informal questions raised by HMRC. Voluntary disclosures made during this period can have significant consequences in the course of a dispute with HMRC, and the outcome of JJ Management Consulting LLP may encourage HMRC to increasingly utilise this informal method of investigation where its powers are less fettered by statute and courts are reluctant to intervene.
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