HMRC currently has the power to issue third-party notices. However, currently, these can only be issued if HMRC has either the agreement of the taxpayer who is the subject of the information request, or the approval of the First Tier Tribunal ("FTT").
This process takes, on average, one year and HMRC consider that that is too long. In particular, where HMRC is seeking information requested of it by foreign tax authorities under the UK's international exchange of tax information obligations, this timeframe exceeds the six month time limit in which the information should be passed on to those other authorities.
To address the issues with the current process the provisions of the draft Finance Bill introduce a new financial institution notice ("FIN") which will not require approval from the taxpayer or the FTT before it can be issued to a financial institution to obtain third party information.
Who can receive a FIN?
FINs can only be issued to "financial institutions". Broadly, these are (i) entities that fall within the definition of "Financial Institution" contained in the Common Reporting Standard ("CRS") other than the part of that definition that catches certain externally managed investment entities (discussed further below), and (ii) any person who issues credit cards.
The CRS definition of "Financial Institution" is very broad and includes "investment entities" but, for the purposes of the FIN regime, the part of the definition of investment entity that specifically applies to externally managed entities is disapplied. HMRC say that this is to ensure that family trusts and charities are not within scope. Although this would appear also to take externally managed funds outside of the scope of the new provision, even if that is correct, it would not exclude the managers of these vehicles, so information about the investors in such funds may be the subject of a FIN issued to the fund manager. Indeed, the fact that one part of the CRS definition of "investment entity" is specifically disapplied, strongly indicates that HMRC has carefully considered the extent to which the asset management sector should be within the scope of the regime and, accordingly, that fund managers are very much in its sights.
In what circumstances can HMRC issue a FIN?
The requirements that HMRC have to meet to enable them to issue a FIN are:
- firstly, the information or document that is being requested must, in the reasonable opinion of the officer giving the notice, be of a kind that would not be onerous for the financial institution to provide;
- secondly, the information or documentation that is being requested is reasonably required by the officer for the purposes of (i) checking the tax position of another person who is known to the officer; or (ii) collecting a tax debt of that person; and
- thirdly, an "authorised officer" of HMRC must give or approve the FIN. HMRC say that this will be an experienced member of staff that is not personally involved in relevant case.
Where the information is required as a result of an international request, the requirements of the relevant international agreement regulating the information exchange will also have to be met. These are likely to include that the information is foreseeably relevant to the administration or enforcement of tax.
The FIN must specify the taxpayer unless HMRC get the FTT's approval for it not to do so. The FTT must give this approval if HMRC have reasonable grounds for believing that naming the taxpayer might seriously prejudice the assessment or collection of tax.
HMRC must notify the relevant taxpayer of the FIN and provide them with a summary of the reasons why the information is required unless they get the FTT's approval not to do so. The FTT must give this approval if it is satisfied that HMRC's compliance with the usual requirements might prejudice the assessment or collection of tax. In the event that this occurs, the FIN notice may then include a requirement that the financial institution does not notify the taxpayer for a period determined by HMRC (click here for further details).
The FIN regime is expected to come into force when Finance Bill 2021 becomes law next year. When that happens there will be a measure of retrospectivity as it seems that regime will be able to be used by HMRC to obtain information about prior tax years.
What will the new FIN regime mean in practice?
During the 2018 consultation process, HMRC said that, although they expected the need for them to make third party information requests would increase as the international exchange of information network under CRS became more established, they expected the number of third party requests to remain low (215 requests for FTT approval were made from 1 April 2016 to 31 March 2017). However, in the two years since that consultation was launched the tax enforcement landscape has moved on, with HMRC being increasing proactive in pursuing enquiries. In addition, experience has shown that if HMRC are given enforcement tools, they are very likely to make full use of them.
Perhaps mindful of recent criticism of the zeal with which HMRC have pursued enquiries and the way in which the "loan charge" was handled, in the Response Document HMRC are at pains to stress the taxpayer safeguards built into the FIN regime. However, these are unlikely to provide much comfort for anxious taxpayers and financial institutions as they mainly restate the legal requirements for FINs (discussed above) which appear fairly easily satisfied or existing safeguards for schedule 36 notices which are generally considered rather weak.
Interestingly, the draft legislation does not include any specific rights of appeal for the taxpayer. The Response Document points out that they can make an application to the courts for judicial review of HMRC's decision to issue a notice, however, that process can be costly and time-consuming and it is likely to be hard for a taxpayer to meet the threshold required to overturn the decision. The interaction of a taxpayer's application for judicial review with the financial institution's compliance with the notice is not discussed in the Response Document. In addition, if the FIN includes a requirement that the financial institution not notify the taxpayer of the FIN, it is unclear how, in practice, the taxpayer will be able to rely on judicial review.
The new rules do require HMRC to report to the Treasury and Parliament on the use of the FIN regime each year. However, this will not assist a taxpayer or financial institution in relation to any particular enquiry and should probably be seen, at best, as potential protection against HMRC's systematic use of the FIN regime in a manner not intended by Parliament.
It is therefore currently uncertain as to whether the FIN regime will lead to a significant increase in information requests. The potential is certainly there given the scope of the draft rules and, in this regard, it is worth noting that the only ground on which the financial institution can, in practice, appeal a FIN is that it would be unduly onerous for it to provide the information. Whether or not information requested from a financial institution with regards its investors is likely to be unduly onerous would have to be assessed on a case by case basis and is likely to be highly contextual.