It would appear from the decision of the High Court in R (oao JJ Management LLP and Ors) v HMRC  EWHC 2006 (Admin), that HMRC can conduct informal enquiries outside of section 9A, Taxes Management 1970 (TMA).
This article was first published in Taxation on 23 September 2019. A copy of the article can be found here.
Mr Bryan Robertson, who was resident and domiciled in the UK, and five companies in which he held a beneficial interest (the Claimants), sought a judicial review of HMRC's decision to conduct informal enquiries into Mr Robertson's and the companies' tax position.
Through the companies, Mr Robertson operated a number of supermarkets in Spain and Portugal. Three of the companies were incorporated in the UK and the remaining two were incorporated in Spain and Portugal. Since mid-2016, HMRC had been investigating Mr Robertson's tax affairs, suspecting that he had paid insufficient tax in connection with gains and/or income derived from his offshore interests. HMRC had not opened any formal enquiries under section 9A, TMA.
In 2017, HMRC issued an information notice to Mr Robertson under paragraph 1, Schedule 36, Finance Act 2008 (FA 2008) and in 2018 it made requests of the taxing authorities in Spain and Portugal, seeking copies of the Spanish and Portuguese companies' bank account statements.
The investigation involved numerous requests from HMRC for information and documents. In some instances, information notices were appealed and HMRC withdrew those notices. Third party information notices were also issued under paragraph 2, Schedule 36, FA 2008.
The Claimants argued that HMRC's enquiries had become protracted, invasive, and were causing severe emotional and financial distress. The Claimants challenged HMRC's decision to conduct the informal enquiries on the following grounds:
1. the enquiries were ultra vires because HMRC did not have a general power to conduct informal enquiries;
2. the informal nature of the enquiries had deprived them of access to justice, and/or the decision to conduct informal enquiries was irrational, disproportionate and unreasoned; and
3. the requests to the Spanish and Portuguese authorities made under the UK/Spain and UK/Portugal Double Taxation Conventions and Council Directive 2011/116/EU, were unlawful.
High Court judgment
It was agreed that Mr Robertson had filed self-assessment tax returns for all relevant years and within the relevant filing deadlines. In a case where a return is filed on or before the relevant filing date, the effect of section 9A(2)(a), TMA, is that HMRC has a period of 12 months after the day on which the return was delivered to open an enquiry into the return under section 9A. As stated above, HMRC did not open any enquiries under section 9A.
It was accepted that, even when HMRC has not opened an enquiry under section 9A, it can utilise the information gathering powers afforded to it under Schedule 36, FA 2008. These powers do, however, have a number of important safeguards.
First, the statutory pre-conditions have to be met. That means that both in the case of a taxpayer notice under paragraph 1 and a third party notice under paragraph 2, the information or document must be “reasonably required" by HMRC "for the purpose of checking the taxpayer’s tax position".
Second, Part 4, Schedule 36, contains a number of restrictions on the use of these powers. For example, under paragraph 21, where a taxpayer has filed a tax return in respect of a chargeable period, a taxpayer notice may not be given under paragraph 1 for the purpose of checking that person’s income tax or capital gains tax position in relation to that period unless one of four specified conditions is met. One condition (condition A) is that a notice of enquiry has been given and the enquiry has not been completed (paragraph 21(4)). This enables HMRC to use paragraph 1 in the course of an open enquiry commenced under section 9A. Another condition (condition B) is that, as regards the taxpayer, an officer of HMRC has reason to suspect that:
(a) an amount that ought to have been assessed to relevant tax for the chargeable period may not have been assessed;
(b) an assessment to relevant tax for the chargeable period may be, or have become, insufficient; or
(c) relief from relevant tax given for the chargeable period may be, or have become, excessive.
There are two other conditions (conditions C and D, contained in paragraphs 21(7) and 21(8), respectively), but these only apply in limited circumstances. If HMRC wishes to issue a taxpayer notice under paragraph 1 when it has not opened an enquiry under section 9A (and in particular after the expiry window has expired), it can usually only do so on the basis of reason to suspect.
Third, the use of Schedule 36 powers is subject to the scrutiny of the First-tier Tribunal (FTT), either by way of prior approval or on appeal. In the case of a third party notice, a notice cannot be issued unless either the taxpayer agrees or the FTT gives prior approval (paragraph 3(1)). The FTT cannot approve the giving of a notice unless it is satisfied, amongst other things, that the officer giving the notice is “justified in doing so” (paragraph 3(3)(b)).
In the case of a taxpayer notice which has not been the subject of prior approval by the FTT, the taxpayer may appeal against the notice, or any requirement contained in it (paragraphs 29(1) and 29(3), respectively). In the case of a third party notice which has not been the subject of prior approval by the FTT (that is where it is given with the agreement of the taxpayer), the third party may appeal against the notice or any requirement contained in it, on the ground that it would be unduly onerous to comply with it (paragraphs 30(1) and 30(3), respectively).
The Claimants' fundamental contention was that HMRC cannot conduct a wide-ranging enquiry into a tax return when it has failed to open a section 9A enquiry, something which the Claimants characterized as a section 9A enquiry by another name, or an “innominate extra-statutory investigation”. It was argued that as a statutory body, HMRC only has the powers provided to it by statute, it does not have general powers and cannot do things that are not authorised by statute.
HMRC accepted that as a statutory body it can only do the things it is empowered to do by statute, but it submitted that such a constraint did not create any difficulty in the instant case because under section 5(1), Commissioners for Revenue and Customs Act 2005 (CRCA 2005) and section 1, TMA, HMRC’s functions include the collection of taxes and conducting an investigation into whether a taxpayer has declared all his income and paid the correct amount of tax, is expedient or conducive to the exercise of that function and is therefore something that it has the statutory power to do under section 9(1), CRCA 2005.
The Court agreed with HMRC. It held that HMRC’s functions include the collection of tax, which is its primary function (see: R v IRC ex p MFK Underwriting Agents Ltd  1 WLR 1545). The Court said that carrying out informal enquiries is ancillary to HMRC's functions to collect the correct amount of tax. Mr Justice Nugee said at :
"The statutory scheme is that the collection of tax is entrusted to HMRC. I have already said that this imposes both a power and a duty on HMRC not just to collect the tax that taxpayers tell them about, but (so far as possible) the tax that taxpayers do not tell them about. For this purpose they have a range of tools to enable them to investigate, discover and collect tax that has not been, as it should have been, declared by way of self-assessment."
He went on to say at :
"Since it is part of the statutory scheme that HMRC can issue discovery assessments, it is necessarily part of HMRC’s functions to consider whether discovery assessments should be issued. For that purpose it must also be part of their functions to investigate a taxpayer’s affairs to see if the information available to them does lead to a conclusion that there has been an insufficiency of tax."
The Court's principle conclusion was that the fact that there was no formal statutory scheme underlying HMRC's informal enquiries did not render such enquiries ultra vires.
The central argument under this ground of challenge was that, during the course of a normal statutory enquiry, the taxpayer has the right to apply to the FTT, under section 28A(4), TMA, for a direction requiring HMRC to close its enquiries. Under section 28A(6), the FTT must issue such a direction unless HMRC can establish (the onus being on HMRC) that there are reasonable grounds for the FTT not to issue such a direction. The Claimants argued that conducting an enquiry in the way HMRC had done, infringed their right to access justice. The Claimants also argued that HMRC had no proper purpose for launching its enquiries and the Court should therefore exercise its supervisory powers to prevent the enquiries from continuing.
HMRC argued in response to this claim that the core content of the right of access to justice is to vindicate legal rights that have been (or are being) infringed. The Claimants did not have a legal right to stop HMRC from asking questions in relation to Mr Robertson's tax position. An informal enquiry by itself does not have any legal consequences, but rather is a process that may lead to something with legal consequences, such as the issuing of a discovery assessment Such consequences do provide certain rights for the taxpayer, such as the right to appeal the assessment to the FTT. HMRC said that it could only be challenged under this heading if it was acting for an improper purpose.
HMRC also argued that the Court could not exercise any supervisory jurisdiction over HMRC in the present case as Parliament could have, but chose not to, legislate to enable the FTT to supervise and/or have jurisdiction over HMRC's informal enquiries.
The Court held that the Claimants' access to justice was not infringed by HMRC conducting informal enquiries, principally because HMRC was seeking information from the Claimants on a voluntary basis. The Court also said that HMRC was not obliged to give reasons for why it chose to launch the instant enquiries. The Court did, however, agree with the Claimants that it could, if it so wished, exercise a supervisory jurisdiction over HMRC in circumstances where HMRC had breached its public law duties, for example, by conducting the enquiries for some improper purpose, or if the investigation was ongoing for an inappropriately prolonged period of time. It concluded, however, that the circumstances permitting it to do so were not present in the instant case.
Ground 3 concerned the validity of requests made by HMRC to the Spanish and Portuguese tax authorities. The Court agreed with HMRC that it could not obtain the same (or similar) information if it were to make a request in the UK, and that in any event, even if it could, it would not have invalidated the requests made under the UK/Spain and UK/Portugal Double Taxation Conventions. The requests were therefore lawful.
The Claimants' argument that the requests made under Council Directive 2011/116/EU were unlawful because HMRC's enquiries were unlawful, was dismissed, as the Court had found that HMRC's enquiries were lawful.
The Court confirmed that as HMRC has a power to collect tax and is indeed under a duty to do so, the carrying out of the informal enquiries were ancillary to those functions and were not therefore ultra vires. Unfortunately, the judgment does not address when such informal enquiries might become ultra vires. As noted above, the Court indicated that delay in progressing an enquiry might render the enquiry ultra vires. The question, what constitutes unacceptable delay, was left unanswered by the Court.
The endorsement by the Court of informal enquiries by HMRC does lead one to question the purpose of section 9A, TMA. If HMRC can simply choose to conduct an informal investigation why should it open a formal enquiry under section 9A? Indeed, as noted above, it may be advantageous for HMRC not to open a formal enquiry, given that, if a formal section 9A enquiry is opened, a taxpayer has the right to ask the FTT to intervene and direct HMRC to close its enquiry. The burden of proof is then on HMRC to convince the FTT why its enquiry should continue. The Court said at :
"Mr Brown’s [for HMRC] evidence was that where matters are referred to the CTU, it is normal for enquiries not to be opened under s. 9A TMA 1970 (or its equivalent for corporations, para 24 of sch 18 FA 1988 [sic]). Ms Nathan [for HMRC] submitted that that was understandable. In a case like the present, HMRC wish to conduct a wide range investigation, wider than would be possible under s.9A, where an enquiry is limited to investigating only a single year’s return. I think that submission is probably well made."
With respect to the learned Judge, this conclusion is difficult to understand. When HMRC opens a formal enquiry, there are few limits on what it can enquire into. If further years of assessment are in point, HMRC has the ability, under section 9A or paragraph 24, Schedule 18, Finance Act 1998, to open enquiries into those other years also.
Following this decision, should HMRC commence an informal enquiry, a taxpayer has a number of options. Assuming HMRC had a proper purpose in commencing the enquiry (if it did not, there may be grounds for a public law challenge by way of a judicial review proceedings), each formal request for information from HMRC should be carefully considered in order to ascertain whether the information is "reasonably required" by HMRC "in order to check the taxpayer's tax position". There is a substantial body of case law on the meaning of "reasonably required" in this context. It was recently summarised by the FTT in Perfectos Printing Co Ltd & Ors v HMRC  UKFTT 388 (TC), at :
"The test that is to be applied is whether or not the items sought are “reasonably required” for the purpose of checking the tax payer’s tax position. It was submitted by counsel for the Appellants that the dividing line as to what was reasonably required … lay between those cases where the officer could show a reason to suspect under-assessment and those where the officer was simply on a “fishing expedition”. This proposition was not challenged by the Respondents and I found it to be a helpful summation."
If the information requested by HMRC is not "reasonably required", the information notice can be challenged on appeal before the FTT, in the usual way.
Should the enquiry become inappropriately protracted and it is considered that HMRC has been supplied with sufficient information to enable it to reach a decision on the taxpayer's tax position, although the taxpayer is unable to apply to the FTT for a direction that HMRC issue a closure notice, as referred to above, a taxpayer may be able to challenge HMRC's decision to continue its enquiry by way of judicial review proceedings and seek an order requiring HMRC to end its enquiry.
In the event that HMRC does decide to issue a discovery assessment following the conclusion of its enquiry (under section 29, TMA or paragraph 41, Schedule 18, Finance Act 1998), the taxpayer can appeal such an assessment to the FTT. It should also be born in mind that it is not uncommon for HMRC, in the context of informal enquiries, to issue so-called 'protective' assessments in order to protect its position in relation to limitation. HMRC will then continue with its enquiry and request further information and documents pursuant to its powers contained in Schedule 36, FA 2008. However, such requests may not be permissible. Where, for example, an assessment has been issued under section 29, TMA, HMRC is required to have "discovered" a loss of tax to the Crown. If HMRC has indeed made such a discovery and reached a conclusion in relation to the taxpayer's tax position (which it should have done by definition) then it is difficult to see how the information requested in the notice is "reasonably required" by HMRC "to check the taxpayer's tax position". In such circumstances, consideration should be given to appealing the information notice.
If it is thought that HMRC has not in fact made a discovery and has simply issued a protective assessment to ensure that it does not fall foul of any statutory time limits in the hope that it will discover something during the course of its continued informal enquiry, consideration should be given to appealing the assessment on the basis that no discovery has been made (see: HMRC v Tooth  EWCA Civ 826, for a recent exposition of the discovery principle). The taxpayer should not be required to comply with an information notice until any such appeal has been determined.
Judicial review is an important means of judicial oversight of the actions of HMRC and HMRC's attempt in this case to persuade the Court that it could not exercise its supervisory jurisdiction over it was given short shrift by the Court. The recent decision of the Supreme Court in R (on the application of Privacy International) v Investigatory Powers Tribunal and others  UKSC 22, emphasises the important role that judicial review plays in ensuring that emanations of the state act in accordance with the rule of law.
The judgment can be viewed here.