In Newton v HMRC  UKFTT 513 (TC), the First-tier Tribunal (FTT) has held that the phrase "statutory records", for the purpose of an information notice issued pursuant to Schedule 36, Finance Act 2008 (FA 2008), must be construed narrowly.
On 20 July 2017, HMRC issued to Mr Maurice Newton (the taxpayer) a taxpayer notice under paragraph 1, Schedule 36, FA 2008 (the notice). The notice was issued in respect of tax years 2012/13, 2013/14 and 2014/15 and requested that the taxpayer provide the following:
i) detailed lists of shareholders;
ii) detailed lists of dividends;
iii) list of all bank accounts;
iv) bank statements;
v) breakdown of a directors loan account; and,
vi) documentary evidence of any capital introduced.
The taxpayer appealed the notice to HMRC on the basis that the documentation requested was not reasonably required to check his tax position. HMRC contended that it had evidence that income received by the taxpayer had been omitted from his tax returns. No evidence of this claim was produced by HMRC.
On 18 August 2017, the taxpayer requested that HMRC review the matter pursuant to section 49A, Taxes Management Act 1970 (TMA). Following the review, the notice was varied and items iv) to vi) were removed, as those requests were considered to be too vague and in any event were not reasonably required. Items i) and ii) were considered to be statutory records and item iii) was considered to be reasonably required.
On 3 October 2017, the taxpayer appealed on the basis the documentation was not reasonably required by HMRC for the purposes of checking his tax position and paragraph 21, Schedule 36, FA 2008, prohibited the issue of the notice. He also argued that none of the material constituted "statutory records".
The appeal was allowed.
The FTT considered the following three questions:
1) was the notice invalid because Condition B in paragraph 21(6), Schedule 36, FA 2008 (reason to suspect that an amount that ought to have been assessed to tax may not have been assessed), was not satisfied?
2) was any of the information required by the notice "statutory records" (if it was, the FTT would not have jurisdiction to hear an appeal against that requirement - paragraph 29(2), Schedule 36, FA 2008); and,
3) if the information was not a "statutory record", was it reasonably required to check the taxpayer's tax position?
Reason to suspect
In his submissions, the taxpayer highlighted that when issuing a third party notice under paragraph 2, Schedule 36, FA 2008, HMRC is required to seek the permission of the FTT. When issuing a taxpayer notice under paragraph 1, Schedule 36, FA 2008, HMRC has the option of seeking permission from the FTT and if it does and permission is granted the recipient of any such notice subsequently issued has no right of appeal.
Where HMRC does not seek the permission of the FTT to issue a taxpayer notice, as in the present case, although there is a right of appeal to the FTT there will have been no oversight by the FTT in the giving of the notice. In such circumstances, HMRC bear the burden of proof and must therefore demonstrate that the notice was justified (Cliftonville Consultancy Ltd v HMRC  UKFTT 231 (TC)).
The FTT agreed that the burden was on HMRC to demonstrate that the notice was justified. As HMRC had failed to provide any evidence which the FTT could rely on to justify the notice, the FTT held that Condition B was not met and quashed the notice.
Although, given the conclusion reached by the FTT in relation to Condition B, it was not necessary for the FTT to determine what constitutes a "statutory record, it did nevertheless go on to consider whether HMRC was correct in its assertion that the information requested constituted statutory records, against which there was no right of appeal (paragraph 39, Schedule 36, FA 2008).
The FTT considered that a restrictive approach needed to be taken to what amounted to a "statutory record". This was for two reasons. First, the recipient of a Schedule 36 notice is denied any right of appeal where the notice requires the production of statutory records. The recipient of such a notice is not able to contest HMRC's assertion that the document or information was reasonably required by HMRC to check the tax position of the taxpayer. Second, the provisions of the Taxes Acts which require the keeping and retention of records contain substantial penalties for failure to keep such records.
The FTT noted that paragraph 62(3), Schedule 36, FA 2008, provides:
"Information and documents cease to form part of a person's statutory records when the period for which they are required to be preserved by the enactments mentioned in sub-paragraph (1) has expired."
Section 12B, TMA, sets two time limits for the keeping of records in cases where, as in the present case, there was no enquiry into a tax return when the notice was issued. Where the recipient of the notice carries on a trade, profession or business, the limit is the fifth anniversary of 31 January after the tax year concerned. Where there is no trade, profession or business carried on by the recipient in any tax year, the limit is the first anniversary of 31 January after the tax year concerned.
HMRC gave no evidence that the taxpayer carried on any trade, profession or business. The limit therefore in relation to the latest tax year under consideration 2014/15 was 31 January 2017 and 31 January 2015 and 31 January 2016 for tax years 2012/13 and 2013/14, respectively. As the notice was issued on 20 July 2017, none of what HMRC had asked for constituted statutory records.
The FTT also expressed the view that as section 12B(4) allows records to be preserved by any means, or allows the preservation of the information in them by any means eg by copying or digitisation, in section 12B cases "information" is only a statutory record if it is information which is in, or taken from, a document. A list of items which does not exist and which has not been kept and preserved is not a statutory record.
The FTT said that had it been necessary to decide the question, it would have held that item ii) was reasonably required but items i) and iii) were not reasonably required.
The FTT has expressed the view that, due to the lack of appeal rights, the term "statutory records" must be construed narrowly and that, given under paragraph 62(3), Schedule 36, FA 2008, statutory records cease to be such on the expiry of any time limit for their preservation, to constitute such records, information must be contained in a written document.
In light of the FTT's comments, taxpayers appealing information notices should give careful consideration to whether a request for information that HMRC asserts constitutes statutory records can be challenged.
A copy of the decision can be viewed here.