Case Study: Successful Appeal on Disclosure to HMRC (demanded under Schedule 36 Information Notice)
December 10 2013
In the case of Kevin Betts v HMRC  UKFTT 430, the First-Tier Tribunal (Tax Chambers) (“FTT”) allowed Mr Betts appeal against a schedule 36 information notice issued by HM Revenue and Customs (“HMRC”). The dispute arose when HMRC requested detailed financial information from Mr Betts in order to verify his tax position stated on his tax return. The FTT upheld Mr Betts appeal ruling that HMRC did not have proper “reason to suspect”.
Facts: Betts v HMRC at Tax Tribunal
In this case HMRC assessed Mr Betts for the tax year ending 5 April 2009. Mr Bett’s tax return showed that he was a non- UK resident for tax purposes. Mr Betts stated that he emigrated from the UK in March 2008.
Mr Betts informed HMRC that he had put his car and home on the market. Moreover, he rented out his home, rather than selling it, due to the poor property market. Mr Betts also received an £808,000 dividend from his company in the UK.
In order to verify Mr Betts tax position, HMRC requested bank, building society and credit statements. However, Mr Betts refused to provide these documents to HMRC.
In light of this, HMRC issued Mr Betts with a schedule 36 information notice, pursuant to paragraph 1, schedule 36, Finance Act 2008 to obtain these documents. HMRC believed that Mr Betts dividend from his UK company would be chargeable at a higher rate of tax if he was a UK-resident. Under paragraph 29, schedule 36, Finance Act 2008, Mr Betts appealed against HMRC’s notice.
The Law: Paragraph 1, Schedule 36, Finance Act 2008
Under paragraph 1, schedule 36, Finance Act 2008, HMRC may issue a notice requiring a taxpayer to provide information or to produce a document if that information or document is reasonably required to assess the taxpayer’s tax position. The taxpayer must comply with this request within the time specified in the notice.
However, if a taxpayer has made a tax return for the relevant tax period, HMRC may not issue the notice unless any of four conditions (A-D) are satisfied (paragraph 21, schedule 36, Finance Act 2008). In summary, these conditions are:
- A: a notice of enquiry has been given in respect of the return, or (b) a claim or election made by the person in relation to the chargeable period in respect of the tax.
- B: an officer of Revenue and Customs has reason to suspect that an amount that ought to have been assessed to relevant tax for the chargeable period may not have been assessed.
- C: the notice is given for the purpose of obtaining any information or document for the purpose of checking that person’s VAT position.
- D: the notice is given for the purpose of obtaining any information or document that is required for the purpose of checking the person’s position as regards any deductions or repayments referred to in paragraph 64(2) (PAYE etc)
First Tier Tax Tribunal Decision
At the hearing, HMRC abandoned their reliance on condition A accepting that the tax enquiry had been not validly opened. Alternatively, HMRC relied on condition B and argued that the bank statements were needed as HMRC had reason to suspect that amount that ought to have been assessed may not have been assessed.
The FTT rejected this argument and allowed the appeal on the basis that condition B was not satisfied. The FTT was influenced by HMRC’s proposal that they required the bank statements in order to find out whether Mr Betts was indeed a UK resident for relevant tax period.
The FTT held that this approach was wrong and that the position is rather that condition B must be satisfied in order for these documents to be validly sought from Mr Betts. The FTT concluded:
“..condition B was in our judgment clearly not met. HMRC’S case was that they sought additional information on the basis that the additional information may, when added to the information already held by HMRC, give the “reason to suspect.”
This demonstrates that in order to satisfy condition B, HMRC must demonstrate a real and genuine belief (and provide evidence of) the fact that the amount that ought to have been assessed may not have been assessed.
However, the FTT did not specify whether this test is a subjective, objective or mixed subjective and objective. Had the FTT addressed this issue, it would have brought clarity and certainty to what is meant by ” reason to suspect”.
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