HMRC seek to extend information and data gathering powers

With the expansion of CRS (Common Reporting Standards) and Tax Information Exchange Agreements, the tax authorities of many jurisdictions, including HMRC, are receiving increasing amounts of information from other jurisdictions.

As part of the Tax Administration Framework Review (TAFR), HMRC is consulting on the expansion of its domestic information and data gathering powers. This goes hand in hand with proposals for a fundamental change in the way taxpayers report their liability to HMRC.

HMRC’s stated aim of the consultation is to simplify the reporting process for both taxpayers and HMRC and to improve compliance by reducing the opportunities for inaccuracy.

Many UK taxpayers will have noticed that their tax return already contains details of, for example, employment income that HMRC has received from their employers. HMRC proposes that this ‘pre-population’ of tax returns should be extended, which requires an extension of the information provided to HMRC by third parties.

HMRC draws on the international experience and comments that:

‘the OECD highlighted in Tax Administration 2022 that data and analytics are a key element of 90% of its members’ approaches to tax administration. Data and analytics are used regularly for analysis, risking, and pre-population of returns’.

HMRC set out the approach in countries such as Estonia, France, Australia, Ireland, and Portugal, which have extensive information gathering powers enabling the tax authorities to pre-populate returns. As a corollary, third-party institutions and others have legal obligations to provide the information to the tax authorities, often in a specified format.

This raises the question of whose obligation is it to get the tax return right?

At present, the onus lies on the taxpayer to report their income and gains and to self-assess the tax due. HMRC then has a range of powers to inquire into the returns if they suspect they might be inaccurate, subject to complicated time limits and conditions.

The ultimate aim of the proposed new approach is that HMRC would send taxpayers their tax returns with the figures already filled in.

HMRC recognises that taxpayers should have the ability to challenge HMRC’s figures. The critical questions are:

• Who should have the primary obligation to get it right: HMRC or the taxpayer? Should there be a reversal of the current position where the obligation lies with the taxpayer?
• What arrangements should there be for verification of the tax return? In Ireland, Norway, and Denmark, the approach is ‘deemed acceptance’: that is the pre-populated return is treated as automatically correct unless a tax payer raises an objection during a specified review period. Most other tax authorities place the responsibility on the taxpayer to confirm the accuracy of the return, or to make any amendments that the taxpayer considers necessary.

There are clear dangers in ‘deemed acceptance’ Many taxpayers will assume HMRC has got it right. Others will lack the understanding of their tax affairs to be able to work out whether HMRC has got it wrong.

A system that requires positive acceptance and the ability to amend must be preferred.

As part of this initiative, HMRC is also looking to expand its powers to gather information.

At present, they can issue notices requiring institutions to provide bulk data on groups of taxpayers. HMRC’s proposals look at whether the notices should be replaced by an obligation on the institutions to report.

At present, HMRC also has the power to issue ‘information notices’ in order to obtain information from a specific taxpayer or from a third party, such as a bank, about a specific taxpayer. Information notices are part of the process by which HMRC checks the accuracy of a particular taxpayer’s tax return, usually as part of an inquiry.

These powers are layered with safeguards for the taxpayers, including time limits and conditions and, in the case of third party notices, a requirement to seek the permission of the First-tier Tax Tribunal before they can be issued.

The call for evidence suggests that HMRC may want to take a two-tier approach, giving greater flexibility and more generous time limits to some taxpayers where the taxpayer is perceived as collaborating with HMRC. Those perceived as non-compliant might be subject to higher penalties and a streamlined procedure, that is, one with fewer safeguards.

There is also a suggestion that the Tribunal consent requirements could be relaxed in some areas ‘to simplify the process’.

HMRC also suggests that where a tax payer and third party are related, such as in the case of a director and his company or a company and its ‘person with significant control,’ they should be able to issue a single information notice, which would require both parties to provide information, again eroding current safeguards.

The call for evidence contains some sensible proposals about simplifying the tax return process by using information HMRC has, or might obtain, to produce a first draft of the tax return. It is essential that the taxpayer should have the opportunity to challenge HMRC’s figures and that there should be a positive affirmation process to avoid deemed acceptance of the return.

 HMRC’s proposals for extending their information notice powers need to be approached with caution. While the non-compliant should be required to comply, there would be scope for HMRC to treat the new process as a licence to go on ‘fishing expeditions’, particularly if the safeguards of internal review and the consent of the Tribunal are relaxed.

If you need any assistance with compliance matters, our International Tax and Estate Planning team is here to help you.

This article was first published in our Primed International newsletter which provides monthly legal insights from our international team. Be the first to receive the next edition and subscribe here.