A notice of enquiry will almost always be accompanied by a request for information. In the previous blog of this series on tax disputes in the UK, we discussed what to look out for when HMRC open an enquiry – and noted that enquiries often go on for years with more and more requests for information. So, in this post, we will describe how HMRC can gather information during an enquiry and set out some tips on how to respond to information requests.

How does HMRC gather information?

Requests for information are largely dealt with on an informal basis, but HMRC may also rely on its statutory information gathering powers. 

What is the difference between informal and statutory information requests?

Taxpayers are not obliged to comply with informal information requests but, to maintain a good relationship with HMRC, they rightly often will. In any case, a failure to comply with an informal request will usually result in a formal, statutory information request. 

Statutory information requests are known as “Schedule 36 notices” because the relevant legislation sits mainly in Schedule 36 of the Finance Act 2008. 

Although informal requests are usually the starting point, there may also be “advantages2 for taxpayers in receiving a formal Schedule 36 notice. For example, HMRC’s enquiry may concern an arrangement governed by some key commercial contracts. Confidentiality clauses in commercial contracts often include a carve-out which permits disclosure of information to a tax authority required by law. This carve-out would not permit the taxpayer to respond to an informal information request (even if they want to do so as part of the normal management of their tax affairs and relationship with HMRC). However, this carve-out would permit disclosure of information under a Schedule 36 notice (compliance with which is required by law). 

What can HMRC ask for using a statutory information request?

Schedule 36 notices give HMRC very significant information gathering powers. HMRC can ask for any information reasonably required to check the tax position of the relevant taxpayer. There are, however, some limits (see below). 

Can Schedule 36 notices be challenged?

Yes, Schedule 36 notices can be challenged by an appeal to the First-tier Tribunal (FTT). 

The most common ground for appeal is that the information requested by HMRC is not reasonably required for the purposes of their enquiry. This is a key limitation on HMRC’s right to request information under Schedule 36. HMRC cannot go “fishing” for information, where a very broad net is cast in an attempt to dredge up something non-specific. 

How should you respond to a request for information?

If you think that HMRC might be “fishing”, or if you are uncertain as to the purpose of a request which appears to meander, you may (and probably should) ask HMRC to specify what they are looking for and why.

Do not hand over materials in bulk to HMRC without having first reviewed them. It is advisable to do such a review to a “litigation standard”. This may mean higher upfront costs, but can save money down the line, particularly if the enquiry does not conclude quickly or positively (and edges towards appeals and/or litigation). It also ensures that HMRC will not be provided with documents to which they are not entitled (whether because they are irrelevant, privileged or otherwise). Fully understanding all materials disclosed to HMRC is critical for ensuring you can reach your own (clear and realistic) merits assessment of your technical position, and properly and coherently explain that position in correspondence with HMRC.

Do not share documents subject to legal professional privilege without being very clear on the benefits and potential risks of doing so. We will cover common questions around privilege in our next post in the tax disputes series.

There are no general carve-outs for personal data or commercially sensitive information, but it is possible to redact such information if it is irrelevant to the enquiry. If any information is withheld or redacted, be clear with HMRC that this has occurred. Not doing so could risk the involvement of the Fraud Investigation Service.

You are also not required to hand over documents that are outside your possession or power – but this carve-out is not always straightforward. Where the relevant documents are held, for example, by an overseas group company, generally a serious effort would have to be made to obtain them. It may be preferable that the group company shares the documents voluntarily before HMRC request assistance to obtain them from the relevant overseas tax authority.

What happens if you do not respond to a request for information?

If you choose not to comply with an informal request, that could lead to a Schedule 36 notice.

You are obliged to comply with a Schedule 36 notice (unless you successfully appeal it to the FTT). There are financial penalties for any failure to comply. 

How will you know that you have complied with an information request?

We have seen many cases where HMRC ask for a significant amount of information and, in such cases, it is advisable to try to agree a suitable scope and a realistic deadline for responding. This is particularly important given (as noted above) the possibility of penalties for failure to comply. 

Where HMRC appear minded to set an unrealistic deadline, highlight this at an early stage. Explain why it would not be possible to meet the deadline and propose a reasonable alternative timeframe.

Judging whether all requested information has been provided can be difficult unless you have agreed clearly with HMRC what you are going to do. For example, if HMRC ask for “all emails” on a certain topic, seek to agree which individuals’ inboxes should be searched, what search terms will be used to siphon through those inboxes, and a date range for the email search. It will be crucial to keep a good record of the decisions that you make while gathering the information.

How we can help…

Please get in touch with any of us or another member of Slaughter and May’s market-leading tax disputes team if you have any questions on the topics discussed in this blog or another tax disputes query. 

We have extensive experience in advising at every stage of a wide range of disputes from questions of UK corporation tax, partnership taxation and VAT grouping to treaty interpretation and transfer pricing. Whether you are looking for strategic advice in respect of an ongoing issue or proactive risk management through the creation of defence files or an audit of existing processes, we can help.