HMRC Inspection powers – Financial Institution Notices

Financial institutions – the present 

At present, if HMRC wants to compel a financial institution to provide information, or documents, in relation to a particular taxpayer, it has two options:

1. It can either obtain the express permission of the taxpayer to contact the third party, or
2. It can receive Tribunal approval.

To obtain Tribunal approval, HMRC must make a detailed application which convinces the judiciary panel that the information it’s requesting from the third party is reasonably required to check the tax position of the taxpayer. Before the Tribunal will even entertain an application of this nature, it insists that HMRC’s case has been approved by an ‘authorised officer’ (a specially trained, senior officer) of HMRC. Sch36 legislates for each of these steps, thereby providing protection from unjustified invasions of privacy.

Financial institutions – the future

Looking ahead, HMRC is in the latter stages of introducing new legislation in relation to the acquisition of information and documents from third parties. This new legislation means the above permissions will no longer be necessary.

If implemented, HMRC will be allowed to issue Financial Institution Notices (FINs) to banks and building societies without receiving the permission of either the first party taxpayer, or the Tribunal. FINs will entitle HMRC to demand the provision of particular customer records and information, including: account statements, loan applications and even hypothetical borrowing potential.

It’s important to note that the draft legislation does not require HMRC to have an open enquiry into a taxpayer before a FIN can be issued. In essence, this means HMRC will be able to demand a taxpayer’s bank statements from any UK bank, without the taxpayer having any prior knowledge that HMRC considers them to be a tax risk.

Reasonable action?

We ought to mention that the UK is currently the only G20 country to require the approval of a Tribunal, or the consent of the taxpayer before a third party notice can be issued. Therefore, the introduction of this new legislation isn’t entirely unexpected.

HMRC has suggested that the FIN legislation is necessary to deal more efficiently with information requests from foreign tax jurisdictions under the Common Reporting Standard. However, there’s no indication that HMRC will limit the use of FINs to complying with requests from foreign jurisdictions.

If the FIN legislation makes it through parliament, HMRC will have access to more information than it has ever had before and there’s no question it’ll better equip them to challenge inaccurate tax returns and claims.

Should you be concerned?

Given HMRC has the power to issue penalties of up to 200% of any tax loss involving offshore non-compliance, this should be taken extremely seriously. By far and away the simplest means for anyone to reduce the risk of these draconian penalties is to ‘come clean’ to HMRC, before you’re approached with concerns.

How can we help?

With only a matter of months before the FIN legislation is introduced, taxpayers who suspect HMRC might uncover inaccuracies in their tax affairs if given access to their bank accounts, ought to be asking what they can do to protect themselves. Anyone caught out will face severe financial penalties, and potentially even criminal prosecution. 

For taxpayers wishing to avoid these potential sanctions, time really is of the essence. If you or someone you know would like to correct any inaccuracies by making a disclosure to HMRC, please do not hesitate to get in touch.