HMRC Information and Inspection Powers – How Does HMRC Gather Information?

The compliance side of HMRC is the part of the department that runs enquiries or investigations into individuals and businesses. Sometimes a ‘compliance check’ can be straightforward, sometimes they are more complex, where HMRC suspects serious or deliberate wrongdoing. HMRC gathers data to inform these checks.

HMRC has access to a significant volume of data already and has powers to request further information or to make an inspection. This article covers what kind of information HMRC already has as a matter of course, as well as how HMRC goes about gathering further data, if it suspects that there is a problem. There are lots of nuances to HMRC’s information and inspection powers – in this article we cover the main themes.

What does HMRC already know about you or your business?

HMRC has a system called ‘Connect’ which it uses to store and analyse a huge volume of data that it already holds, or data that it is regularly given by third parties. The data that HMRC already holds includes information about the vehicles you own or have finance on, your credit history, including who you are borrowing from and how much.

HMRC will know your current address and whether you own or co-own other properties. If you have a bank account outside of the UK, HMRC will probably know about it. If you own a yacht or aircraft, there is a fair chance HMRC will know. HMRC can link you to other people by tracking shareholdings and directorships.

Recently HMRC has also started to get data from online marketplaces and crypto exchanges. It is understood that HMRC is starting to deploy more sophisticated technology and AI to scrape data from the internet and social media platforms to build a bigger picture of your activity, and potentially your earnings.

HMRC already knows quite a lot. Sometimes the data can contain errors, but HMRC uses the data it holds to screen for anomalies and select cases for enquiry. HMRC can also seek more information if it needs to.

Information and Inspection Powers

HMRC has powers to inspect and powers to request information and documents.

In relation to an inspection, HMRC has the power to enter business premises to inspect business assets and business documents. Inspect does not mean ‘search’.

You can refuse to allow an inspection. However, if you do so, HMRC may then approach the Tax Tribunal to get a Tribunal-Approved inspection notice. If you refuse an inspection that the Tribunal has approved, HMRC may issue you with a penalty, unless you have a reasonable excuse.

There are restrictions on the types of documents that HMRC can ‘inspect’ (as there are with HMRC’s information powers) – these restrictions include personal records, journalistic material, legally privileged documents, appeal materials, tax advisers’ papers giving advice and auditors’ statutory audit papers.

HMRC can also issue formal information notices to gather data. Information notices can request particular information or documents, but they can’t demand that information is ‘created’, for example HMRC can’t demand that you combine several sources of information into one document.

HMRC can only request information ‘reasonably required’ for the purpose of checking your tax position. Business bank accounts, for example, are likely to be ‘reasonably required’. Details of which football club you support probably would not be. There is sometimes a fine line between what might be considered reasonably required, and what looks like a ‘fishing expedition’. In these cases, a dispute may arise.

Before issuing a formal information notice, HMRC sometimes takes an ‘ask for everything’ approach informally, on the basis that if you don’t ask, you don’t get. However, HMRC is not entitled carte blanche to ask for everything, and this is sometimes where disputes arise. HMRC’s powers to police the tax system need to be balanced with an individual’s right to privacy.

In some circumstances, HMRC may approach the Tax Tribunal to ask for approval of an information notice which they intend to send to you. You will usually be asked to give any representations you have about the information being requested to the Tribunal before that hearing.

Third-Party Notices

HMRC can ask ‘third parties’ for information they hold about you or your business. For example, HMRC might issue an information notice to a bank to get your bank statements and any other documents the bank may hold about you.

Third-party notices can be issued by HMRC with your approval, often you’ll be asked to sign some paperwork giving your approval for the third party to provide information to HMRC. HMRC can also ask the Tax Tribunal to approve a third-party information notice, even if you don’t approve. Such a hearing is ex-parte, i.e. the individual under enquiry is not present.

Usually, you would be told that HMRC will be seeking a third-party notice. However, if HMRC believes that you knowing about this request in advance might prejudice collection of tax (for example if they believe that you might try to encourage the third party to destroy documents, or not comply), HMRC can apply to the court to have the hearing about the notice without telling you. In some circumstances, therefore, HMRC might have collected detailed information about you from third parties that you were not aware that it had gathered.

If you don’t comply with a formal information notice, HMRC can issue penalties.

Production Orders

A different type of information gathering power that HMRC can sometimes use in criminal investigations is Production Orders. These require the recipient to produce documents, often in relation to a specific individual or business, that they hold, usually within a short timeframe. Sometimes notice is given that HMRC will seek an order, sometimes HMRC will ask a Crown Court Judge for a production order ‘without notice’ which is then given to the recipient.

Production Orders are a serious matter, and if you receive one and you are concerned about what you need to provide, you should seek legal advice from an expert in this area. Failure to comply with a Production Order can result in serious consequences, like imprisonment or a significant fine.

Right to Appeal

You have a right to appeal an information notice issued to you, unless it is requesting statutory records or it has been approved by the Tribunal. The question of what statutory records are is complex and we don’t have room to cover it all here, but they are generally the records that a business must keep – sometimes, like with VAT, they are fairly well defined, but in other taxes sometimes less so.

If you disagree with a Tribunal-approved notice, you will need to challenge that via Judicial Review.

Often disputes against information notices centre on whether the information is ‘reasonably required’ or whether the information being sought is exempted by the restrictions to HMRC’s powers. Sometimes HMRC may stray into what are arguably personal, and not purely business or tax related areas when asking for information. Individuals do have a right to privacy. Sometimes the information requested is voluminous and onerous to provide. In those situations, we often try to agree a sampling approach with HMRC.

We often help our clients to explain the information being provided. For example, bank statements might contain transactions which look ‘odd’ to HMRC without explanation and might lead it to concluding that something is wrong. However, explaining unusual looking information pro-actively (sometimes by providing more than has been asked for to prove there is no problem) can often prevent HMRC from heading off on a wild goose chase.

If you have received an information notice and you don’t think you should have to provide the information, or you are worried about what to provide or how to explain it, inTAX can help. We have helped hundreds of clients to navigate the ‘information gathering’ stage of an HMRC enquiry, appealing unreasonable requests, agreeing a sensible approach and being proactive with explanations of what the provided information means. With our help clients can feel much more confident when complying with HMRC’s requests for information.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email jeremy.johnson@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. But we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.