Following a lengthy consultation, the UK government has published draft legislation which potentially significantly expands the scope of its information gathering powers under Schedule 36 of the Finance Act 2008.
Currently HMRC has the power to both request information and documents:
Since the Finance Act 2008 was implemented, HMRC has successfully extended the scope of their powers through the courts.
They have had success in increasing the ambit of circumstances in which the information is deemed to be 'reasonably required' - as well as successfully issuing notices to overseas parties.
From the overseas angle, the Court of Appeal ultimately found in Tony Michael Jimenez v FTT and HMRC  EWHC 2585 that HMRC were able to issue first party taxpayer notices to non-UK residents. Two years later the First Tier Tribunal found that HMRC had this power for third party notices to non-UK residents in HMRC v Mr & Mrs PQ, 2019 UKFTT 371 TC. These cases were significant as, before the Jimenez decision, it was generally thought that HMRC was unable to compel a non-UK resident party to provide information under these statutory powers.
However, these powers remain subject to certain safeguards.
For third party notices, the most significant safeguard is that HMRC is unable to issue a notice unless either:
The Government has recently published draft legislation amending Schedule 36 Finance Act 2008, which gives HMRC new powers to issue 'Financial Institution Notices' (FINs).
In effect, these are third party notices which can only be issued to "financial institutions" and which require the specific financial institution to provide information to HMRC about a specific taxpayer. Crucially – and in contrast to the current safeguards - HMRC will not require either taxpayer consent or tribunal approval to issue such notices.
Instead, HMRC will simply have to be able to demonstrate that the information requested is reasonably required for the purposes of checking a known taxpayer's tax position.
These startling changes have been introduced with little publicity, despite the removal of the previous safeguards compared to current requests. The Government has justified their actions by stating that the UK currently fails to comply with its obligations under international standards and is unable to respond to information requests from other jurisdictions in a timely manner. In evidence, HMRC's policy paper notes that it takes an average of 12 months for HMRC to obtain information requested by other tax authorities, whereas the target under international standards is six months.
Notwithstanding this justification, it is noteworthy that, in its original consultation paper, the Government previously proposed abolishing the requirement to seek FTT or taxpayer approval before issuing any third party information notice.
Unsurprisingly, this consultation proposal was met with negative reactions, with respondents highlighting that the measure went beyond what was reasonably required to address the problem that HMRC was seeking to address (namely responding in good time to requests for information from tax authorities in other jurisdictions). As a result, HMRC chose to introduce FINs rather than to remove any of the existing safeguards relating to third party information notices (i.e. to sidestep the earlier objections).
As first and third party notices have been found to apply extra-territorially, one suspects that the same finding would be made in respect of FINs in the future. However, the draft legislation is silent on the point, and the matter would need to be taken to the courts for confirmation.
Significantly, whilst Schedule 36 provides rights to appeal first and third party notices, the draft legislation provides no right to appeal a FIN. Instead, if a penalty is issued for non-compliance with the FIN, there is a right to appeal the penalty but not the FIN itself. As the penalty grounds for appeal are that there was a "reasonable excuse" for non-compliance rather than contesting that the notice itself was improper, this is much narrower. "Reasonable excuse" is normally only for a temporary period and includes circumstances such as illness preventing compliance by the deadline. So, if a third party appeals a penalty for non-compliance, the starting presumption will be that the penalty is due, and the onus shifts to the recipient to demonstrate a narrow range of excuses and that the excuse has not expired.
FINs (unlike third party notices) may only be provided to a "financial institution". This definition is therefore central to the practical application of FINs. The draft legislation defines Financial Institution as including any person treated as a financial institution for the purpose of the Common Reporting Standard ("CRS") (or any person that issues credit cards), other than an institution which is only within the CRS definition because it is a particular type of "investment entity" within section VIII(A)(6)(b) of the CRS.
We understand that this exemption is to ensure that family trusts and charities (which are not generally regarded as financial institutions in the traditional sense) are excluded from the scope of any FIN.
The draft legislation has been published as part of Finance Bill 2020/21, which will eventually become Finance Act 2021. The government invited comments under their technical consultation (now closed), which will be considered before the legislation is laid before Parliament. It's therefore by no means certain that the legislation in its present form will be passed.
For CRS purposes, a trust constitutes an "entity" even though they do not have legal personality under general law (in most common law jurisdictions). However, a trust will fall within the "investment entity" exception provided its gross income is primarily attributable to investing, reinvesting or trading financial assets and it is managed by another entity that is a financial institution (e.g. a professional trust company). As a result, HMRC will be unable to issue FINs to such trusts themselves.
However, it is likely that the professional trust company that administers a trust, the custodian bank and the investment manager which holds and manages that trust's assets, would constitute financial institutions for CRS purposes even if the trust itself is outside scope of a FIN. On such a literal interpretation of the legislation, HMRC could potentially obtain information relating to the settlor, protector and/or beneficiaries of a family trust by issuing a FIN to any of these entities, provided the information requested is not onerous for the institution to provide and the information is reasonably required by the officer to check the tax position of the relevant taxpayer.
If HMRC issued such a FIN, seemingly seeking to sidestep the trust exclusion, currently there would be no scope to appeal the notice itself (as opposed to non-compliance). However, it could be possible to claim a reasonable excuse whilst a trustee seeks advice as to the application of the notice.
Under current law, any non-UK trustee in receipt of a first or third party notice under Schedule 36 should seek advice as to whether to comply with that notice and/or whether to appeal (if that right is available). There are confidentiality and data protection obligations which need to be considered, and a trustee needs to consider the appropriate balance to strike. In striking that balance, even though a UK tribunal might consider the notice to have extra-territorial effect, a non-UK trustee would need to consider what view a local court would take as to enforceability (and, for instance, whether a local court might decide that the proper channel for the request would be for HMRC to apply under the applicable Tax Information Exchange Agreement between the jurisdictions).
In the future a non-UK trustee receiving a FIN would not be in a wholly dissimilar position, save that there remains more scope to argue that the FIN does not apply extra-territorially. If the courts find that there are no geographical limits, the grounds of appeal are more limited and less productive. On receipt of such notices, a trustee will need a combination of UK tax advice, together with local advice on data protection and the applicable trust law.
Crucially, the trustees should not just comply with the notice without seeking advice.