A serious effort - steps taxpayers must take to show a document is not within their "power"

04 July 2022

The First-tier Tax Tribunal has suggested in One Call that anyone who receives a formal document request from HMRC must make a "serious effort" to acquire the documents before they can say that the documents are not in their "power".

This potentially places a greater burden on the recipient than previous cases, and further reiterates the need for taxpayers to have clear evidence of them trying - and being unable - to secure documents. If taxpayers cannot provide that evidence, it may not be accepted that documents are not in their power or possession.

HMRC can request documents in a person's "power or possession"

To recap, HMRC has many different ways to acquire information under the UK tax code. The point at which most people come face-to-face with HMRC's information gathering is when they (or their business) receive a request for documents to check their tax position.

Such requests can usually be dealt with informally, but HMRC has the power to issue a formal information notice demanding the documentation. This comes with sanctions for non-compliance, and will typically need to be appealed to the FTT if the recipient wants to challenge it.

One of the key criteria for whether recipients are obliged to provide documents is whether those documents are within their "power or possession". The concept of "power" has proved a contentious issue in modern tax cases.

"Power" is interpreted more widely in a tax context

The general law position set out by the House of Lords in the 1980s is that someone must have a legal right to acquire a document for them to have "power" over it. However, for the last 20 years, multiple FTT and Upper Tribunal decisions have found that, in a tax context, only de facto control over a document is required, i.e. if the recipient would expect to receive a document from a third-party by asking for it, they should do so, regardless of the legal status.

It is only if the third-party refuses (and, even then, refuses for good reason) that the FTT and the UT will, in principle, accept that a recipient has no "power" over the document.

This creates the scenario where individuals being asked for documents by HMRC are often under a greater obligation than they would be in most other contexts. It means that recipients of a notice cannot reject it outright on the basis that they do not have the relevant legal rights - it requires them to undertake the time and effort (and potentially cost) of engaging with the third party to try to secure the documents.

Of course, this is a practical way of assisting tax administration, by making it difficult for people simply to rely on a strict legal framework to avoid providing documents to HMRC that, in reality, they could actually access.

Taxpayers should make "serious efforts" to acquire documents

The extent to which a recipient is required to engage with the third party is an open question. Previous cases have suggested that a one-off request may not be enough, as this might not constitute a "serious attempt" to acquire the documentation. The case of One-Call v HMRC seems to push that requirement further.

The facts of the case are not especially relevant. The key point was that the recipient of an information notice from HMRC made little or no effort to acquire documents from various trusts and associated companies. Indeed, it only sent the trustees a letter explaining the basis on which the information notice was being challenged.

Unsurprisingly given previous decisions, the FTT's view was that this was not sufficient, and it took a dim view of the taxpayer providing the trustees with the reason for refusing the request that the taxpayer was itself making.

However, the FTT then went further than previous cases, and suggested that:

  • the law requires the taxpayer to show that they made "serious efforts" to acquire the document; and
  • that there should have been some positive attempt to persuade the third parties to provide the documents.

Emphasising “efforts” over “attempts” may look like a semantic distinction, but the shift in language – and the tenor of the case - imposes a greater burden on the recipients of an information notice.

To date, there has been little suggestion that recipients have to do much beyond ask for documents, let alone actively try to persuade third parties to provide them.

Further, the use of "serious efforts" indicates that the FTT will expect to see evidence of more rigorous engagement with third parties, despite the fact that these are documents that the general law would not normally require a recipient to do anything about.

Of course, this is a non-binding FTT decision that did depend on the facts of the case, in that there was no evidence of to the taxpayer really trying to obtain the relevant documents. As a result, its impact may be limited. However, while it is hoped that HMRC will apply such a decision sensibly, it does leave open the risk that recipients might be expected to go to disproportionate lengths to show documents cannot be acquired.

It will therefore be crucial for anyone unable to acquire a document that is the subject of an information notice to pro-actively engage with the holder of the document and retain sufficient evidence of their efforts.

Read the full decision - One Call Insurance Services Limited v HMRC [2022] UKFTT 184 (TC)

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