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Wearing two hats?

Mark McLaughlin looks at a recent case on information notices which considered the information exclusion for auditors and tax adviser.

Information Notices are commonly issued by HMRC to require taxpayers to provide information or produce documents considered to be ‘reasonably required’ to check the taxpayer’s tax position.

Third party notices

HMRC also has the power (among others) to obtain information and documents from a third party which are reasonably required to check the taxpayer’s tax position (FA 2008, Sch 36, para 2).

HMRC cannot issue a third-party notice without either the taxpayer’s agreement or the tribunal’s approval. The tribunal may not approve a third-party notice (or an information notice to the taxpayer) unless certain conditions are satisfied. These include that the tribunal is satisfied in the circumstances that the HMRC officer giving the notice is ‘justified in doing so’ (Sch 36, para 3(3)(b)).

Power restrictions

There are various restrictions on HMRC’s information powers (FA 2008, Sch 36, Pt 4). These include restrictions in respect of auditors and tax advisers.

An auditor is broadly not required to provide information held, or to produce documents belonging to and created by the auditor (or on their behalf), in respect of the performance of their auditor’s function (Sch 36, para 24).

A tax adviser is not required to provide information about ‘relevant communications’ or to produce documents belonging to the tax adviser consisting of such communications (Sch 36, para 25). ‘Relevant communications’ are broadly communications between the tax adviser and their client, or between tax advisers of the same client, in relation to advice on the client’s tax affairs.

Restriction on restrictions!

The above restrictions in respect of auditors and tax advisers are subject to an exception. This is broadly where the auditor or tax adviser has helped their client to prepare accounts or returns etc. sent to HMRC, and information or documents explains the accounts, returns etc. Such information or documents are not protected from an HMRC information notice (Sch 36, para 26).

However, it is not uncommon for the same professional firm to act as both an auditor and tax adviser for a client. Can HMRC use the fact that (say) a professional firm is a client’s tax adviser to obtain information that HMRC would be excluded from obtaining in the firm’s capacity as the client’s auditor (under Sch 36, para 24)? This issue was considered in In HM Revenue and Customs v A Taxpayer [2018] UKFTT 541 (TC).

Auditor and tax adviser

In that case, the taxpayer companies were members of a group of companies. The auditor delivered a qualified audit opinion for an accounting period. As well as acting as the taxpayers’ auditor, the auditor also prepared and submitted the taxpayers’ corporation tax returns to HMRC as the taxpayers’ agent. HMRC were concerned by the qualified audit opinion, reasoning that the taxpayers’ corporation tax liability depended on figures from their accounts and so, if figures in the accounts were incorrect, the taxpayers may have understated their corporation tax liability for the relevant accounting period. HMRC therefore applied to the First-tier Tribunal (FTT) (under Sch 36, para 3) to authorise the issue of an information notice requiring the auditor to provide various information, including copies of some of the auditor’s working papers.

HMRC argued that the exception from the protection for auditors applied, because (among other things) the auditor had ‘delivered’ the audited accounts to HMRC in its capacity as tax accountant and therefore could legitimately be asked for relevant information and documents to ‘explain’ those audited accounts. However, the FTT disagreed. The request was not for documents and information that the auditor had in its capacity as tax accountant. The FTT saw no reason why HMRC should be entitled to disclosure of the documents and information simply because the auditor also happened to act as the taxpayers’ agent for the preparation and submission of corporation tax returns. The FTT concluded that the requirement of Sch 36, para 3(3)(b) was not met (as HMRC was not ‘justified’ in giving a notice requiring the auditor to provide documents and information protected from disclosure). The FTT would therefore not approve the information notices requested.

Difference of opinion

HMRC’s Compliance Handbook manual states (at CH22340): “The protection given to auditors…and tax advisers… does not apply…where…the auditor or tax adviser has helped the person in the preparation or delivery of accounts, returns or other information or documents sent to HMRC, and…the papers explain the accounts, returns or other information or documents given to HMRC. In these circumstances, you are entitled to have access to the protected information to the extent necessary to get the explanation you seek.”

It seems that HMRC interpreted the exclusion from protection for auditors and tax advisers as applying in A Taxpayer. Fortunately for the taxpayer companies, the FTT disagreed with HMRC’s interpretation. The FTT’s decision may be helpful in similar circumstances, subject to an appeal by HMRC.


This article was written by Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is a tax consultant with the TACS Partnership (www.tacs.co.uk), consultant editor and author (www.markmclaughlin.co.uk) and co-founder of TaxationWeb (www.taxationweb. co.uk)

This article was first published in HMRC Enquiries, Investigations and Powers magazine. See hmrctaxinvestigation.co.uk for details.

By HMRC Enquiries Investigations & Powers Magazine

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