HMRC Powers – Financial Institution Notices

Legislation at Finance Act 2021 gives HMRC powers to issue Financial Institution Notices (FINs) to Financial Institutions (FIs) about specific taxpayers. The particularly concerning aspect is that HMRC have no obligation to seek approval from the tribunal before issuing FINs. These rules apply to FIs under the Common Reporting Standard (CRS) definition, or a credit card issuer.

The previous standard for information notices was that they must be issued for the purpose of checking the tax position. The 2021 legislation enhances this power across all information notices to include “for the purpose of collecting tax debts”.

A number of safeguards are written into the legislation in respect of FINs.

• It would not be onerous for the FI to provide the requested information.
• The information requested must be reasonably required for the purpose of checking a known taxpayer’s tax position.
• For international requests, the requested information must be relevant to the administration / collection of tax in that jurisdiction. The tax authority requesting the information must first exhaust all reasonable domestic ways to get the information.
• Documents subject to legal professional privilege cannot be requested.
• An authorised officer of HMRC must approve the decision to issue a FIN.

Taxpayers will usually be given a copy of the FIN and informed why the information has been sought from the FI. However, the powers also enable HMRC to seek advance approval from the tribunal that reporting of FINs to the taxpayer is not required if there are reasonable grounds for believing the notification might prejudice the assessment or collection of tax. If an FI tells a taxpayer about the FIN despite a ruling they should not, penalties can be levied on the FI.

Failure by an FI to comply with a FIN will result in penalties, against which the FI will have a right of appeal.

Why was a new power needed?

HMRC’s main claim was that it receives a large number of requests for data from other tax authorities, which take an average of 12 months to respond to using HMRC’s earlier powers. The international standard is six months and so the measure was intended to help the UK contribute more efficiently to the global drive to tackle tax non-compliance.

The FIN legislation removed the need for HMRC to obtain tribunal approval, something that must be done before using historic third-party information powers. To put this into perspective, the UK is the only G20 jurisdiction that requires either Tribunal approval or taxpayer consent before issuing third-party information notices.

Was it really necessary?

In the period 1 July 2021 to 31 March 2022, HMRC’s published statistics shows that 355 FINs were issued; only 141 resulted from international information requests. The average time to respond to international requests dropped from 365 days to 197 days, with HMRC commenting: “HMRC has reduced the time taken to reply considerably and expects to make further progress as legacy cases are resolved. This brings the UK more into line with other jurisdictions and the international standards.”

The publication indicates there have not been any complaints from taxpayers or FIs.

In instances where HMRC has a genuine suspicion of discovery, there are powers to issue information notices to the taxpayer requesting relevant data in their power or possession; failure to do so can result in daily penalties. Taxpayers also have the option of authorising HMRC to request data direct from the third-party. HMRC’s compliance handbook (CH232100) indicates obtaining the information by these means should be their normal approach, which perhaps explains why so few FINs were issued in the period to 31 March 2022. It will be interesting to see how the statistics look for the year to 31 March 2023. Many voiced concerns about HMRC having the ability to bypass the taxpayer and tribunal and write direct to FIs to gather information direct. The taxpayer would be reliant on the FI to argue on their behalf that the information is not reasonably required in instances where HMRC is overstepping the mark. Unfortunately, FI’s are unlikely to argue whether the FIN includes reasonable requests, as the sole concern of the FI’s legal department will be the receipt of a legal notice and how they will comply. The HMRC publication states that in the period under review, no penalties have been issued to FIs because no appeals were made.

What to do next

FIs should take time to familiarise themselves with their obligations and put procedures in place to ensure FINs have been properly issued, otherwise FIs leave themselves open to legal claims from disgruntled taxpayers. HMRC frequently push the boundaries of what can be demanded so FIs might want to think about taking advice from an independent specialist in this area of tax on the merits of the data being requested given the potential for future challenge if data is handed over which could have validly been resisted.

For more information, get in touch with a member of Crowe’s Tax Resolutions team or your usual Crowe contact.