Perring – Burden of proof for establishing that documents are 'reasonably required' in taxpayer information notice appeal is on HMRC
In Perring v HMRC  UKFTT 110, the First-tier Tribunal (FTT) held that the burden of proof for establishing that documents are 'reasonably required' under a taxpayer notice issued under paragraph 1, Schedule 36, Finance Act 2008 (FA 2008) lies with HMRC.
Mr Thomas Perring and Mr Michael Perring (the Appellants) appealed against information notices issued to them by HMRC under paragraph 1, Schedule 36, FA 2008, in relation to tax years 2012/13 to 2017/18, and related penalties for non-compliance with the notices.
The appeals were allowed in part.
The FTT considered the following issues:
1. Was the burden of proof on HMRC to satisfy the FTT that the information notices had been issued to the Appellants in accordance with the provisions of Schedule 36 or did HMRC simply have to show a prima facie case, following which the burden of proof then shifted to the Appellants to demonstrate that the information notices did not comply with the provisions of Schedule 36?
The FTT determined that the burden lies with HMRC to satisfy the FTT that the notices issued to the taxpayers satisfied the requirements of Schedule 36. The FTT rejected HMRC's argument that once HMRC has shown an initial case that the documents are required, the burden of proof passes to the taxpayer.
2. In order to satisfy the reasonable grounds to suspect test, in paragraph 21(1) , Schedule 36, did HMRC have to have for each year to which the information notice applied, some evidence to indicate that tax assessments had become deficient?
The FTT commented that it is a well-established principle that HMRC may not use information notices for the purposes of a 'fishing-expedition'. A return had been filed by the Appellants for all years in respect of which a request had been made and the period for making an enquiry into those returns had past (save in respect of 2017/2018). The FTT noted that the evidence given by the relevant HMRC officer confirmed that he had a particular concern in relation to the 2016/17 tax year because of an undisclosed disposal of a barn and the possible non-inclusion of rental income in 2015/17, but noted that the officer had no particular concern of a deficiency in relation to the remaining tax years but had a general concern and wished to understand the background, in particular, how the Appellants financed the purchase of the assets acquired by them in the relevant period.
3. Did the information and documents requested by HMRC fall within the category of 'statutory records' against which there could be no appeal?
The FTT concluded that statutory records include the information necessary to compute a person’s tax liability and file a return. With regard to capital gains tax, that would include in relation to an asset disposed of, the purchase price, the sale price and all deductible expenses. In relation to a property rental, that activity is a business activity, and the statutory records would include the records of receipts and expenses which would include personal bank statements if, and only to the extent that, the personal bank account had been used for the purpose of paying expenses or receiving rent.
4. Can information or documents be said to be reasonably required for the purposes of checking a taxpayer's tax position where the tax year to which they relate has not been the subject of an enquiry and no assessment may be made by HMRC, or where the information or documents are already in HMRC's possession?
In the view of the FTT, the information or documents cannot be said to be reasonably required to check a taxpayer’s tax position where there is no evidence of dishonesty and:
a. the information or documents relate to a tax year in relation to which HMRC may not raise an assessment; or
b. HMRC already has the information or documents in its possession.
5. Was the information or documents requested by HMRC protected by legal professional privilege?
The FTT concluded that all correspondence between the Appellants and their solicitor in connection with the purchase of property and the fact that legal advice had been taken in that connection was protected by legal professional privilege. The FTT commented that in the absence of evidence of fraud in which the solicitor is implicated, the details of the Appellants' solicitors could not be reasonably required.
6. Were the notices for the 2012/13 tax year valid to the extent that they required documents which were created more than 6 years before the date of the notice where there was no evidence or suspicion of deliberate behaviour?
In the view of the FTT, HMRC's request for information in relation to the tax year 2012/13 was invalid as the authorising HMRC officer’s recorded reason indicated that the basis of his approval was that there was a serious risk of tax evasion but the FTT noted that he had no reason to suspect dishonesty at the date of issue of the notices or subsequently.
In light of the above, the Appellants' appeals were allowed in part with the FTT setting aside the majority of the information notices and varying certain information requests relating to tax years 2014/15 to 2017/18.
This is another case in a series of recent cases on the important issue of who has the burden of proof for establishing that documents are 'reasonably required' for the purposes of paragraph 1, Schedule 36, FA 2008.
In this instance, the FTT concluded that the burden of proof lies with HMRC alone. However, this decision is at odds with the recent decision of a differently constituted FTT in Hargreaves and others v HMRC  UKFTT 80 (TC) (our blog on that decision can be viewed here) where it was decided that HMRC bears the burden of establishing that information requested in a taxpayer information notice is reasonably required, after which the burden of proof then passes to the taxpayer to establish that the information was not reasonably required. The different approaches adopted by the FTT in this case and Hargreaves has created some uncertainty in this important area of the law and it would be helpful if the issue could be considered by a higher court.
The decision can be viewed here.