HMRC opens its books to mortgage lenders

16 September 2011. Published by Daniel Hemming, Partner

Having been first announced in the March 2010 Budget and following a pilot, the mortgage verification scheme, a joint venture between HMRC, the Council of Mortgage Lenders and the Building Societies Association, was finally launched at the start of the month.

How does it work?

Under the scheme, mortgage lenders can submit relevant details from a mortgage application which they suspect to be fraudulent to HMRC via a new online portal.  For a fee of £14, HMRC will then check these details against income tax and employment returns and advise the lender whether the application corresponds with those returns.

In principle, the scheme is a sensible one and should reveal the most obvious mortgage frauds where the would-be borrower has overstated their income on an application and provided false documents to support this (except in circumstances where the borrower has taken the precaution of similarly overstating their income on their last tax return!).  Accordingly, it should act as a strong disincentive to anyone intending to submit a mortgage application based on false income details in circumstances where this does not accord with their recent tax history.

It may also assist HMRC in identifying and recovering unpaid tax.  After all, a discrepancy between a mortgage application and the applicant's tax history can be explained by tax evasion just as readily as by attempted mortgage fraud!

Importantly, the use of the scheme is to be limited to cases where, following their own investigations, lenders reasonably suspect that mortgage fraud may be taking place.  This limitation is to be welcomed, and it would be disappointing if a check against the borrower's tax records became a routine part of a mortgage application, given their confidential nature.  However, it is not clear how this requirement is to be enforced, the extent to which lenders will be required to present evidence to support their suspicions nor whether such evidence will be properly scrutinised by HMRC before the verification is carried out.

Restrictions on HMRC disclosure

The interaction between the scheme and the general prohibition on disclosure of taxpayer information by HMRC contained in section 18 of the Commissioners for Revenue & Customs Act 2005 ("CRCA") (for my recent comments on this provision in the context of disclosures to the SFO, click here), is not entirely clear.  Although disclosures to mortgage lenders could fall within the exception for disclosures in the public interest contained in section 20 CRCA, as it does not fall within the existing permitted categories in subsections (2) to (7), this would need to be permitted by a Statutory Instrument.  It appears that no such Statutory Instrument has been enacted. 

Presumably, therefore, HMRC have taken the view that, as they are merely checking applications against taxpayer records rather than disclosing information to mortgage lenders, section 18 CRCA is not engaged.  If this is the case, then they may be treading a fine line.  If there are discrepancies between a mortgage application and a taxpayer's records, lenders will require details of the discrepancy, rather than merely the fact that there is one, and HMRC then risk disclosing taxpayer information within the meaning of section 18 CRCA.  In this regard, it is notable that a breach of section 18 can amount to a criminal offence by the HMRC officer making the disclosure under section 19 CRCA.

The US Connection

As a final point, it is interesting to note that this is yet another example of HMRC adopting an initiative first implemented across the Atlantic.  The IRS have operated an "income verification service", making taxpayer details available to mortgage lenders, for a number of years (though at a lower cost of $2.25 per tax return!).

...and finally

HMRC's best and brightest have always been an attractive target for private sector recruiters, given their technical expertise and knowledge of HMRC's often mysterious ways. But hats off to the former HMRC inspector who looked in to Gordon Ramsay's affairs a few years ago, and who has now been taken on as Compliance Director at Gordon Ramsay Holdings, according to the Daily Mail. If there is one thing we have learnt from watching Mr Ramsay on TV, it is that he can be a hard man to impress!

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