Tribunal finds HMRC's information notice to be invalid

07 October 2015. Published by Adam Craggs, Partner

In PML Accounting Limited v HMRC[1], the First-tier Tribunal (FTT) has found that a taxpayer information notice was invalid, as HMRC should have issued a third party information notice.


PML Accounting Limited (PML), provided accounting, tax and corporate services to contractors and consultants. The sole director of PML was Mr Hazell.

On 26 November 2012, HMRC issued a taxpayer information notice to PML, pursuant to paragraph 1, Schedule 36, FA 2008, to "check the company's Chapter 9 ITEPA 2003 position [and…] to give proper consideration to the application of the Managed Service Company Legislation." HMRC suspected that PML was a managed service company (MSC) provider.

After agreeing an extension of time by which to provide the documents requested in the information notice, 16 boxes of documents were sent to HMRC. Following review of the documents, HMRC issued a penalty notice to PML, pursuant to paragraph 39, Schedule 36, FA 2008, for failure to comply, as HMRC was of the view that it had not received all the documents requested in the information notice.

During this period, Mr Hazell became seriously ill and was hospitalised in intensive care for over two weeks. He also lost the use of both of his legs and had to abstain from full-time employment for a period of several months. HMRC wrote to Mr Hazell during that period noting his illness and agreeing to "only" charge daily penalties of £20 per day for failure to comply with the notice. Mr Hazell continued to inform HMRC that he was in no condition to continue to run the company or comply with a document review exercise. His pleas fell on deaf ears and further penalty notices were issued (three in total). The penalties amounted to £4,560 in total.

Following an internal review, which upheld the penalty notices, PML appealed the penalty notices to the FTT.    

The FTT's decision

The FTT concluded that the information notice was invalid because PML did not have a present or future tax liability and its appeal was allowed.

The FTT indicated that a third party or 'identity unknown' notice under paragraph 2 or 5, Schedule 36, FA 2008, would have been appropriate.

In the view of the FTT, PML's tax liability was contingent on HMRC finding that it was an MSC provider in relation to an MSC, and that the MSC had a liability to account for PAYE that remained unpaid after a specified period, and on that liability being transferred to PML.

At the time the information notice was issued, there was no past or present liability for PML to account for tax, as no notice under Regulation 97C[2] (transfer of debt of MSC) had been issued. Nor could there be deemed to be any future liability for PML to account for tax unless and until:

(i)    it had been determined that PML was an MSC provider in respect to an MSC;

(ii)   the MSC has a liability to account for PAYE;

(iii)  that liability had become a relevant PAYE debt by virtue of the service of a Regulation 80 determination (or other specified notice or document) on the MSC;

(iv)  the PAYE debt was unpaid for at least 14 days after service of the determination notice on the MSC;

(v)   HMRC was satisfied that the liability of the MSC to account for PAYE was irrecoverable within a reasonable period;

(vi)  HMRC had issued a direction under Regulation 97C; and

(vii) a transfer notice in respect of that liability had been served on PML.

All of the above had to be satisfied in order for a liability to exist. Failure to meet all of these conditions meant there was a contingent liability only and this contingent liability did not constitute a "tax position" for the purposes of Schedule 36. Accordingly, the information notice was invalid as it related to the tax position of PML's clients, rather than PML itself.  

The FTT also concluded that if it were wrong on the question of validity vis-à-vis the issue of a contingent  tax liability, the information notice would also be invalid because it breached PML's  clients' rights under Article 8 of the European Convention on Human Rights (right to privacy). PML's clients were unaware of the information notice served on PML and were, therefore, unable to exercise their right to judicial review, resulting in an absence of an effective remedy as required by Article 8.


This decision is a reminder to recipients of information notices that they need to consider carefully whether the criteria for the issue of a valid information notice are satisfied.

The FTT rejected HMRC's argument that the information notice was issued to PML in order to enable it to obtain information about PML's business which would enable it form a view on its tax position. In the view of the FTT, the possible liability of PML to account for tax under the MSC legislation was "too remote". If HMRC wanted to find out whether PML was a MSC provider in relation to its clients, it could do so by enquiring into the clients' tax positions.

To read the full judgment please click here.

[1] [2015] UKFTT 0440 (TC).

[2] Income Tax (Pay as You Earn) Regulations 2003 (SI 2003/2682).

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