Mark McLaughlin warns that taxpayers may be required to provide HMRC with documents not physically held.
Taxpayers are sometimes issued with information notices requiring them to provide HM Revenue and Customs (HMRC) with information and documents ‘reasonably required’ to check the taxpayer’s tax position (or to collect a taxpayer’s tax debt).
‘Possession or power’?
However, there are various restrictions on HMRC’s powers. One such restriction is that HMRC can only require the taxpayer to produce a document if it is in their ‘possession or power’.
This test has two alternative limbs. For example, an individual’s personal bank statements for the tax year 2020/21 should be in their ‘possession’ or ‘power’; even if they don’t possess paper statements due to online banking, it will generally be in their power to download and print statements, or at least obtain paper copies from the bank.
Trust deed
However, in some cases, it may be less clear cut whether a document is in someone’s possession or power. For example, in Cotswold Financial Planning Ltd v Revenue and Customs [2021] UKFTT 198 (TC), HMRC opened an enquiry into the company’s tax returns for two years and stated in a letter that it was also undertaking a PAYE compliance check, including in relation to a remuneration trust. HMRC issued an information notice requesting a list of documents and information.
The company produced all the documents and information requested in stages, apart from the trust deed for the remuneration trust. HMRC subsequently issued a fixed penalty of £300 for failing to comply with the information notice. The company appealed on the basis that the trust deed was not in its possession or power and that it had made ‘numerous and serious attempts to obtain the trust deed from the relevant parties and will continue to do so’. HMRC also issued daily penalties.
Unfortunately for the company, the First-tier Tribunal (FTT) decided that the trust deed was within the company’s power. As to whether the company had a reasonable excuse for failing to provide HMRC with the trust deed, the FTT noted that the company waited over five months from the initial information notice before making its first written request to the trustees. Ultimately, all it had taken was a phone call to the trustees to insist on the provision of the trust deed for it to be forthcoming within a few days.
HMRC’s view
HMRC considers that ‘possession’ means that the taxpayer has physical control over the document, irrespective of who the document actually belongs to. Furthermore, a document is in the taxpayer’s ‘power’ if they can obtain the document from whoever holds it.
This ‘ability’ to get the document can be through a legal entitlement to make the person holding it give it to them, or the influence that the taxpayer has on the person who owns or possesses the document (see HMRC’s Compliance Handbook manual at CH22120).
Practical tip
There is a taxpayer right of appeal against information notices (subject to certain exceptions) and against penalties for non-compliance. An appeal should be considered if the taxpayer can demonstrate that a document is not in their possession or power, or if they can satisfactorily explain why they are unable to produce a document that is within their power.
