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Taxpayer challenges lawfulness of HMRC’s ‘informal’ investigations

Taxpayer challenges lawfulness of HMRC’s

Court of Appeal upholds lawfulness of HMRC’s ‘informal’ investigations and provides important guidance on challenge by judicial review.

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The Court of Appeal has upheld the lawfulness of informal investigations by HMRC into a taxpayer’s affairs and provided important guidance on the way in which those investigations can be challenged by way of judicial review. This case demonstrates that the management of informal investigations by HMRC needs a careful and considered strategic approach and professional advice is strongly recommended. It should also be noted that a challenge to the use of informal investigation powers by HMRC may be brought by other means than judicial review.

Introduction

Informal investigations are not conducted pursuant to HMRC’s statutory enquiry powers and initially do not involve the use by HMRC of their power to issue information notices under Sch.36 Finance Act 2008 (FA 2008). Instead, these types of investigations are characterised by informal requests for documents or information which are not backed up by penalty or sanction, save to the extent that failure to cooperate might lead to a reduction of any penalties due on unpaid tax. Such investigations therefore rely on voluntary cooperation of the taxpayer.

In this case the taxpayer challenged the lawfulness of an informal investigation by judicial review, contending that it was unlawful, irrational, disproportionate and, ultimately, ultra-vires. The Court of Appeal dismissed the claim and gave important guidance on the means by which a taxpayer can challenge and safeguard their position in response to an informal investigation. The Court also confirmed that, in principle, informal investigations were amenable to judicial review on ordinary public law grounds, but that it would take “a wholly exceptional case on its legal merits” to succeed.

The Facts

As is typical with informal investigations, HMRC notified the taxpayer in this case that they had commenced an investigation. Although HMRC confirmed in writing they were undertaking a wide-ranging investigation into all aspects of the taxpayer’s affairs, they advised that they were not issuing a notice under s9A TMA 1970. The relevant time limits for opening such enquiries had largely passed for the earlier periods under consideration. HMRC confirmed that they wanted to hold a meeting with the taxpayer and their advisers and made informal requests for information. Although these requests contained the proviso that should the requests not be responded to, then formal notices under Sch. 36 FA 2008 would be issued, HMRC initially chose not to use these powers and maintained their informal approach. Only after the basis of the investigation had been challenged did HMRC issue information notices under Sch.36 FA 2008.

Issue 1: Does HMRC have the power to conduct informal investigations?

The Court of Appeal found in favour of HMRC by determining that they were empowered to conduct informal investigations. This was because it was clearly incidental, conductive, necessary or expedient in the exercise of its public function to collect the right amount of tax.

The Court of Appeal referred to Commissioners for Revenue and Customs Act 2005 (CRCA 2005) and in particular section 9 (ancillary powers) which provides that:
(1) The Commissioners may do anything which they think;
(a) necessary or expedient in connection with the exercise of their functions; or
(b) incidental or conducive to the exercise of their functions.

The Court of Appeal determined that: “HMRC's functions include checking tax returns without opening a section 9A enquiry, including after the enquiry window has closed, with a view to determining if there are grounds for making a discovery assessment, and that such checking can include…contacting the taxpayer, to obtain information and documents on a voluntary basis”.

The Court also confirmed that it was the very antithesis of good administration for an arm of the state to have to use compulsory, intrusive powers as a first step in obtaining information from an individual. As a result, it would be wrong to find that HMRC had to use its statutory powers when it could pursue an informal investigation first, subject to the cooperation of the taxpayer.

Issues 2 & 3: Challenging informal investigations by Judicial Review

Although the Court agreed that HMRC had the power to conduct informal investigations, it reiterated the long-standing principles that HMRC must act lawfully and that use of their power to conduct informal investigations is subject to judicial review on ordinary public law grounds. As the Court said, “HMRC… must exercise their powers so as to promote the statutory purpose for which they are given; and must act lawfully, exercising their powers in good faith and on a rational basis”.

Nevertheless, and bearing in mind HMRC’s wide managerial discretion, the Court imposed a high threshold for success when challenging an informal investigation by HMRC; in particular, the Court found that “it will take a wholly exceptional case on its legal merits to justify judicial review of a… decision by HMRC to conduct an informal investigation”. On the facts of this case, and taking into account the evidence of both parties, there was nothing to indicate that the test had been met.

Comment

The judgment has confirmed that HMRC can conduct wide-ranging investigations on an informal basis without recourse to statutory enquiry powers and information notices.

In addition, and given the high threshold which the Court has imposed on challenging informal investigations, a judicial review will probably only be successful where a taxpayer can show that the investigation was being conducted: maliciously; irrationally or without rational reason; in breach of an exceptionally strong legitimate expectation; or so unfairly as to be unlawful (and, potentially, in breach of Human Rights). Cases which meet this threshold will be few and far between but, if appropriate, taxpayers should still consider using judicial review to challenge HMRC’s informal investigations.

A challenge to the use of informal investigation powers by HMRC may of course be brought by other means than judicial review. The Court of Appeal commented that a taxpayer could refuse to co-operate with informal enquiries or provide information to HMRC on a voluntary basis. In the first instance any objections should be raised with the HMRC caseworker involved. The management of such cases calls for a careful and considered strategic approach and professional advice is strongly recommended.

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