New tax information notice for UK financial institutions

Changes made by the Finance Act 2021 allow HM Revenue and Customs (HMRC) to issue a financial institution notice (FIN) requesting information about a financial institution's customers for the purposes of domestic or overseas tax investigations, without having to obtain the approval of the first-tier tribunal (FTT) or the taxpayer.

This is a big change to the previous rules. Previously, HMRC could only issue a notice requiring a third party to provide information reasonably required to check a person's tax position if the taxpayer agreed or if the FTT approved the notice. Notices can be issued where HMRC is seeking information for its own enquiries, or where it has been asked for information by a foreign tax authority.

A FIN can only be used where, in the reasonable opinion of the HMRC officer giving the notice, the information or document requested is of a kind that it would not be onerous for the financial institution to provide or produce.

The changes are intended to enable HMRC to deal more efficiently with requests for information from foreign tax authorities. The UK was the only G20 country to require the approval of a tribunal or the consent of the taxpayer before a third party notice could be issued. This made the process take longer, and meant that it takes HMRC on average 12 months to produce the information compared to an internationally-agreed target of six months.

The changes came into effect on 10 June 2021. They apply to notices issued after this date regardless of when the tax liability or tax debt arose.

What is a financial institution notice?

A FIN is a notice that may be given to a financial institution requiring it to provide information or produce documents to HMRC either for the purposes of checking the tax position of a named taxpayer, or for collecting the tax debt of a named taxpayer.

A FIN does not need the approval of the FTT, but can only be used where, in the reasonable opinion of the HMRC officer giving the notice, the information or document requested is of a kind that it would not be onerous for the financial institution to provide or produce.

HMRC must give a copy of the FIN to the taxpayer, together with a summary of reasons why the information is required, unless the FTT has agreed that notifying the taxpayer might prejudice the assessment or collection of tax. The FTT may also approve the issue of a FIN that does not name the taxpayer if it is satisfied that the HMRC officer has reasonable grounds for believing that naming the taxpayer might seriously prejudice the assessment or collection of tax. The identity of the taxpayer must, however, be known to the HMRC officer issuing the notice: the notice cannot be used, for example, to find out which taxpayers hold a particular type of account.

'Financial institution' uses the Common Reporting Standard (CRS) definition, but includes credit card issuers and excludes investment entities such as family trusts and charities.

What safeguards apply to HMRC's use of a FIN?

All notices must be approved by an authorised HMRC officer trained in the application of civil information powers. Authorised officers are designated experienced staff who are not personally involved in the cases they review.

One important condition for the issue of the notice is that the information or document requested is, in the reasonable opinion of the HMRC officer giving the notice, of a kind that it would not be onerous for the financial institution to provide or produce. However, there is no right of appeal against a FIN, and it would be difficult in any event to show that an HMRC officer did not hold a reasonable opinion that providing the information was not onerous. If the HMRC officer has not appreciated the difficulty of providing the information requested, it is to be hoped that the issue could be resolved in discussions with HMRC.

If the financial institution does not comply with a FIN and a penalty is charged, there is a right of appeal against the penalty on the basis of reasonable excuse even though there is no right of appeal against the notice itself.

The notice may only be issued where the information is reasonably required to check a known person's tax position, or for the purpose of collecting a tax debt. For international requests, it must be shown that the information is foreseeably relevant to the administration or collection of tax. The taxpayer will receive a copy of the notice and a summary of reasons why the information is required, unless the FTT has approved the waiver of the requirement. As there is no appeal process, the only way to challenge a FIN which appears to be unreasonable is by way of judicial review. This can prove to be a costly process.

The usual restrictions in part 4 of schedule 36 of the 2008 Finance Act on the use of information notices will apply to this new notice. These include that a person is only required to produce something that is within their possession or power; and that documents which are privileged do not need to be produced.

HMRC will be required to report annually to the UK parliament on how it has used the new power, including the number of FINs which have been issued.

What other changes have been made to HMRC's civil information powers?

The Finance Act 2021 included provisions to enable HMRC to request information from all third parties for the purpose of debt collection, whether under the existing third party notice power or the new FIN. Previously, third party powers could only be used to check a person's tax position.

Previously, where a third party notice was issued, the FTT could be asked to agree that the taxpayer not be informed about the third party notice if informing the taxpayer could prejudice the investigation. However, even if the FTT agreed, there was nothing to stop the third party telling the taxpayer. One of the changes means that the third party is forbidden from informing the taxpayer if the FTT has approved the issue of a notice without the taxpayer being informed.

Do the changes to notices only apply to financial institutions?

In its original 2018 consultation document, the government sought views on whether the requirement for FTT approval should be removed for all third party notices, not just those given to financial institutions. This would have aligned the rules for third party notices more closely with those for notices to the taxpayer, where FTT consent is not required.

However, almost all of the consultation respondents (21-page / 295KB PDF) opposed this, with most preferring the option of only removing the requirement for FTT approval from notices to financial institutions.

This is welcome news, as complying with a third party notice which does not relate to financial information may be onerous. The information may not necessarily be easily accessible, and providing it will probably not be routine. FTT consent ensures the information requested is strictly necessary, and is an important safeguard for both the taxpayer and the third party.

How will FINs interact with CRS reporting requirements?

Financial institutions are already required to annually report high-level information about financial accounts held by non-residents to HMRC under the CRS. HMRC then automatically passes that information onto the overseas tax authorities concerned.

As the overseas tax authorities digest the huge amounts of information provided under these automatic exchanges of information, HMRC expects that they will make more requests for more detailed information under tax information exchange agreements. FINs should make it easier and quicker for HMRC to comply with the expected increase in numbers of these requests.

This guide is an updated version of an interview of Jake Landman of Pinsent Masons by Tom Inchley for LexisPSL.