Defining Reasonable Requirement for HMRC Information Notices: The Phillipou v. Revenue and Customs Decision

Introduction

The case of Marylin May Phillipou v. Revenue and Customs ([2017] UKFTT 20 (TC)) centers on the issuance of information notices by Her Majesty's Revenue and Customs (HMRC) under Schedule 36 of The Finance Act 2008. The appellant, Marylin May Phillipou, operated a fish and chip shop and was subject to an inquiry into her 2013/2014 tax return. HMRC issued two information notices seeking additional documentation and information to verify her tax position. The core issue was whether the information requested by HMRC was reasonably required to assess her tax liabilities accurately.

Summary of the Judgment

The First-tier Tribunal (Tax Chamber) reviewed the appeal lodged by Mrs. Phillipou against the information notices issued by HMRC. After considering the submissions from both parties and relevant case law, the tribunal concluded that HMRC was justified in seeking the additional information. Consequently, the tribunal varied the original notices with revised ones and dismissed Mrs. Phillipou's appeal. The decision emphasized HMRC's broad powers under Schedule 36 to ensure accurate tax assessments by obtaining necessary information.

Analysis

Precedents Cited

The judgment extensively referenced several key cases that shaped the tribunal's reasoning:

Stephen Price [2011] UKFTT 624 (TC): Highlighted HMRC's entitlement to comprehensive information to make informed tax assessments.
Andreas Michael [2015] UKFTT 0577 (TC): Reinforced the necessity for HMRC to obtain sufficient data before issuing closure notices.
Eclipse Farm Partnerships No. 35 LLP [2009] STC (SCD) 293: Detailed the significance of closure notices and the balance of interests between HMRC and taxpayers.
Fidex Ltd v Revenue and Customs Commissioners [2014] UKUT 454 (TCC): Clarified the scope of appeals against amendments to tax returns based on closure notices.

These precedents collectively underscored the principle that HMRC must have a factual and procedural basis for its assessments, ensuring that taxpayers are not unfairly burdened without just cause.

Legal Reasoning

The tribunal's legal reasoning was anchored in the interpretation of Schedule 36 of the Finance Act 2008, particularly focusing on what constitutes information being "reasonably required" for HMRC to check a taxpayer's position. Key points include:

Broad Definition of Tax Position: The term encompasses past, present, and future tax liabilities, allowing HMRC extensive leeway in conducting inquiries.
HMRC's Duty to Gather Comprehensive Information: To issue a closure notice, HMRC must base its conclusions on thorough and reliable data, necessitating additional information when initial records are insufficient.
Balancing Interests: The tribunal emphasized the need to balance HMRC's right to accurate tax assessments with the taxpayer's obligation to provide necessary information without undue hardship.
Burden of Proof: While traditionally HMRC bears the burden of proving that requested information is necessary, the tribunal acknowledged arguments that, in some cases, the burden might shift to the taxpayer to demonstrate that the information is not required.
Practicality of Information Requests: The tribunal assessed whether the information sought was readily available and not overly burdensome, ultimately finding that HMRC's requests were justified and manageable.

Through this reasoning, the tribunal affirmed HMRC's authority to request additional information under Schedule 36, provided there is a reasonable basis for doing so.

Impact

The decision in Phillipou v. Revenue and Customs has significant implications for both HMRC and taxpayers:

Enhanced Clarity on HMRC's Powers: The judgment reinforces the broad scope of HMRC's authority to request information deemed necessary for accurate tax assessments.
Taxpayer Obligations: Taxpayers are reminded of their responsibility to comply with information notices and the importance of maintaining comprehensive and accurate business records.
Guidance for Future Cases: The judgment serves as a precedent for future disputes involving information notices, providing a clear benchmark for what constitutes a reasonable requirement.
Encouragement for Proactive Compliance: Taxpayers may be more inclined to cooperate and provide detailed information proactively to avoid prolonged inquiries and potential disputes.

Overall, the decision underscores the necessity for both parties to engage transparently and diligently in tax matters to ensure fairness and accuracy in assessments.

Complex Concepts Simplified

Schedule 36 of the Finance Act 2008

Schedule 36 empowers HMRC to issue information notices to taxpayers. These notices compel individuals or businesses to provide specific information or produce documents deemed necessary for verifying their tax returns. The key components include:

Reasonable Requirement: HMRC must demonstrate that the requested information is essential for accurately assessing the taxpayer's liability.
Compliance Obligations: Taxpayers are legally obliged to comply with information notices unless they successfully challenge them.
Tribunal Appeals: Taxpayers have the right to appeal against information notices, but the tribunal can only vary or set aside the notice if it finds the request unreasonable.

Closure Notice

A closure notice signifies the end of HMRC's enquiry into a specific tax return. It outlines HMRC's conclusions regarding the taxpayer's liability and may include amendments to the tax return based on those conclusions. Issuing a closure notice is a critical step, as it defines the scope and basis for any subsequent appeals by the taxpayer.

Business Economic Exercise

A business economic exercise involves HMRC creating a model of a taxpayer's business operations to assess the accuracy of reported profits and turnover. This exercise helps HMRC determine if the taxpayer's figures align with industry standards and actual business performance.

Burden of Proof in Information Notice Cases

The burden of proof generally lies with HMRC to justify that the information requested is reasonably necessary. However, in certain scenarios, especially where HMRC's requests seem unfounded, the burden may shift to the taxpayer to demonstrate that the information is not required. This dynamic ensures that both HMRC and taxpayers engage in a fair exchange of relevant information.

Conclusion

The Phillipou v. Revenue and Customs decision serves as a pivotal reference in understanding the limits and extents of HMRC's powers under Schedule 36 of the Finance Act 2008. By affirming that HMRC can rightfully seek additional information when necessary, the tribunal emphasized the importance of thoroughness in tax assessments. This judgment underscores the balance between HMRC's duty to ensure accurate tax collection and the taxpayer's obligation to provide essential information. For taxpayers, it highlights the necessity of maintaining detailed business records and cooperating with information requests to facilitate smooth and fair tax assessments. For HMRC, it reaffirms the legitimacy of utilizing broad legislative powers to obtain necessary information, thereby ensuring the integrity and accuracy of the tax system.