Mathew v. Revenue & Customs: Tribunal Upholds Schedule 36 Notices Requiring Disclosure of Financial Records

Introduction

In the case of Mathew v. Revenue & Customs (Rev 1) ([2015] UKFTT 139 (TC)), the First-tier Tribunal (Tax Chamber) addressed an appeal by Joshy Mathew against HM Revenue & Customs (HMRC). The core issue revolved around the issuance of Schedule 36 (Sch 36) Notices, which mandated Mr. Mathew to provide detailed financial records and information pertinent to his self-assessment (SA) tax returns for the years 2008-09 through to 2012-13. The Tribunal was tasked with determining whether these notices were justified, whether the appeal process was correctly followed, and whether HMRC had reasonable grounds to withhold issuing closure notices on the ongoing tax enquiries.

Summary of the Judgment

The Tribunal concluded that Mr. Mathew had not properly appealed the Sch 36 Notices as initially required by law. However, recognizing HMRC's discretion, the Tribunal permitted a late appeal and varied the Sch 36 Notices accordingly. The key decision was to uphold the notices, compelling Mr. Mathew to comply with the updated documentation requirements within a stipulated timeframe. Additionally, the Tribunal determined that there were reasonable grounds for not issuing closure notices at that juncture, citing the complexity and volume of the information requested.

Analysis

Precedents Cited

The judgment extensively referenced prior cases to establish the burden of proof and the interpretation of statutory records:

Kevin Betts v HMRC [2013] UKFTT 430 (TC): Affirmed that the burden of proof in appeals against information notices typically lies with HMRC.
Eudora Thompson v HMRC [2013] UKFTT 103 (TC): Reinforced that HMRC bears the burden of demonstrating that requested information is reasonably required.
R (oao) Derrin Brother Properties Ltd v HMRC [2014] EWHC 1152 (Admin): Emphasized the presumption of regularity in HMRC's issuance of notices and the importance of HMRC's justification.
Coombs ([1991] 2 AC 283): Established that the presumption of regularity applies to both HMRC officers and tribunals, placing the onus on appellants to disprove the reasonableness of information requests.
Other Cases: Included MM Nicholson v Chapman, HMRC v Vodafone, and D Arcy v HMRC, which collectively informed the Tribunal's understanding of fair use of HMRC's powers and the necessity of reasonable grounds in information requests.

Legal Reasoning

Central to the Tribunal's reasoning was the interpretation of what constitutes "statutory records" under the Taxes Management Act 1970 (TMA). The Tribunal analyzed whether the information requested by HMRC via Sch 36 Notices was essential for completing a correct SA return:

Statutory Records: Defined as information or documents required to be kept under the TMA for accurate and complete SA returns.
Burden of Proof: Determined that HMRC bears the burden to prove that the requested information is reasonably required, aligning with precedents like Coombs.
Reasonableness of Requests: Evaluated each item in the Sch 36 Notices to ascertain if they were genuinely necessary for tax assessment purposes, rejecting claims of fishing expeditions.
Appeal Process: Acknowledged procedural lapses in Mr. Mathew's initial appeal but allowed rectification based on HMRC's discretion and compliance with justice principles.

Impact

This judgment reinforces HMRC's authority to request comprehensive financial documentation when there is a perceived discrepancy between a taxpayer's declared income and lifestyle. It upholds the principle that HMRC must substantiate the necessity of such requests, placing the onus on them to demonstrate reasonableness. Future cases will likely reference this decision when evaluating the balance between HMRC's investigative powers and taxpayers' rights to appeal dispensation of information requests.

Additionally, the Tribunal's stance against classifying the Sch 36 Notices as fishing expeditions sets a precedent for asserting the legitimacy of thorough HMRC inquiries, provided they are grounded in reasonable suspicion and not retaliatory motives.

Complex Concepts Simplified

Several intricate legal concepts were pivotal in this judgment. Here's a breakdown for clearer understanding:

Schedule 36 (Sch 36) Notices: Legal instruments under the Finance Act 2008 empowering HMRC to request specific financial information from taxpayers deemed necessary for accurate tax assessments.
Statutory Records: Documents or information that a taxpayer is legally obligated to keep to ensure the accuracy and completeness of their tax returns.
Burdens of Proof: The responsibility to provide evidence. In this context, HMRC must prove that their requests for information are justified and necessary.
Presumption of Regularity: A legal assumption that procedures and actions by officials are performed correctly and lawfully, shifting the burden of proof to the challenger.
Fishing Expedition: An unfocused search for evidence or information without specific intent or reasonable suspicion, considered an abuse of power if conducted by authorities.

Conclusion

The Tribunal's decision in Mathew v. Revenue & Customs underscores the rigorous standards HMRC must meet when issuing Sch 36 Notices. By affirming that HMRC bears the burden of proving the necessity of requested information and rejecting allegations of fishing expeditions, the judgment fortifies HMRC's investigatory capabilities while ensuring taxpayer protections are maintained. This balanced approach ensures that tax enforcement is both effective and just, laying a clear pathway for future adjudications involving similar disputes.