THE BALANCE OF POWER

Financial Institution Notices are a concerning extension to HMRC’s Civil Information armoury

From 2021, the UK’s tax authority, HMRC, gains new powers to require financial institutions to provide banking information about taxpayer clients without prior permission from the courts. This is concerning as the ever-growing compliance burden on financial institutions looks set to increase.

As part of a package of measures to strengthen HMRC’s civil information powers, HMRC has recently confirmed that it will proceed with its plans to introduce a Financial Institution Notice (“FIN”) with effect from 2021.

The issue of a FIN will enable HMRC to formally require a financial institution to provide banking information, including bank statements, transaction information and KYC information, about specific taxpayers. This represents a significant extension to HMRC’s existing powers to request information from third party financial institutions about their customers. Under the current rules, prior approval from the First-tier Tribunal is generally required in order to issue such information notices. Under the new rules, no such prior approval is needed.

This represents a significant extension to HMRC’s existing powers to request information from third party financial institutions about their customers.

The new rules

A FIN can be issued by HMRC against “financial institutions” (which are, broadly, those as defined under the Common Reporting Standard and credit card issuers). Draft legislation has been published which sets out the following conditions that must be met for HMRC to issue a FIN.

  1. In the reasonable opinion of the officer giving the notice, the information or document is of a kind that would not be onerous for the financial institution to provide or produce.
  2. The information or document is reasonably required by the officer for: (a) checking the tax position of the relevant taxpayer; or (b) collecting a tax debt of the taxpayer.

The new rules are concerning given the absence of effective safeguards for taxpayers.

The new rules are concerning given the absence of effective safeguards for taxpayers and the likely increased compliance burden for financial institution recipients. The most obvious concern is the absence of any requirement to seek prior approval from the First-tier Tribunal. In addition, there is no right of appeal against the issue of the FIN and penalties will be issued against financial institutions who fail to comply. It is also unclear at this stage what information HMRC will consider to be “onerous” for financial institutions to provide but it is expected that HMRC’s views on this will differ significantly from the financial institution recipient.

CONCLUSION

The UK government has made clear that its primary motivation for introducing the FIN is to accelerate the time HMRC takes to deal with international exchange of information requests. It will be interesting to see how often HMRC uses its new powers, whether the introduction of the FIN will lead to further requests for information from international tax authorities, and the extent of the compliance burden this will inevitably place on financial institutions.

In the short-term, therefore, it is likely that HMRC’s reliance on its new powers may be limited

HMRC’s compliance activity levels have fallen quite significantly during 2020, as it has redeployed its internal resources to implement the package of support measures introduced by the UK government in response to COVID 19. In the short-term, therefore, it is likely that HMRC’s reliance on its new powers may be limited. However, in the medium to long term, as HMRC’s productivity levels return to normal, and in light of the inevitable pressure it will face to raise tax revenue, we would expect large numbers of FINS to be issued. Given this, financial institutions should use this interim period to ensure they have appropriate processes in place to respond promptly to such requests.


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KATE ISON

Partner, London

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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.

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