HM Revenue and Customs

4. Mr A complains on behalf of Mr C about HMRC and its enquiry into Mr C’s 2013-14 self-assessment return, with regards to the Statutory Residence Test (SRT). He specifically complains that:

· HMRC refused to accept the evidence provided by Mr C and instead sought further confirmation ‘in a manner appropriate to a case of suspected fraud’ rather than in a manner proportionate to the nature of its enquiry, and that it held no grounds to suspect any fraudulent behaviour. He says this is a clear breach of both HMRC’s Litigation and Settlement Strategy (LSS) and Charter commitment to treat its customers as being honest, unless it has good reason not to.

· HMRC made an inappropriate and informal third-party request to Mr C’s former employer for information that he had already provided. He says this is a breach of HMRC’s published processes and safeguards, particularly as Mr C refused his permission. This was of particular concern as the information being sought was medical records which are subject to additional safeguards in HMRC’s guidance.

· The enquiry was disproportionate, poorly managed and took longer than was necessary.

5. Mr C says he has been caused stress, inconvenience and unnecessary legal costs.

6. As an outcome to his complaint Mr C would like an apology and a financial remedy.

7. Whilst working for his former employer, Mr C was based overseas, however, there were times he returned to the UK for work. He had returned to the UK in April 2013 at which time he became ill and was admitted to hospital with pneumonia, which was further complicated as he also contracted MRSA. He remained in hospital for four days before being discharged. He was advised to take two weeks sick leave and was not able to fly for a further six weeks to allow his lungs time to recover. This period covered a total of 41 days in the UK. Mr C stopped working overseas for his former employer in August 2013.

8. On 18 December 2015 HMRC opened an enquiry into Mr C’s self-assessment tax return for 2013-14. This was to check Mr C’s SRT claim for this period in light of the number of days he had been in the UK during this tax year, and to establish if he had worked on any of the days he was on sick leave.

9. On 11 February 2016 HMRC sent an information notice to Mr C. The information was provided by Mr A on 10 March 2016. On 6 December 2016 HMRC wrote to Mr A explaining that it proposed to issue a third-party information notice to Mr C’s former employer. Mr A wrote to HMRC on 21 December 2016 and 15 February 2017 explaining that Mr C did not consent to HMRC contacting his former employer.

10. On 7 April 2017 HMRC wrote to the former employer on an ‘informal basis’, outlining the information it needed. The former employer replied to HMRC on 9 June 2017 and provided the information it had requested.

11. On 30 January 2018 HMRC issued a closure notice for its enquiry.

Statutory Residence Test

12. The Statutory Residence Test (SRT) came into effect on 6 April 2013, for the 2013-14 tax year. The purpose of the test is to establish the residence status of a person for income tax, capital gains tax, and where relevant, corporation tax and inheritance tax. HMRC’s website says:

‘Under the SRT an individual is either a UK resident or a non-UK resident for a full tax year, and at all times on that tax year.

However, if during a year the individual starts to live or work abroad, or comes from abroad to live or work in the UK, the tax year will be split into 2 parts, if their circumstances meet specific criteria:

· A UK part for which they will be charged to UK tax as a UK resident

· An overseas part for which, for most purposes, the individual will be charged to UK tax as a non-UK resident’

13. HMRC’s website explains that there are eight cases where a person might meet the criteria for split year treatment. Cases four to eight cover situations where the individual comes to the UK part way through the tax year. Mr C’s self-assessment was based on him meeting the criteria for case six: ceasing full-time work overseas.

HMRC’s refusal to accept evidence

16. Mr C complains that HMRC refused to accept the evidence he provided in relation to his SRT. He says this is a breach of HMRC’s Litigation and Settlement Strategy and Charter commitment to treat its customers with honesty unless they had good reason not to. He outlines paragraph 11 of the LSS pinpoints HMRC’s breach as this says ‘in the absence of agreement, the key test for any request is whether, in HMRC’s view, the information or documents are reasonably required for the purpose of checking the tax position’.

17. Mr C says HMRC’s persistent checking and seeking of further information in this case would have only made sense if either he had acted fraudulently or HMRC had reasonable grounds for suspecting that was the case. He says HMRC acknowledged that it had no such concerns.

18. In its response dated 14 September 2018 HMRC said:

‘Mr C was seriously ill and off work for a period of four weeks during the enquiry year. Whilst the illness has never been in question we needed to be satisfied that the additional two weeks recuperation he took following his release from hospital was doing exactly that and not working. If any work was undertaken during that period his UK day count, which was already close to the maximum allowed, would have altered the split year treatment.

It was on this basis that the information request was made to Mr C’s employer. We needed corroborative evidence to substantiate Mr C’s work status to establish whether he did or didn’t work, however informally, during that period’.

19. In its response dated 19 October 2018 HMRC said:

‘As you are aware, the purpose of an enquiry is for officers to satisfy themselves as to the completeness and accuracy of the information given by the customer. To do this they will use their judgement to decide what information they require and what documentation they wish to examine’.

20. In its report dated 14 May 2019, the Adjudicator’s Office said ‘the LSS requires HMRC to be diligent and thorough when conducting enquiries, and verifying statements made by the customer does not carry any implication that the customer is not believed. Independent verification, where possible, is one of the more efficient ways of establishing facts’.

21. HMRC’s Litigation and Settlement Strategy is its guidance on resolving all tax disputes that are subject to civil law. The overall aim of this guidance is to ensure that the right amount of tax is paid and that disputes are resolved with minimal cost to both HMRC and the taxpayer. This is done in line with its laws and legislation.

22. In considering this complaint we looked at both HMRC’s Charter and its LSS. HMRC’s Charter says ‘We’ll work within the law to make sure everyone pays the right amount of tax and gets their benefits and other entitlements. We’ll assume you’re telling the truth, unless we’ve good reason to think you’re not’.

23. Paragraph 11 of HMRC’s LSS says ‘in any dispute, HMRC will seek to establish and understand the relevant facts as quickly and efficiently as possible’.

24. The LSS goes on to say under the heading ‘A best-practice approach to establishing facts’:

‘The approach outlined below seeks to balance the following three factors:

1. the need for HMRC to have a good understanding of the facts before it reaches firm conclusions on what it believes to be the right tax

2. the need for requests for information to be well targeted, confined to the relevant facts, and framed with a view to making the fact-finding process as cost effective as possible for both HMRC and the customer

3. the need to ensure the tax avoidance is critically examined both to satisfy HMRC that the relevant tax planning has been implemented as described and to consider other approaches, for example a ‘purposive’ construction of tax law or abuse of law principle, for which HMRC will normally require pre-planning information’.

25. The LSS goes on to say in paragraph 13:

‘HMRC will seek to work with the customer to understand fully the relevant facts and law, sharing and testing HMRC’s arguments, and fully understanding and testing the customer’s arguments, before reaching a considered view on the strength of its case’.

26. We can see from the records provided by HMRC that on 20 August 2016 Mr A’s company sent an email to HMRC which says ‘his [Mr C] word and the diary are sufficient evidence unless there is a compelling reason why HMRC should doubt his integrity’. In its response on 23 August 2016, HMRC said ‘checking that something has been claimed correctly does not mean that I think there is something wrong with your client’s residency position. This is just my role as an officer of HMRC’.

27. We can also see a phone note on 8 September 2016 that says, ‘[Mr A’s company] mentioned at some point in the phone call, that [HMRC officer] ‘did not believe a word they [Mr A’s Company] and the customer say’. [HMRC officer] disagreed and pointed out that he never said that. Rather, [HMRC officer] was asking for records to check Mr C’s tax return was complete and correct which was his role as a HMRC officer’.

28. Our Principles of Good Administration say ‘All public bodies must comply with the law and have regard for the rights of those concerned. They should act according to their statutory powers and duties and any other rules governing the service they provide. They should follow their own policy and procedural guidance, whether published or internal’. Our principles go on to say, ‘In their decision making, public bodies should have regard to the legislation. Decision making should take account of all relevant considerations, ignore irrelevant ones and balance the evidence appropriately’.

29. Mr A and Mr C acknowledge that HMRC has the right to check Mr C’s residency position. However, we can see why Mr A thought Mr C was being excessively scrutinised by HMRC and why they both felt Mr C was being viewed as dishonest by HMRC. We understand this would have been a source of stress for Mr C.

30. Both the LSS and the Charter outline how HMRC should resolve any tax disputes and we have not seen any evidence that shows it has strayed from this guidance. The LSS’s overarching aim is to ensure the taxpayer has paid the right amount of tax and HMRC must balance its responsibilities to achieve this. Whilst we appreciate that Mr A and Mr C were unhappy that HMRC did not accept the evidence they provided on face value, we do not consider that HMRC’s actions show it believed the evidence to be fraudulent or dishonest in any way. HMRC made it clear on a number of occasions that this was not the case and it was carrying out its role to ensure Mr C had paid the right amount of tax. HMRC’s guidance on assessing evidence, referred to in paragraph 25, gives its officers the scope to ‘fully understand and test’ the customer’s arguments. In our view, seeking corroborative evidence of what happened does not in itself imply that the investigating officer did not believe Mr C’s evidence, or felt him to be dishonest. It was investigating in line with its own guidance and powers.

31. We consider that HMRC has acted in line with our principles quoted above as it has followed its guidance and legislation throughout its enquiry. As such, our decision is to not uphold this aspect of the complaint.

Third party request

32. Mr C complains about the third party request HMRC made to his former employer. He says that by using an informal request, this bypasses the proper legal process and the associated processes and safeguards set out in HMRC’s guidance. Furthermore, he says he did not provide his consent for HMRC to contact his former employer, particularly as the information being sought was his medical records. In addition, the information HMRC was seeking had already been provided by him.

33. In its response dated 19 October 2018 HMRC said ‘It is normal practice during the course of an enquiry to request information informally before issuing a formal notice as this can save time and costs for both parties’.

34. In its report, the Adjudicator’s Office referred to Schedule 36 of the Finance Act 2018. The parts relevant to the Adjudicator’s decision under the heading ‘Approval etc of taxpayer notices and third party notices’ say:

‘3(1) An officer of Revenues and Customs may not give a third party notice without-

(a) the agreement of the taxpayer, or

(b) the approval of the First-tier Tribunal

(2) An officer of Revenue and Customs may ask for the approval of the First-tier Tribunal to the giving of any taxpayer notice or third party notice (and for the effect of obtaining such approval see paragraphs 29, 30 and 53 (appeals against notices and offences))

(3) The First-tier Tribunal may not approve the giving of a taxpayer notice or third party notice unless-

(a) an application for approval is made by, or with the agreement of, an authorised officer of Revenues and Customs,

(b) the Tribunal is satisfied that, in the circumstances the officer giving the notice is justified in doing so,

(c) the person to whom the notice is addressed has been told that the information or documents referred to in the notice are required and given a reasonable opportunity to make representations to an officer of Revenue and Customs,

(d) the First-tier Tribunal has been given a summary of any representations made by that person, and

(e) in the case of the third party notice, the taxpayer has been given a summary of the reasons why an officer of Revenue and Customs requires the information and documents’.

35. The Adjudicator’s Office said:

‘When considering the events in this case, sub paragraph 3(c) is of particular importance, as it directs that the person to whom the notice is addressed is made aware of the information required and given the opportunity to make representations.

HMRC’s interpretation of this aspect of the legislation is that before the approval of a Tribunal is sought for the issue of a third party information notice, the third party must be given the opportunity to make representations to an officer of HMRC…

HMRC chose to do this by asking [former employer] for the information they were seeking on an informal basis. This satisfied the pre-conditions that needed to be met before approaching a Tribunal for permission to issue a third party information notice, it also contained the possibility that [former employer] would choose to provide the information voluntarily’.

36. HMRC’s guidance CH23260 says:

‘You should try, wherever it is possible and practical to do so, to get the information or documents you need from the person whose tax position you are checking before approaching another person for them.

Wherever it is reasonable to assume that the information or documents are within the power of the person to provide, you should normally seek them from that person. If necessary you should issue a taxpayer notice and take penalty action if they do not comply. Only if that approach fails should you consider approaching a third party for the information or documents.

There may, however, be factors which make an approach to the person whose affairs you are checking inappropriate. For example, the information or documents are not in their power to provide or you need to verify facts independently’.

37. HMRC’s guidance CH225150 says:

‘Informal requests to third parties may produce the required information, if not, the authorised officer should not seek the approval of the tribunal to issue a third party notice unless the information you need cannot be obtained any other way’.

38. HMRC’s guidance CH225450 says:

‘Where you intend seeking tribunal approval, consent will only be given if you have told the third party that the information or documents are required, and you have given them an opportunity to make representations’.

39. HMRC’s guidance CH225420 says:

‘The named person must be asked to approve the notice in the exact form in which it will be sent to the third party, except where the third party is a bank.

If you are asking for the person’s approval you should send the person a summary of the reasons why you need the information when you ask for their approval, see CH225430. There is not legal requirement to do this but the benefits for doing so are twofold:

· The person may be more amenable to giving their approval if they know why you need the information

· It will put you in a position to seek tribunal approval if the person’s approval is not forthcoming

…

Where the person does not approve the issue of the third party notice the third party will need to be given the opportunity to make representations that you will present to the tribunal for consideration’.

40. Section 9 of the Commissioners for Revenue and Customs Act 2005 says:

‘9 Ancillary powers

(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’.

41. We consider that all the guidance quoted above makes clear that in order for a tribunal to consider giving approval to issue a third party information notice, HMRC should inform the third party first that the information is required, and it can do this by way of issuing an informal request. The Finance Act 2018 also makes this clear. The Commissioners for Revenue and Customs Act 2005 also makes clear that HMRC’s discretion on how it carries out its functions, which includes how it manages its enquiries, is wide. From the evidence we have seen, the third party (former employer) was clear that it was voluntarily providing the information HMRC requested.

42. Whilst we acknowledge Mr C’s frustration that HMRC sought information from the former employer that had already been provided, the guidance also makes clear that HMRC can do this to independently verify the information it has received. We do not consider that this means HMRC believe the information provided by Mr C to be incorrect or fraudulent in any way. We have also not seen any evidence that HMRC have acted outside of its powers to corroborate the information that it had received.

43. Notwithstanding the fact that he had already provided the information, we also recognise that Mr A was concerned that HMRC was seeking Mr C’s personal information from his former employer, and this was outside the scope of its powers.

44. In its report, the Adjudicator upheld this element of the complaint and explained that, according to HMRC’s guidance, when seeking information specific to sick leave the case should be discussed with HMRC’s Central Policy team. However, it found no evidence that this had happened.

45. In its report to the Adjudicator’s Office, HMRC said:

‘We provided a detailed response on 16 January 2017 setting our why we required the information about Mr C’s sick leave from [former employer] and how our request complied with the requirements of Schedule 36 FA 2008 [Financial Act 2008]. Part of [Mr A’s Company] complaint was that the information we were seeking from the ex-employer comprised personal records concerning Mr C’s physical or mental wellbeing so we should not be asking for this. To do this would be in breach of Section 12 of the Police and Criminal Evidence Act 1984. However, we pointed out that Paragraph 19 Schedule 36 FA 2008 permitted the omission of information whose inclusion would make the original documents personal records so we could ask for information in the sick leave records that was not personal information. What we were seeking to corroborate here were the number of days Mr C was absent from work due to sick leave and not the reasons why’.

46. Section 12 of the Police and Criminal Evidence Act 1984 says:

‘12 Meaning of “personal records”

In this Part of this Act “personal records” means documentary and other records concerning an individual (whether living or dead) who can be identified from them and relating –

(a) to his physical or mental health;

(b) to spiritual counselling or assistance given or to be given to him; or

(c) to counselling or assistance given or to be given to him, for the purposes of welfare, by any voluntary organisation or by any individual who-

(i) by reason of his office or occupation has responsibilities for his personal welfare: or

(ii) by reason of an order of a court has responsibilities for his supervision’.

47. We have seen the third party information request that HMRC sent to the former employer, it says:

‘Please ensure that any records provided are not “Personal records” as defined by Section 12 of the Police and Criminal Evidence Act 1984.

Please provide the following information and documents:

1. Mr C’s leave records, paid and unpaid, which cover any leave taken in the period from and including 6 April 2013 to 5 April 2014. This includes but is not limited to:

· Annual leave

· Sick leave

· Parental leave

Please indicate if any leave was unpaid.

As described above, please ensure that no records are “personal records”. In practical terms, this means any information relating to Mr C’s physical or mental wellbeing, eg. the reason for a period of sick leave should be omitted from any records’.

48. HMRC’s guidance CH22180 says:

‘You cannot require a person to

· Produce personal records: or

· Provide personal information from personal records.

‘Personal records’ is more limited than it sounds. It is defined in Section 12 of the Police and Criminal Evidence Act 1984 and means records concerning any individual’s physical, mental, spiritual or personal welfare.

‘Personal records’ information in itself is not normally required to check a tax position. However, some medical professions keep mixed medical and financial records despite advice from their professional bodies to keep them separate.

Where ‘personal records’ contain mixed information you can require the person to provide the information that does not relate to any individual’s welfare.

This can be done by omitting the information that makes the document ‘personal records’. If you require a ‘personal records’ document to be produced or inspected, the welfare information can be covered up, or redacted, so that you cannot see it’.

49. The Adjudicator’s Office identified that HMRC had not followed its guidance when requesting personal information as it did not refer to its Central Policy team first. It recommended HMRC apologise to Mr C for this.

50. We are satisfied that HMRC has acted in line with our principles quoted in paragraph 28, and has followed its guidance and legislation, when requesting personal information via the third party information notice. This is because it made it clear to the former employer that any personal records should not be provided and also provided an explanation of what this means in practice. Furthermore, HMRC was only seeking to confirm the number of days of leave Mr C had taken in this tax year and not the reason why he was on sick leave. As such our decision is to not uphold this aspect of the complaint.

Length and proportionality of enquiry

51. Mr A complains that the enquiry was disproportionate, was poorly managed and took longer than was necessary. He says HMRC held all the information it required by September 2016, but the enquiry was not closed until 30 January 2018.

52. In its response dated 14 September 2018, HMRC said ‘Unfortunately, by its very nature, a compliance check can be intrusive and an unwelcome distraction for the taxpayer, sometimes over a lengthy period. However, our complaints policy must recognise our right to undertake a compliance check and to assure ourselves as to the completeness and accuracy of a customer’s tax affairs. On this basis, I believe our actions were appropriate in the circumstances and I am therefore unable to uphold your complaint’.

53. In its response dated 19 October 2018, HMRC said ‘Whilst I accept our enquiry was ongoing for some time it is important we ensure we examine the facts provided and verify the information if required. We try to deal with enquires as quickly as possible. I can see from the case papers that the officer has been mindful of the time in dealing with the enquiry shown by the fact that he requested a face-to-face meeting with your client’.

54. In its report the Adjudicator said ‘I acknowledge that the enquiry lasted just over two years, and that no new relevant information came to light after the first year. However, that does not mean that the enquiry was disproportionate. The time was consumed by HMRC’s efforts to secure independent confirmation, which ultimately they were unable to do. That being the case, the enquiry was closed’.

55. Our Principles of Good Administration say:

‘Public bodies should do what they say they are going to do. If they make a commitment to do something, they should keep to it, or explain why they cannot. They should meet their published service standards, or let customers know if they cannot.

Public bodies should behave helpfully, dealing with people promptly, within reasonable timescales and within any published time limits. They should tell people if things take longer than the public body has stated, or than people can reasonably expect them to take’.

56. As explained already in this report, we have seen no evidence that HMRC have acted outside of its powers throughout its enquiry. The LSS and Charter also do not provide timescales for how long an enquiry can last. However, we have looked at the timeline of the enquiry provided by HMRC. Our initial view was that during the first year of the enquiry there were no significant delays, but we did find gaps of two and three months where no action appeared to take place between October 2016 and January 2018. However, as part of its comments on our provisional report, HMRC provided new evidence which we have considered further.

57. HMRC told us that Mr A’s company provided a significant amount of information for it to consider in its letters dated 3 and 10 October 2016. HMRC told us that in view of its guidance CH225150 which says, ‘any third party notice is likely to impose a burden on the recipient in terms of time and costs. You should consider carefully what information you need and go no wider with your request’. The caseworker would have likely discussed the case with either their manager or a technical colleague at this time, though HMRC could not provide any evidence that this happened.

58. Where we found gaps between April and June 2017, HMRC also provided further evidence of its correspondence with Mr A’s company during this time. We found a further gap between October 2017 and the closure notice being issued in January 2018. HMRC told us that it received a letter dated 27 October 2017 from Mr A’s company on 7 November 2017. It said that its caseworker needed to thoroughly review the case as a whole, which included the period of the enquiry prior to its involvement, before reaching a decision to issue a closure notice.

59. We accept that as the enquiry was allocated to a new caseworker in April 2017, and with the information it received from the former employer and Mr A’s company in October 2017, the new caseworker needed time to consider all the information HMRC had acquired throughout the enquiry. As such we do not consider the time taken to do this, from 7 November 2017 to 30 January 2018, was unreasonable. That said, we do acknowledge that this delay would have been frustrating for Mr C.

60. However, we are not persuaded that the information Mr A’s company provided in October 2016 would have taken such a significant time to consider, even if the caseworker sought advice from their manager or technical colleague. However, we do not consider in the overall timeline of events that this fell so far short of our principles that it is maladministration. As such, and on balance of all the evidence we have seen, we do not find that there are any unreasonable delays which prevented the enquiry being closed sooner than it did. It is for this reason that our decision is to not uphold this aspect of the complaint.

1. We found no evidence that HMRC breached its Litigation and Settlement Strategy (LSS) or its Charter during the enquiry into Mr C’s 2013-14 self-assessment tax return. Therefore, our decision is to not uphold this aspect of the complaint.

2. We found no evidence that the informal third-party request was inappropriate or in breach of HMRC’s published processes and safeguards. Therefore, our decision is to not uphold this aspect of the complaint.

3. We did not find that the enquiry into the self-assessment tax return was disproportionate, or that there were any unreasonable delays during the enquiry. Therefore, our decision is to not uphold this aspect of the complaint. However, we do acknowledge that it did take a long time to conclude the enquiry and that this caused distress to Mr C.