This month’s Chartered Accountants Tax Case Digest takes a look at a case where HMRC were seeking to issue several Schedule 36 information notices to the auditors of a company seeking access to certain working papers as a result of an unqualified audit opinion.

HMRC was concerned that the taxpayers’ corporation tax liability depended on figures from their accounts and so, if figures in the accounts were incorrect, the taxpayers’ may have understated their corporation tax liability for the relevant period.

The request for an information notice in this case clearly shows HMRC’s desire to seek information. However the Tribunal’s refusal to approve enforces the protection available to company auditors in circumstances where the auditor is also the company’s tax agent.

In essence, practitioners should always consider what information HMRC are entitled to and not assume they are entitled to what is asked for.

Background

A number of UK resident companies (the taxpayers) are members of a group of companies. The statutory auditor of those companies for a particular accounting period delivered a qualified audit opinion stating:-

1. that it could not be certain of the appropriate amount to include in the taxpayers’ statutory accounts in respect of intra-group debtor balances because of the complex nature of the related party structure within which the taxpayers’ operated; and
2. (for certain of the taxpayers) it could not be certain that turnover had been correctly stated in the period or in figures for the previous accounting period.

The taxpayers’ auditor also prepares and submits the taxpayers’ corporation tax returns to HMRC as their agent. The auditor’s written submissions confirmed this position (although the corporation tax returns were prepared by a different team acting behind a “Chinese wall”).

HMRC were concerned by the qualified audit opinion issued. Their reasoning was that the taxpayers’ corporation tax liability depended on figures from their accounts and so, if figures in the accounts were incorrect, their corporation tax liability for the relevant accounting period may have been understated.

As a result, HMRC applied to the Tribunal on a “without notice” basis under paragraph 3 of Schedule 36 to authorise the issue of an information notice requiring the auditor to provide the following:

1. (for each of the taxpayers), information on the checks that it tried to carry out to verify intra-group debtor balances and copies of its working papers relating to those checks; and
2. (for those taxpayers whose turnover figures had been qualified), information on the checks that the auditor performed to verify turnover and copies of relevant working papers.

The auditor owes a duty of confidentiality to the taxpayers as clients and therefore, before providing the information requested, wanted to be sure that it truly is obliged to deliver that information and hence made representations resisting HMRC’s request.

The auditor of the company made it clear that it was willing to comply with any lawful requirement to provide documents or information under Schedule 36. Its observations (that paragraph 24 of Schedule 36 means that it is not obliged to provide the information and documents requested) were not made out of any desire to frustrate HMRC’s enquiries.

Decision

The case hinged on whether or not the Tribunal would approve an information notice under paragraph 3 of Schedule 36 of Finance Act 2008. The decision followed a hearing that was held in private. However, since it raised a point of general application, the case decision was published on an anonymised basis.

HMRC’s power to require documents and information comes from paragraph 2 of Schedule 36. However, HMRC do not have an unfettered power to obtain documents or information from third parties. Unless the taxpayer whose position is being checked agrees, HMRC need the approval of the Tribunal before they can issue a third party notice. In addition, paragraphs 24–26 of Schedule 36 provide a level of exclusion and protection for the working papers of auditors and tax advisers.

In their first application to the Tribunal, HMRC made no mention at all of the provisions of paragraph 24 or paragraph 26 of Schedule 36 (which provide exclusions from auditors’ obligations to deliver documents). When HMRC make a “without notice” application such as this, they have a duty of candour to the Tribunal and should point out all relevant factors including factors that might incline the Tribunal not to approve the notice.

HMRC argued that the auditor has “delivered” the audited accounts to HMRC in its capacity as tax accountant and therefore can legitimately be asked relevant questions (and required to produce relevant documents) to “explain” those audited accounts. For the reasons set out below, the Tribunal did not agree with this interpretation.

First, HMRC’s analysis involved giving an unduly literal interpretation to the concept of “delivering” the audited accounts. In a narrow sense, the auditor has “delivered” those accounts to HMRC as it has sent them to HMRC to accompany the corporation tax returns.

However, paragraph 26 of TMA 1970 seeks to identify the returns or statements that a tax accountant is making, not documents that it is required to send together with those returns or statements. On that interpretation, the corporation tax return is prepared or “delivered” as tax accountant. The same is true of any schedules to the return or any statement that reconciles the calculation of taxable profit (in the tax return) with accounting profit (in the audited accounts).

The audited accounts themselves are not prepared for HMRC (they consist of a report to the company’s shareholders on accounts that the directors have prepared) and while they are certainly “sent to” HMRC, they are not “delivered to” HMRC in the requisite sense.

The clear emphasis is on documents that the tax accountant, using its professional skill as a tax accountant, has helped the taxpayer to prepare or deliver. The conclusion that any document that is merely sent to HMRC falls within its scope is inconsistent with this reading of paragraph 26. A client does not need a tax accountant’s professional assistance merely to send documents to HMRC; it needs help with the substantive preparation of the content of documents. Once that is appreciated, it becomes clear that the focus is on documents which a person has as tax accountant, had some role in preparing or filing.

The example of the documents and information that HMRC are requesting focuses quite clearly on documents and information relating to the statutory audit. The request is not for documents and information that the auditor has in its capacity as tax accountant.

If the taxpayers did not use their auditor to prepare their corporation tax returns, HMRC would not be able to obtain the documents and information requested from the auditor as paragraph 24 would clearly apply and protect that information and documents from disclosure.

Therefore HMRC is not entitled to disclosure of the documents and information simply because the auditor also happens to act as the taxpayers’ agent for the preparation and submission of corporation tax returns.

The Tribunal’s overall conclusion, therefore, was that the requirement of paragraph 3(3)(b) of Schedule 36 was not met and the information notices requested were not approved.

There is no right of appeal to the Upper Tribunal against this decision though HMRC are able to seek judicial review of it.

The full judgment in this case is available from: http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j10685/TC06710.pdf