Is HMRC getting more creative with Schedule 36 notices?

As part of the Finance Act 2008, Schedule 36 grants HMRC the authority to issue an ‘information notice’ to taxpayers, enabling them to request documents and data necessary to verify a taxpayer’s tax position. While the issuance of these notices has long been part of HMRC’s arsenal, there has been an increasing number of instances where Schedule 36 powers are being used in unexpected ways. In this article, James Cordiner, Tax Investigations Manager at Markel Tax, looks at HMRC’s scope of powers, the consequences of non-compliance, and the strategies accountants can employ to protect their clients.

Understanding Schedule 36

At its core, Schedule 36 gives HMRC the power to ensure accurate tax reporting and compliance. Under this provision, HMRC can issue an information notice obliging a taxpayer, or a third party, to provide documents or data relevant to verifying the tax position of the taxpayer. These powers are typically used during routine tax checks but can also be applied in more targeted investigations.

Although the issuance of a Schedule 36 information notice is a formal request, it would be normal practice for HMRC to first make informal enquiries. If the requested information is not provided promptly or in full, HMRC may then follow up with a formal Schedule 36 request. This makes the process a critical phase of any ongoing tax enquiry, as failure to comply can result in penalties, including daily fines for continued non-compliance.

HMRC’s evolving use of Schedule 36

In recent years, Markel Tax has observed a shift in how HMRC uses Schedule 36. For example, there has been an increasing use of the notice to investigate tax years where the statutory enquiry window has closed. While HMRC’s traditional powers are bound by time limitations, Schedule 36 provides an avenue for HMRC to extend their reach. This is permissible if HMRC has “reason to suspect” that a taxpayer has understated their tax liability.

This trend is especially important for accountants to monitor. In one particularly extreme case, HMRC used their Schedule 36 powers to demand information from as long ago as 20 years. While such cases are not the norm, they highlight the far-reaching implications of Schedule 36 and demonstrate HMRC’s growing focus on past tax years and how HMRC may still seek information for extended periods if they have grounds for suspicion of a loss of tax.

We are also seeing increased usage is its application to future tax years. HMRC can request information that is relevant not only to current and past tax years but also to future tax positions. HMRC has been using these powers to investigate matters related to pension lifetime allowance protection, essentially seeking clarification of pension contributions made by the taxpayer or their employer that could mean any fixed protection of the lifetime allowance has been lost. The lifetime allowance was abolished with effect from 6 April 2024, however, this action by HMRC demonstrates preventative action by HMRC to collect the right tax in future years.

Consequences of non-compliance

Failure to respond to a Schedule 36 information notice can result in significant penalties. If a taxpayer fails to provide the requested information by the deadline, they can be fined £300 initially, followed by daily penalties of up to £60 for each day the failure continues. Additional increased daily penalties can also be imposed of up to £1,000 per day for continued non-compliance, if approved by the tribunal. For more serious non-compliance, additional penalties of up to £3,000 can be imposed if HMRC determines that the taxpayer is deliberately withholding information.

This level of penalty emphasises the importance of clear and timely communication with HMRC where these notices are concerned. If meeting an imposed deadline is not feasible, contact HMRC and request an extension. This type of proactive engagement can often prevent escalation and additional penalties.

There is a right of appeal against default and inaccuracy penalties if a reasonable excuse exists. Any appeal must be made to HMRC within 30 days of receipt of the penalty notice.

Appeal rights and limitations

While taxpayers have the right to appeal a Schedule 36 information notice, there are certain restrictions. For example, statutory records are not subject to appeal, nor are notices approved by a tax tribunal. This means that in some cases, the scope for challenging an information notice will be limited for customers.

Schedule 36 does, however, contains specific limitations on HMRC’s powers. One is that an information notice cannot compel a taxpayer to produce documents that originated more than six years before the notice was issued, unless the notice has been approved by an authorised officer or tribunal. This limitation can offer some protection, but it is vital to review the details of the notice to ensure it complies with these statutory restrictions.

Tips for dealing with a Schedule 36 notice

Given the increasing scope and frequency of Schedule 36 notices, there are practical steps accountants can take to ensure they are protecting their clients’ interests:

1. Verify the notice: Always check the validity of the Schedule 36 information notice. Is it relevant to the tax years in question? Does it comply with statutory limitations, such as the six-year rule? Ensuring legitimacy is the first step in addressing HMRC’s request.
2. Engage proactively: If there are concerns about meeting HMRC’s deadlines, engage with them early in the process. Requesting an extension or negotiating the scope of the information required can help prevent penalties.
3. Document everything: Keep detailed records of all interactions with HMRC, including informal requests for information. This will help protect your clients in the event of future disputes or penalty assessments.
4. Prepare for longer timeframes: As HMRC increasingly uses its powers to investigate past tax years, accountants must be prepared for requests covering longer periods than previously anticipated. Understanding the broader scope of these investigations can help to anticipate potential risks.
5. Stay informed: With HMRC’s use of Schedule 36 continuing to evolve, it is important for accountants to stay informed about changes in its application. 

Schedule 36 is a powerful tool in HMRC’s tax compliance arsenal. As accountants, understanding its scope, limitations, and how to manage an information notice can make a significant difference when looking to protect clients from potential risks and penalties.