HMRC’s informal investigation powers confirmed by the Court of Appeal

By Jack Prytherch, Emily Au


In R (JJ Management Consulting LLP and others) v Revenue and Customs Commissioners [2020] EWCA CIV 784, the Court of Appeal confirmed that HMRC are entitled to conduct an informal investigation into a taxpayer's affairs outside of their formal enquiry powers.

What happened in this case?

In June 2016, HMRC began an extensive investigation into the tax returns of an individual UK taxpayer and five companies that he used to operate a chain of supermarkets in Spain and Portugal. The investigation was not pursued using any of HMRC’s statutory powers of enquiry (i.e., under section 9A of the Taxes Management Act 1970, which provides that HMRC must give formal notice of their intention to open an enquiry).  HMRC initially made informal requests for information, only later issuing information notices under Schedule 36 to the Finance Act 2008 (both to the taxpayer and to third parties). 

Believing that the enquiries had become increasingly invasive, the individual and companies brought a judicial review challenge in the High Court, asserting that HMRC’s decision to investigate without opening a formal enquiry was ultra vires.  

The High Court rejected the judicial review on the basis that informal investigations into tax affairs are consistent with HMRC’s ancillary powers under section 9(1) of the Commissioners for Revenue and Customs Act 2005 (“CRCA 2005”), which allow HMRC to do anything which they think is necessary, expedient, incidental or conducive for the exercise of their statutory functions. Further, the judge determined that judicial review over a decision to investigate will only be justified in wholly exceptional cases. 

What happened at the Court of Appeal?

The primary ground of appeal put forward by the claimants in the Court of Appeal was that the High Court had erred in deciding that CRCA 2005 empowered HMRC to conduct informal investigations. The Court of Appeal considered that HMRC require wide managerial discretion to carry out their tax collecting function. In this case, the Court did not find that it was “impermissible or unreasonable” to hold the view that conducting informal investigations was expedient and conducive to HMRC's functions. 

The claimants also disputed the High Court’s application of a test of exceptional circumstances in relation to the availability of judicial review over such powers. The Court of Appeal affirmed this threshold and highlighted the reticence of the courts to interfere with HMRC’s civil decision-making processes, given the need for separation of powers. On that basis, the Court of Appeal agreed with the High Court that such high bar had not been met in this case. 

What are the implications for taxpayers?

One of the advantages to taxpayers of being within a formal enquiry is that they will have access to certain statutory protections, not least the right to ask the First-tier Tribunal (Tax Chamber) to close the enquiry altogether.  As a result of the Court of Appeal's decision, it is foreseeable that HMRC will begin to conduct informal investigations with new-found confidence (knowing that the bar for successful judicial review in such cases has been set very high).

By virtue of their nature, informal investigations and requests for information do not require taxpayers to disclose information as a matter of law.  The decision to do so will therefore be voluntary and taxpayers should be aware that any information disclosed could be used against them.  However, the level of penalties that may be imposed with any subsequent assessment can also be heavily affected by the level of cooperation afforded to HMRC in their enquiries.  Taxpayers will always, therefore, have to tread a fine line between cooperation and the need to protect their position. 

Simply refusing to provide any information would be inadvisable – taxpayers determined to be uncooperative should expect HMRC to issue formal information notices fairly swiftly in such circumstances.  However, the burden of proof is on HMRC and HMRC's formal information powers are not unlimited – for example, in a formal enquiry, HMRC do not have the right to interview employees and taxpayers are not required to provide information subject to legal professional privilege, not "reasonably required" or outside their possession/power (e.g., if held by a non-UK entity).  Taxpayers who are currently under, or are facing, formal or informal enquiries from HMRC should always seek immediate advice on the appropriate action to take. 

If you would like to discuss any of the above, or for further information on how Bird & Bird can assist, please contact a member of our specialist Tax Disputes and Investigations team.