SA ENQUIRIES 5
SECTION 19A & PARA 27 NOTICES
26.01.06

Section 19A of the Taxes Management Act 1970 is a fairly narrow information power. As such the issue of a section 19A notice is unlikely to be a disaster provided of course that it is appealed against within the 30 day time limit.

Information falls within section 19A only if it meets all of three conditions.

1. It must be required in connection with the Officer's enquiry into the specific tax return to which it relates.
2. It must be reasonably required for the purpose of checking that the return is not incorrect or incomplete.
3. It must be in the possession or power of the taxpayer.

As Parliament has introduced section 19A as the Officer's primary tool to obtain information from the taxpayer, it surely follows that Parliament felt that information falling within all three of these heads is all that HMRC need to carry out the enquiry into a tax return that Parliament envisaged. So if the Officer is seeking other information you ought to be able to persuade the General Commissioners to set the notice aside. Of course if the information falls squarely within the above three heads you will lose before the Commissioners, so it is pointless not to provide the information.

I'll take the three heads in turn. What is the Officer enquiring into? Whether and the extent to which, the return is incorrect or incomplete (s 19A(2)). If the Officer is enquiring into a 2004/05 return, information in relation to 2003/04 or 2005/06 is unlikely to be required in connection with his enquiry. It may enable him better to put into perspective something that happened in 2004/05, but while that may be a good reason for you to decide to volunteer the information, it is unlikely to make it relevant to the enquiry. Similarly information about income of the client's spouse or children is not relevant to the enquiry - although again there my sometimes be merit in volunteering it, particularly if the reality is that it is the spouse's income that supports the family.

As the return is a return of income, questions about assets and liabilities are unlikely to be relevant to the return. What have they to do with its correctness or completeness? If the client is self-employed drawings are unlikely to have any bearing on the correctness or completeness of the return. It is surely a private matter for the client what he does with his income. What he does with it has no relevance whatsoever to the quantification of the income.

What is "reasonably required"? This is an objective test not a subjective one. What the man on the Clapham omnibus would need if he wanted to enquire into the return, not what the particular Officer concerned think that he himself needs. Or to put it another way, it is what the Commissioners think is reasonable. It is not necessary for you to convince the Commissioner that what the Officer is seeking is unreasonable. They are not entitled to start from the basis that his request is reasonable. They have to decide for themselves, no doubt having listened equally to what you both have to say but with no preconception that because HMRC have asked for information it is likely to fall within head (2) above. Nor is it a question of whether or not the Officer is acting reasonably; it is simply whether or not the information he is seeking is reasonably required for anyone to carry out an enquiry into the return.

And why has the draftsman used the double negative, that the return is not incorrect or incomplete? Tax draftsmen do not normally use two words when one will do - or at least they did not do so at the time the legislation was enacted. Accordingly "not incorrect" is probably intended to be a different test to correct. Sometimes there may be two equally acceptable answers, e.g. on a valuation issue, so adopting one will be not incorrect even though the other might be more incorrect. But the double negative might be equally apt to cover other points. If the return includes estimates you cannot show that these estimates are "correct" but could well be able to demonstrate that they are "not incorrect". It might even be arguable that as accounts must give a true and fair view (a concept that embraces the principle of materiality) there is no need to provide information about something that is immaterial, as even if it is wrong the profit figure will still be "not incorrect".

Finally possession or power. Although this is a common expression there is little case law on it but what there is indicates that it is a question of fact. It is though unclear whether the phrase refers to actual possession or legal possession or to a legal ability to obtain documents or a de facto ability to do so. (see Meditor Capital Management Ltd v Feighan SpC 409). What is clear is that normally a taxpayer has no power to obtain documents belonging to third parties. In particular your working papers are your property not the client's (although there may be some doubt about journal entries in relation to a company) and they are accordingly not within the client's power. The main area of doubt seems to be when a parent company has power over documents of its subsidiary. In B v B, a matrimonial case, the court held that the controlling director of a company had power over company documents, although that was in a very different context and it seems questionable whether it is applicable to tax.

There are a number of other points to bear in mind in relation to section 19A. There is no right of appeal against the Commissioners' decision. On first sight this looks odd but the reason is clear, namely that what they have to decide was regarded by Parliament as purely a question of fact and the Commissioners are always the final arbiters of questions of fact.

An appeal against a section 19A notice in effect puts the notice into suspension until the Commissioners have dealt with the appeal. If they uphold the notice the taxpayer then has a further 30 days within which to comply with it. A side effect of this is, of course, that if you need more than 30 days to comply with a notice you ought to appeal against it even if you intend to comply with it. This will avoid penalties for non-compliance if you are able to provide the information before the date of the Commissioners hearing - and as stated in an earlier article in my experience Commissioners hearings on section 19A notices are extremely rare; in most cases the Officer will make do without the information.

A particular area in relation to corporate returns is the extent, if any, to which information relating to the personal affairs of directors can be reasonably required in relation to an enquiry into the company's return.

HMRC argue that if they are checking that income has not been diverted from a close company they need to consider where it has been diverted to, and that it most likely to be the directors, so they need information about the directors' personal income and perhaps to see the director's bank statement. They admit however that in most cases that they may have difficulty in bringing these within the scope of paragraph 27 and they tell their staff not to open an enquiry on the directors in order to do so unless there is something in a director's return itself that warrants an enquiry. If a paragraph 27 notice is issued for such information consideration needs to be given as to whether to oppose it or whether volunteering the information might be in everyone's best interests if it is likely to facilitate a closure of the company enquiry.

See also:
SA Enquiries 1 - Receipt on the Opening Letter
SA Enquiries 2 - Handling Correspondence
SA Enquiries 3 - Records
SA Enquiries 4 - Meetings
SA Enquiries 6 - Going to the General Commissioners