Opinion of financial institutions – a threat to the right to privacy?

In a remarkable move, the 2021 finance law strengthened the powers of HMRC to request information from financial institutions (FIs) without the need to seek client approval.

The information will be used either to verify the taxpayer’s tax situation or to collect debts.

Context of the new power

The main reason given for this new power is to allow HMRC to reduce the time it takes to comply with financial information requests from other countries.

While the UK was at the forefront of the G20 initiative to improve international cooperation and assistance in tax matters, the UK fell short of the international standard for information exchange .

HMRC believes the new legislation will mean the UK will be able to cut the time it takes to provide requested information in half and meet the international standard of six months.

More than 100 countries currently participate in the OECD model for the automatic exchange of financial information.

This model is called Common Reporting Standard (CRS) and requires basic financial account details each year for the country in which the account holder is tax resident.

Communication between jurisdictions is now essential to prevent tax evasion and harmful tax evasion. It’s understandable that HMRC wants to speed up the process.

The strengthened legislation will also allow HMRC to request information for UK taxpayers. Although HMRC already has the authority to request information from third parties, they normally must first seek approval from the taxpayer or tax court.

HMRC now has the power to bypass the taxpayer and avoid having to convince the tax court that the financial information is reasonably required. This new power only applies to financial institutions as prescribed by CRS and not to all third parties who may provide fiduciary obligations or services, such as trusts.

There are safeguards to ensure that FINs are only used under the right circumstances. First, a senior manager must authorize the notice and be confident that it would not be unduly onerous for the FI to comply with the notice.

In addition, that the information requested is reasonably necessary to verify the taxpayer’s tax situation or to collect a tax debt.

The important problem here is that neither the FI nor the taxpayer can appeal the opinion. While judicial review may be available, it is both expensive and time consuming and potentially only accessible to the wealthy.

In most cases, the taxpayer will receive a copy of the FIN, along with information on why this information is required.

However, when it is considered that this would be detrimental to the collection or assessment of the tax, HMRC may apply to the tax court to authorize the notice and there would be no obligation to notify the taxpayer.

HMRC may request that the financial institution not notify its client of the notice.

Normal restrictions apply to the information that may be requested; it must be in the possession of the financial institution. This raises several issues with international financial institutions.

If the client has accounts in multiple jurisdictions, could overseas financial information be requested from the UK entity?

There are also other restrictions on what can be requested. For example, if the information is privileged. While there is no right of appeal against FIN, it is important that anyone notified that HMRC has written to their bank seek specialist advice to ensure that the guarantees described below. above have not been violated in any way.

The House of Lords’ sub-committee on economic affairs has expressed concerns about “the removal of important taxpayer guarantees for information requests” and the rationale given for the new powers.

There are fears that the balance of power has shifted too much in HMRC’s favor, and it remains to be seen whether the new FIN power will be used in a proportionate and appropriate manner.

One of the concerns is that HMRC’s perspective on what is reasonably required may differ significantly for the taxpayer and their advisor. We all have the right to privacy and expect that we will not suffer from unnecessary interference from the state.

Although HMRC is responsible for tax collection and oversight of the system, we are rapidly approaching the situation where all of our financial information will be made available to tax authorities – not just in the UK but overseas.

It is crucial that the new powers of HMRC are managed and monitored so that HMRC does not overstep the norm and violate our right to privacy.

John Hood is a tax partner with Moore Kingston Smith


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