HMRC fails to reel in millionaire in fishing expedition

<p>Some taxpayers will be familiar with the anxiety that can arise when HM Revenue & Customs (HMRC) opens an investigation into their tax affairs. The natural temptation will often be to cooperate as much as possible and provide any information requested in the hope of a swift resolution.</p><p>However, the recent case of <a href="/content/dam/media/judgmentfiles/j12440/tc-2008487.pdf">David Hackmey vs Commissioners for HMRC</a>, involving a tax investigation into the son of the multi-millionaire Joseph Hackmey, highlights that HMRC does not always get it right. Sometimes, HMRC’s attempts to obtain information go too far and amount to a fishing expedition for information, asking the taxpayer to provide the bait that might hook themselves.</p><p>The facts of the case highlight there were legitimate grounds for HMRC to initially open an investigation.</p><p>David Hackmey (‘Mr Hackmey’) moved to the UK in 2007 and was non-UK domiciled, electing to be taxed on the remittance basis of taxation in relation to his overseas income and gains.</p><p>This was not an issue for HMRC, but it later had cause for suspicion that there was potentially unpaid tax at stake when the costs of Mr Hackmey’s lifestyle appeared to materially exceed his taxable income. For example, for a number of years Mr Hackmey paid the £30,000 remittance basis charge but no other taxable income or gains were shown on the relevant tax returns. In the same period, he acquired a home in the UK worth £9.7 million and paid Stamp Duty Land Tax of £679,000.</p><p>Whilst the initial tax investigation was prompted by the suspicion of tax fraud as a result of this disparity between tax paid and living costs, the subsequent information provided by Mr Hackmey made it clear his lifestyle was largely funded by substantial gifts from his father.</p><p>Nevertheless, HMRC wanted to dig further into Mr Hackmey’s tax affairs and issued an Information Notice, requesting further details for years which would typically be out-of-time to obtain. In this case, in order to obtain the information requested, HMRC needed to show it was “reasonably required” for the purpose of checking Mr Hackmey’s tax position. It was also important to show the HMRC officer “has reason to suspect” tax has been underpaid. The burden of proof sits on HMRC’s shoulders.</p><p>The court found that once the details of the gifts were ascertained, the focus of the investigation shifted into a broader investigation of Mr Hackmey’s affairs and wider business and family structures. It was acknowledged that, for a large part of the information requested, HMRC’s requests for additional information were not legitimate.</p><p>Whilst HMRC might be interested to see additional information and may ask for it as a matter of course in similar tax investigations, there needed to be evidence to support its position that it had reason to suspect tax had been under-assessed. As the judge noted, “what HMRC have largely failed to do…is to “join the dots” and link the documents and information they require to their reasonable suspicions. I can only speculate whether the outcome of this appeal would have been different if HMRC had prepared their case with more care, or had varied or replaced the Information Notice to reflect the changes focus of their investigations.” This highlights the importance of receiving professional advice when undergoing tax investigations, or you may risk giving away more information than is needed.</p>