The Freedom of Information Act – A Right without Bite?

The Freedom of Information Act – A Right without Bite?

Tue 03 Dec 2019

It’s nearly 20 years since the Freedom of Information Act 2000 (FOIA) was created. The Act was designed to create a public right of access to previously-inaccessible information held by public authorities but over the years concerns have been raised that FOIA is effectively “toothless” as the legislation contains numerous exemptions which allow public authorities to refrain from disclosing information.

In addition to the exemptions, public authorities can also simply bypass any requests if they claim that the costs of complying would be more than £600. The sum of £600 was never a large amount but the passage of time has eroded its value even further with the result that it appears that many public authorities are increasingly citing costs to opt out from ever complying with a request.

It is ironic that at a time when HMRC is demanding that individuals, partnerships and companies be more ‘tax transparent’ it seems that as a whole HMRC is becoming less transparent – in regard to its own processes, procedures and guidance – in that it has a tendency to cite costs (as opposed to exemptions) in order to reject an FOIA request. An example of this relates to an FOI request made in respect of the tax investigations it conducts under the Cross Tax Enquiry (CTE) regime.

It appears HMRC first started to undertake CTEs following the enactment of Schedule 36 Finance Act 2008 which updated HMRC’s Information and Inspection powers. The CTE programme was devised with the intention of conducting and coordinating enquiries into an entity’s tax return, VAT returns and Employers’ payroll on the premise that a joined-up enquiry into all three would be less costly and resource intensive for taxpayers. However, there is a concern within the accounting profession that over the years CTEs have morphed into wide ranging intrusive investigations into owner managed businesses that are largely of an exploratory nature. For ‘exploratory’ read ‘fishing expeditions’.

On challenge, the HMRC officers leading CTEs have stated that their investigations are intelligence led and they are enquiring into suspected tax evasion. Unfortunately, the basis for these suspicions are only rarely explained (and very rarely justified) with the result that the HMRC approach often comes across as unduly aggressive. The tax case of Stirling Jewellers (Dudley) Limited v The Commissioners for Her Majesty’s Revenue and Customs [2019] UKFTT 44 (TC) is a primary example of the aggressive approach that can often be displayed in a CTE. The HMRC officer conducting the CTE alleged that the director had deliberately evaded tax on sales of nearly £49M but was not able to show or suggest what the director had actually done with the funds. Fortunately for the taxpayer, the Tribunal was not convinced by HMRC’s arguments and quashed the assessments (including penalties issued on the basis of deliberate behaviour).

A common concern expressed by the accountancy profession is that CTE enquiries are not being conducted in accordance with HMRC’s own guidance. For example, the opening letters issued at commencement of a CTE invariably request:

a. A copy of the Accountant’s linking or working papers,

b. A schedule supporting the figures for all the principal balance sheet items (including aged debtors and creditors), and

c. The directors’ personal bank account statements.

These are all contrary to HMRC’s own guidance contained within its Compliance Handbook and Enquiry Manual, which advises that such information should not be sought as a matter of routine – and, indeed, that requesting sight of a director’s personal bank statements in the context of a company enquiry will constitute a breach of the Director’s right to privacy under Article 8 of the Human Rights Act unless the Inspector has actually established that the business profits have been understated. In efforts to determine (a) whether breaches of its own guidance were common to every CTE and (b) the number of companies and directors who had been subjected to this process, a FOIA request was submitted to HMRC.

HMRC’s response was to deny the request on the basis that the cost limit would be exceeded as the information was not held centrally (HMRC claimed nearly 400 files would need to be manually reviewed). This was surprising as HMRC had introduced a case and document management system called Caseflow some years ago with the aim that all of its investigations would be managed and results recorded centrally.

In response to a challenge as to why this information was not available, HMRC stated;

“…While all data is mandatorily captured on an HMRC system it is not all recorded on the Caseflow system. Where data is captured can depend on a number of factors, for example, the source of an enquiry, the eventual outcomes and any links to other connected parties”

HMRC use several different systems to record enquiry details so data is not all captured in a standard format which would otherwise enable straightforward automated interrogation to be carried out to answer your request.”

HMRC’s responses suggests that Caseflow is either not working in the way that HMRC intended or that officers are not populating it with the data (including all documents and correspondence) that they should. Either explanation is disappointing given the costs of the software and its roll-out costs.

In efforts to assist HMRC with the costs of compiling the response, the FOI request was pared down from asking for data for five years to just data for the latest year. Even then, HMRC declined the request citing cost grounds, saying that even one year’s analysis would cost more than £600.

In situations such as this, where HMRC has followed the process required under the FOIA legislation, the only recourse for a person who wished to pursue the matter further would be to submit a legal challenge to the decision. However, such a challenge can entail significant costs, with the result that it would only be the rare and very wealthy person who might take it further. The result is that such responses leave a person with a nasty taste in the mouth – and the not unnatural lingering suspicion that perhaps costs are being cited as a means to enable HMRC and other public authorities to refrain from providing information that might otherwise embarrass them. Perhaps the answer is that, if Freedom of Information is to have any real meaning, the UK Government now needs to reconsider the cost limit so that public authorities cannot use the achingly low cost limit as an excuse for not providing information requested under the FOIA.

A blog co-authored by Sajid Ghufoor and Tony Monger.