Scope of Schedule 36 Notice reduced by FTT

In Metropolitan International Schools Ltd v HMRC [2021] TC08322, the First Tier Tribunal (FTT) reduced the scope of a widely drafted Schedule 36 Information Notice. Items such as 'all computer records' were not reasonably required as there was no ground to believe that record-keeping was inaccurate. Items such as board minutes and marketing material had no bearing on tax return entries. Using its powers, the FTT re-made the Notice.

• HMRC identified that there was a risk that Metropolitan International School Ltd (MIS) had underpaid tax as:
  • Royalties were being paid to an overseas company that bore no relationship to the turnover of MIS.
  • There were unusual financial arrangements whereby interest-free loans were made to MIS students with the interest being paid by MIS. The loans were made from a non-UK company that was under common ownership.
  • An officer of MIS was described as a consultant and received fees in a personal capacity rather than as an employee.
• Enquiries were opened into the Corporate Tax return for the year ended 31 March 2015.
• Schedule 36 Information Notices were then raised by HMRC and these covered information in respect of Corporation Tax, VAT and PAYE.
• The taxpayer appealed against the scale and relevance of the information requested in the Schedule 36 notice.

The FTT found that:

• Information covered by a Schedule 36 Notice must be reasonably required to check the tax position of MIS irrespective of whether that information was a statutory or non-statutory record.
• • There is no appeal against the request for information that represents a statutory record if it is reasonably required to check a tax position. Whether the information was a statutory record could be challenged.
  • The definition of statutory record differed depending on the tax and whether an enquiry had been raised into the relevant returns.
• To be reasonably required to check the tax position the information would need to be:
  • Relevant to the issues which were under investigation.
  • Documents or supporting records are used to complete the accounts and tax return.
  • Explanation of items included or omitted from the accounts and return. This specifically included accounting opinions covering the exclusion of deferred income, details of any transfer pricing policy, the consultancy contract for the director and sample loan agreements.
• The Notice requested some information that was not reasonably required to check the company's tax position and did not need to be provided:
  • Board minutes which discussed the strategic direction of the company.
  • Items that were already in HMRC's possession.
  • Marketing material for the company.
  • All loan documents between MIS and its students; a sample was sufficient.
  • All computer records; there was no ground to believe the records were inaccurate.

The FTT remade the Notice to exclude the items that were not reasonably required.

Useful guides on this topic

Schedule 36 information notices
What is a Schedule 36 Information Notice? When can HMRC issue one? What rights does the taxpayer have when an information notice is issued?

Penalties: Schedule 36 information notices
This is a freeview 'At a glance' guide to penalties and Information Notices.

External links

Metropolitan International Schools Ltd v HMRC [2021] TC08322