DPT was introduced by Part 3 of the Finance Act 2015, with effect from 1 April 2015. Its purpose was to counter measures taken by multinational groups to ‘divert’ profits that would otherwise be subject to Corporation Tax (“CT”). DPT was designed to encourage companies to restate profits on an ‘arm’s length’ basis and pay additional CT (or face a DPT charge instead—at a higher punitive rate).
There are two ‘gateways’ to the DPT charge—(1) where entities / transactions lack economic substance and are used to exploit an ‘effective tax mismatch outcome’ (ss.80–81 FA 2015); and (2) arrangements to avoid a UK permanent establishment (s.86 FA 2015). In March 2026, HMRC reported that DPT had helped HMRC to settle over 250 investigations for additional CT between April 2015 and March 2025 and that more than £10.5 billion had been secured since DPT's introduction.
Repeal and replacement of the DPT regime
S.46 of and Schedule 5 to the Finance Act 2026 repealed DPT and replaced it with the Unassessed Transfer Pricing Profits (“UTPP”) rules (inserted as Part 4A of TIOPA 2010) for accounting periods beginning on or after 1 January 2026. Under these new rules, HMRC may assess unassessed transfer pricing profits to CT at a punitive rate where certain conditions are met.
HMRC’s policy reasons for the change included (1) clarifying the relationship between the taxation of diverted profits and the transfer pricing regime and (2) to enable businesses to benefit from the UK’s international tax treaties including access to the Mutual Agreement Procedure (“MAP”) to relieve double taxation (HMRC considered DPT stood outside of the UK’s double tax treaties).
Continuing relevance of the DPT regime
Notably, the old DPT regime remains applicable for accounting periods that began before 1 January 2026 (and for open enquiries, notices and reviews relating to those periods). The UTPP rules govern periods beginning on or after that date. Companies must notify HMRC within 3 months of the end of the relevant accounting period (s.92 FA 2015) if they have arrangements which are potentially within the scope of the DPT regime (subject to certain statutory exceptions). Failure to notify may attract a tax-geared penalty (Schedule 41 FA 2008).
Where HMRC believe DPT is due, a preliminary notice is issued (HMRC’s time limit for this varies depending on whether it is a ss.80-81 case or a s.86 case and whether the company has failed to notify). Subject to the company’s response, HMRC may then issue a charging notice requiring payment within 30 days. The regime has been described as a ‘pay now, argue later’ regime. Following the charging notice and expiry of the payment window, HMRC have a 15-month review period during which they are meant to work with the company to resolve the matter (the company may amend its CT return before the final 30 days of the period, to bring profits into CT and reduce the DPT). HMRC may decide to issue a notice to reduce or increase the charge. After conclusion of the review, the taxpayer may appeal against the DPT charging notice within 30 days of the end of the review period.
Relationship with the transfer pricing regime
DPT operates in tandem with the arm’s length principle (following Part 4 TIOPA 2010). The UK's transfer pricing rules price transactions between connected parties for tax purposes as per this principle. The DPT and transfer pricing regimes work together—where an enquiry has been settled on a transfer pricing basis and additional CT has been paid, DPT may be reduced and any overpayment repaid (HMRC investigations into purported profit diversion are often resolved by companies agreeing to change their transfer pricing and pay additional CT).
In summary, although the UTPP rules now apply for accounting periods beginning on or after 1 January 2026, DPT remains relevant to taxpayers for accounting periods commencing before that date and related disputes. It is therefore important for companies in multinational groups to remain aware of the DPT regime because it remains highly relevant and a significant HMRC enforcement ‘stick’.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
The recent case of Lifeplus Europe Ltd v HMRC [2026] UKFTT 00797 (TC) is relevant to taxpayers facing Schedule 36 information notices in the context of a Transfer Pricing Dispute. The case shows HMRC’s assertiveness in this area and provides an example of a taxpayer successfully resisting HMRC’s demands. It is a reminder of the limitations of HMRC's Schedule 36 powers:
• HMRC were unable to show that the parent company accounts requested were “reasonably required”;
• It was also found that the documents were not within the taxpayer's “possession or power” to obtain.
Our previous insight article provides an introduction to Schedule 36 in the Transfer Pricing Disputes context and can be found here: Transfer Pricing Disputes & Investigations: HMRC’s Schedule 36 powers and associated penalties | JHAB LLP. As explained in that article, Schedule 36, among other things, allows HMRC to compel production of information or documents that are “reasonably required” to check a taxpayer's tax position. Schedule 36 also includes a penalty regime and specific Transfer Pricing amendments were introduced in 2023.
Background
Lifeplus Europe Limited (“the Appellant”) is a UK subsidiary of a US parent. HMRC opened an enquiry into the Appellant’s tax position, having identified a perceived Transfer Pricing risk for certain Accounting Periods (there had been significant growth in the Appellant’s turnover, yet the net profit margin in its company accounts had reduced significantly). This reduction in profits had coincided with the adoption of a particular Transfer Pricing policy. HMRC issued a Schedule 36 Information Notice to the Appellant, requesting, in respect of several Accounting Periods, all of the US parent company’s group consolidated financial statements (“Item 1”); and all of that parent company’s entity level financial statements (“Item 2”).
Following an HMRC review, the Appellant appealed to the Tribunal. The issues were: (1) Whether the documents requested were “reasonably required” by HMRC to check the Appellant’s tax; and (2) If so, whether the documents were in the “possession or power” of the Appellant. These issues required the Tribunal to consider relevant Transfer Pricing principles applied to cross-border transactions.
The parties’ arguments
HMRC argued that in respect of ‘Item 1’, the consolidated financial statements would: (1) evidence the group’s overall turnover, costs and profit; (2) enable HMRC to assess the proportion of the Appellant’s contribution to group profits/losses; and (3) substantiate the accuracy of the evidence that the Appellant had provided to HMRC during the enquiry.
In respect of ‘Item 2’, HMRC argued that the entity level financial statements would: (1) evidence the figures put forward as part of the Appellant’s proposed adjustment to HMRC’s CUP analysis; (2) assist with verifying whether the parent company, as an entity, was making a loss in 2013; and (3) enable HMRC to compare the Appellant’s turnover and costs/profits with those of the parent company, to support the correctness of the CUP analysis.
In response, the Appellant argued that: (1) The consolidated group accounts and the parent company accounts were not ‘reasonably required’ for the purpose of checking the Appellant’s tax position, because there was no ‘rational connection’ between those accounts and the issue in the enquiry; and (2) in any event, those accounts were not in the Appellant’s ‘possession’ or ‘power’ because the Appellant did not have any enforceable legal right, ‘general consent’, or ‘de facto’ right to access them.
The Tribunal’s Decision
The Tribunal decided in favour of the Appellant. The Tribunal considered that the approach adopted by HMRC during the enquiry, together with the relevant Transfer Pricing methodologies and processes, is the lens through which any ‘rational connection’ between the tax dispute and the documents requested in the Information Notice is to be viewed.
Having considered the information, the Tribunal held that the documents requested in the Information Notice were not ‘reasonably required’. HMRC had, among other things, failed to give an objectively reasonable explanation for why they should be permitted to have the contents of the accounts. OECD Guidelines para 3.22 states that once a one-sided method is chosen with the domestic taxpayer as tested party (as in the instant case), the tax administration "generally has no reason to further ask for financial data of the foreign associated enterprise".
For completeness, regarding ‘possession or power’, the Tribunal was satisfied that the Appellant had made serious attempts to obtain the documents requested—upon receipt of the Information Notice, the Appellant’s representatives asked the parent company’s Chief Financial Officer to obtain the documents, but the parent company declined (stating that the owners of the privately-held company were entitled to their privacy and confidentiality under US law, and citing the sufficiency of the annual transfer pricing studies and the volume of information already provided). Some of the Appellant’s officers were also officers of the parent company, however the Tribunal decided, amongst other things, that the Appellant did not have either a right or power to access the documents without the parent company’s consent and that complying with HMRC’s requests would put the Directors in breach of their statutory duties. As part of its reasoning, the Tribunal considered disclosure case law from the High Court and Court of Appeal and the CPR 31.8 line of authorities, noting that ‘control’ and ‘power’ have the same meaning.
Implications and possible next steps
The end of the decision includes the standard right to apply for permission to appeal, however the Tribunal’s decision cannot in fact be appealed as it is considered ‘final’ (by virtue of Paragraph 32(5) of Schedule 36).
In terms of the wider matter, HMRC may now decide (having failed to obtain the documents sought), to simply issue closure notices amending the relevant tax returns based on the information they currently hold. The Appellant would then be able to appeal, and the burden would be on them to dislodge the amendments.
As the enquiries remain open, there are no time limits for HMRC to close the enquiries and amend the returns, however the Appellant may apply to the Tribunal for a direction that HMRC issue a closure notice unless there are reasonable grounds not to (Paragraph 33, Schedule 18 to Finance Act 1998). In light of HMRC’s delays and failures so far, the Tribunal may be sympathetic to such an application (enquiries have been open since 2016 across ten Accounting Periods and almost 30,000 emails have been provided to HMRC).
HMRC may also need to consider the UK/US treaty dimension, should they seek to impose a Transfer Pricing adjustment. There may also be double-taxation and mutual agreement procedure / corresponding adjustment considerations.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
Schedule 36 Finance Act 2008 contains information and inspection powers, which HMRC regularly use as an investigative tool against taxpayers during tax investigations and before tax disputes have become litigious. It also includes a penalty regime. HMRC may use this tool in Transfer Pricing investigations and disputes.
Schedule 36 has seen several amendments aimed at strengthening HMRC's powers in areas of particular enforcement interest to HMRC. It can therefore be a useful marker of HMRC's current priorities. The targeted Transfer Pricing amendments made to Schedule 36 in 2023 underscore a growing HMRC appetite for investigation and enforcement action in this area. Below is a brief introduction to Schedule 36 in the Transfer Pricing context.
HMRC’s Schedule 36 powers
Part 1 of Schedule 36 enables HMRC to issue information notices compelling a person to provide information or produce documents (provided they are reasonably required for checking a tax position). Part 2 gives HMRC the power to enter a person's business premises and inspect the premises, business assets and business documents (again, where reasonably required for checking that person's tax position). Part 4 contains restrictions on HMRC’s powers. Part 5 covers appeal rights.
Notably, there is no right of appeal against a requirement in an information notice to produce statutory records. The master file and local file under the Transfer Pricing Records Regulations 2023 are considered statutory records. HMRC also have targeted Transfer Pricing Schedule 36 powers which (as per HMRC’s Transfer Pricing Documentation policy paper published 15 March 2023) are part of a wider package designed to “ensure that businesses maintain, and provide upon request, transfer pricing documentation prepared in accordance with OECD Transfer Pricing Guidelines”. Specifically, Schedule 36 was amended by Schedule 5 to Finance (No.2) Act 2023 so that an information notice can specify the prescribed Transfer Pricing records (i.e. the master file and local file), and can be issued outside an enquiry, and so that the "possession or power" requirement is disapplied where documents are in the possession or power of another member of a multinational group.
In the Transfer Pricing context therefore, taxpayers may see HMRC use its Schedule 36 powers with particular confidence, informed heavily by policy. Schedule 5 to Finance (No.2) Act 2023 also inserted paragraph 3C into Schedule 24 Finance Act 2007 (and parallel provisions into Schedule 18 Finance Act 1998 and TMA 1970) so that where the taxpayer has failed to maintain or produce the specified Transfer Pricing records, an inaccuracy is presumed ‘careless’ unless reasonable care is shown—potentially exposing the taxpayer to substantial tax-geared penalties and extended assessment time limits.
The Schedule 36 penalty regime
Part 7 contains the penalty regime for non-compliance. Penalties range from small, fixed amounts (under paragraphs 39 and 40) to potentially unlimited tribunal-imposed penalties (under paragraph 50).
There is a right of appeal to the FTT against both the decision that a penalty is payable under paragraphs 39 or 40 and the amount of the penalty. No liability arises under paragraphs 39 or 40 if the person satisfies HMRC or the FTT that there was a reasonable excuse for failing to comply with the information notice or for obstructing an HMRC officer.
Paragraph 50 contains a tax-related penalty: where a person has become liable to a paragraph 39 penalty, the failure or obstruction continues after that penalty is imposed, and an officer has reason to believe that, as a result, the amount of tax the person has paid or is likely to pay is significantly less than it would otherwise have been, HMRC can apply to the Upper Tribunal (within 12 months of the relevant date) for an additional penalty. In deciding the amount, the Upper Tribunal must have regard to the tax which has not been, or is not likely to be, paid—this can mean a very substantial penalty in high value Transfer Pricing contexts.
Taxpayers should also be aware that paragraphs 53-55 create a criminal offence where a person conceals, destroys or disposes of a document (or arranges for the same) that is the subject of a Tribunal-approved information notice (or where HMRC has informed the person that the document is or is likely to be the subject of such a notice). This can lead to a fine and / or a custodial sentence of up to 2 years.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
DPT was introduced by Part 3 of the Finance Act 2015, with effect from 1 April 2015. Its purpose was to counter measures taken by multinational groups to ‘divert’ profits that would otherwise be subject to Corporation Tax (“CT”). DPT was designed to encourage companies to restate profits on an ‘arm’s length’ basis and pay additional CT (or face a DPT charge instead—at a higher punitive rate).
There are two ‘gateways’ to the DPT charge—(1) where entities / transactions lack economic substance and are used to exploit an ‘effective tax mismatch outcome’ (ss.80–81 FA 2015); and (2) arrangements to avoid a UK permanent establishment (s.86 FA 2015). In March 2026, HMRC reported that DPT had helped HMRC to settle over 250 investigations for additional CT between April 2015 and March 2025 and that more than £10.5 billion had been secured since DPT's introduction.
Repeal and replacement of the DPT regime
S.46 of and Schedule 5 to the Finance Act 2026 repealed DPT and replaced it with the Unassessed Transfer Pricing Profits (“UTPP”) rules (inserted as Part 4A of TIOPA 2010) for accounting periods beginning on or after 1 January 2026. Under these new rules, HMRC may assess unassessed transfer pricing profits to CT at a punitive rate where certain conditions are met.
HMRC’s policy reasons for the change included (1) clarifying the relationship between the taxation of diverted profits and the transfer pricing regime and (2) to enable businesses to benefit from the UK’s international tax treaties including access to the Mutual Agreement Procedure (“MAP”) to relieve double taxation (HMRC considered DPT stood outside of the UK’s double tax treaties).
Continuing relevance of the DPT regime
Notably, the old DPT regime remains applicable for accounting periods that began before 1 January 2026 (and for open enquiries, notices and reviews relating to those periods). The UTPP rules govern periods beginning on or after that date. Companies must notify HMRC within 3 months of the end of the relevant accounting period (s.92 FA 2015) if they have arrangements which are potentially within the scope of the DPT regime (subject to certain statutory exceptions). Failure to notify may attract a tax-geared penalty (Schedule 41 FA 2008).
Where HMRC believe DPT is due, a preliminary notice is issued (HMRC’s time limit for this varies depending on whether it is a ss.80-81 case or a s.86 case and whether the company has failed to notify). Subject to the company’s response, HMRC may then issue a charging notice requiring payment within 30 days. The regime has been described as a ‘pay now, argue later’ regime. Following the charging notice and expiry of the payment window, HMRC have a 15-month review period during which they are meant to work with the company to resolve the matter (the company may amend its CT return before the final 30 days of the period, to bring profits into CT and reduce the DPT). HMRC may decide to issue a notice to reduce or increase the charge. After conclusion of the review, the taxpayer may appeal against the DPT charging notice within 30 days of the end of the review period.
Relationship with the transfer pricing regime
DPT operates in tandem with the arm’s length principle (following Part 4 TIOPA 2010). The UK's transfer pricing rules price transactions between connected parties for tax purposes as per this principle. The DPT and transfer pricing regimes work together—where an enquiry has been settled on a transfer pricing basis and additional CT has been paid, DPT may be reduced and any overpayment repaid (HMRC investigations into purported profit diversion are often resolved by companies agreeing to change their transfer pricing and pay additional CT).
In summary, although the UTPP rules now apply for accounting periods beginning on or after 1 January 2026, DPT remains relevant to taxpayers for accounting periods commencing before that date and related disputes. It is therefore important for companies in multinational groups to remain aware of the DPT regime because it remains highly relevant and a significant HMRC enforcement ‘stick’.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
The recent case of Lifeplus Europe Ltd v HMRC [2026] UKFTT 00797 (TC) is relevant to taxpayers facing Schedule 36 information notices in the context of a Transfer Pricing Dispute. The case shows HMRC’s assertiveness in this area and provides an example of a taxpayer successfully resisting HMRC’s demands. It is a reminder of the limitations of HMRC's Schedule 36 powers:
• HMRC were unable to show that the parent company accounts requested were “reasonably required”;
• It was also found that the documents were not within the taxpayer's “possession or power” to obtain.
Our previous insight article provides an introduction to Schedule 36 in the Transfer Pricing Disputes context and can be found here: Transfer Pricing Disputes & Investigations: HMRC’s Schedule 36 powers and associated penalties | JHAB LLP. As explained in that article, Schedule 36, among other things, allows HMRC to compel production of information or documents that are “reasonably required” to check a taxpayer's tax position. Schedule 36 also includes a penalty regime and specific Transfer Pricing amendments were introduced in 2023.
Background
Lifeplus Europe Limited (“the Appellant”) is a UK subsidiary of a US parent. HMRC opened an enquiry into the Appellant’s tax position, having identified a perceived Transfer Pricing risk for certain Accounting Periods (there had been significant growth in the Appellant’s turnover, yet the net profit margin in its company accounts had reduced significantly). This reduction in profits had coincided with the adoption of a particular Transfer Pricing policy. HMRC issued a Schedule 36 Information Notice to the Appellant, requesting, in respect of several Accounting Periods, all of the US parent company’s group consolidated financial statements (“Item 1”); and all of that parent company’s entity level financial statements (“Item 2”).
Following an HMRC review, the Appellant appealed to the Tribunal. The issues were: (1) Whether the documents requested were “reasonably required” by HMRC to check the Appellant’s tax; and (2) If so, whether the documents were in the “possession or power” of the Appellant. These issues required the Tribunal to consider relevant Transfer Pricing principles applied to cross-border transactions.
The parties’ arguments
HMRC argued that in respect of ‘Item 1’, the consolidated financial statements would: (1) evidence the group’s overall turnover, costs and profit; (2) enable HMRC to assess the proportion of the Appellant’s contribution to group profits/losses; and (3) substantiate the accuracy of the evidence that the Appellant had provided to HMRC during the enquiry.
In respect of ‘Item 2’, HMRC argued that the entity level financial statements would: (1) evidence the figures put forward as part of the Appellant’s proposed adjustment to HMRC’s CUP analysis; (2) assist with verifying whether the parent company, as an entity, was making a loss in 2013; and (3) enable HMRC to compare the Appellant’s turnover and costs/profits with those of the parent company, to support the correctness of the CUP analysis.
In response, the Appellant argued that: (1) The consolidated group accounts and the parent company accounts were not ‘reasonably required’ for the purpose of checking the Appellant’s tax position, because there was no ‘rational connection’ between those accounts and the issue in the enquiry; and (2) in any event, those accounts were not in the Appellant’s ‘possession’ or ‘power’ because the Appellant did not have any enforceable legal right, ‘general consent’, or ‘de facto’ right to access them.
The Tribunal’s Decision
The Tribunal decided in favour of the Appellant. The Tribunal considered that the approach adopted by HMRC during the enquiry, together with the relevant Transfer Pricing methodologies and processes, is the lens through which any ‘rational connection’ between the tax dispute and the documents requested in the Information Notice is to be viewed.
Having considered the information, the Tribunal held that the documents requested in the Information Notice were not ‘reasonably required’. HMRC had, among other things, failed to give an objectively reasonable explanation for why they should be permitted to have the contents of the accounts. OECD Guidelines para 3.22 states that once a one-sided method is chosen with the domestic taxpayer as tested party (as in the instant case), the tax administration "generally has no reason to further ask for financial data of the foreign associated enterprise".
For completeness, regarding ‘possession or power’, the Tribunal was satisfied that the Appellant had made serious attempts to obtain the documents requested—upon receipt of the Information Notice, the Appellant’s representatives asked the parent company’s Chief Financial Officer to obtain the documents, but the parent company declined (stating that the owners of the privately-held company were entitled to their privacy and confidentiality under US law, and citing the sufficiency of the annual transfer pricing studies and the volume of information already provided). Some of the Appellant’s officers were also officers of the parent company, however the Tribunal decided, amongst other things, that the Appellant did not have either a right or power to access the documents without the parent company’s consent and that complying with HMRC’s requests would put the Directors in breach of their statutory duties. As part of its reasoning, the Tribunal considered disclosure case law from the High Court and Court of Appeal and the CPR 31.8 line of authorities, noting that ‘control’ and ‘power’ have the same meaning.
Implications and possible next steps
The end of the decision includes the standard right to apply for permission to appeal, however the Tribunal’s decision cannot in fact be appealed as it is considered ‘final’ (by virtue of Paragraph 32(5) of Schedule 36).
In terms of the wider matter, HMRC may now decide (having failed to obtain the documents sought), to simply issue closure notices amending the relevant tax returns based on the information they currently hold. The Appellant would then be able to appeal, and the burden would be on them to dislodge the amendments.
As the enquiries remain open, there are no time limits for HMRC to close the enquiries and amend the returns, however the Appellant may apply to the Tribunal for a direction that HMRC issue a closure notice unless there are reasonable grounds not to (Paragraph 33, Schedule 18 to Finance Act 1998). In light of HMRC’s delays and failures so far, the Tribunal may be sympathetic to such an application (enquiries have been open since 2016 across ten Accounting Periods and almost 30,000 emails have been provided to HMRC).
HMRC may also need to consider the UK/US treaty dimension, should they seek to impose a Transfer Pricing adjustment. There may also be double-taxation and mutual agreement procedure / corresponding adjustment considerations.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
Schedule 36 Finance Act 2008 contains information and inspection powers, which HMRC regularly use as an investigative tool against taxpayers during tax investigations and before tax disputes have become litigious. It also includes a penalty regime. HMRC may use this tool in Transfer Pricing investigations and disputes.
Schedule 36 has seen several amendments aimed at strengthening HMRC's powers in areas of particular enforcement interest to HMRC. It can therefore be a useful marker of HMRC's current priorities. The targeted Transfer Pricing amendments made to Schedule 36 in 2023 underscore a growing HMRC appetite for investigation and enforcement action in this area. Below is a brief introduction to Schedule 36 in the Transfer Pricing context.
HMRC’s Schedule 36 powers
Part 1 of Schedule 36 enables HMRC to issue information notices compelling a person to provide information or produce documents (provided they are reasonably required for checking a tax position). Part 2 gives HMRC the power to enter a person's business premises and inspect the premises, business assets and business documents (again, where reasonably required for checking that person's tax position). Part 4 contains restrictions on HMRC’s powers. Part 5 covers appeal rights.
Notably, there is no right of appeal against a requirement in an information notice to produce statutory records. The master file and local file under the Transfer Pricing Records Regulations 2023 are considered statutory records. HMRC also have targeted Transfer Pricing Schedule 36 powers which (as per HMRC’s Transfer Pricing Documentation policy paper published 15 March 2023) are part of a wider package designed to “ensure that businesses maintain, and provide upon request, transfer pricing documentation prepared in accordance with OECD Transfer Pricing Guidelines”. Specifically, Schedule 36 was amended by Schedule 5 to Finance (No.2) Act 2023 so that an information notice can specify the prescribed Transfer Pricing records (i.e. the master file and local file), and can be issued outside an enquiry, and so that the "possession or power" requirement is disapplied where documents are in the possession or power of another member of a multinational group.
In the Transfer Pricing context therefore, taxpayers may see HMRC use its Schedule 36 powers with particular confidence, informed heavily by policy. Schedule 5 to Finance (No.2) Act 2023 also inserted paragraph 3C into Schedule 24 Finance Act 2007 (and parallel provisions into Schedule 18 Finance Act 1998 and TMA 1970) so that where the taxpayer has failed to maintain or produce the specified Transfer Pricing records, an inaccuracy is presumed ‘careless’ unless reasonable care is shown—potentially exposing the taxpayer to substantial tax-geared penalties and extended assessment time limits.
The Schedule 36 penalty regime
Part 7 contains the penalty regime for non-compliance. Penalties range from small, fixed amounts (under paragraphs 39 and 40) to potentially unlimited tribunal-imposed penalties (under paragraph 50).
There is a right of appeal to the FTT against both the decision that a penalty is payable under paragraphs 39 or 40 and the amount of the penalty. No liability arises under paragraphs 39 or 40 if the person satisfies HMRC or the FTT that there was a reasonable excuse for failing to comply with the information notice or for obstructing an HMRC officer.
Paragraph 50 contains a tax-related penalty: where a person has become liable to a paragraph 39 penalty, the failure or obstruction continues after that penalty is imposed, and an officer has reason to believe that, as a result, the amount of tax the person has paid or is likely to pay is significantly less than it would otherwise have been, HMRC can apply to the Upper Tribunal (within 12 months of the relevant date) for an additional penalty. In deciding the amount, the Upper Tribunal must have regard to the tax which has not been, or is not likely to be, paid—this can mean a very substantial penalty in high value Transfer Pricing contexts.
Taxpayers should also be aware that paragraphs 53-55 create a criminal offence where a person conceals, destroys or disposes of a document (or arranges for the same) that is the subject of a Tribunal-approved information notice (or where HMRC has informed the person that the document is or is likely to be the subject of such a notice). This can lead to a fine and / or a custodial sentence of up to 2 years.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
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