Insurance companies: HMRC wants your data – and can now access it

HM Revenue & Customs (HMRC) Investigators have always and always will take a great deal of interest in the information insurance companies hold about their clients, whether high value assets e.g. watches, cars, yachts, or business insurances e.g. loss of earnings or annuity contracts. Somewhat stating the obvious, this is because experience often shows there is a mismatch between the information submitted to HMRC and the insurer.

HMRC has always had the ability to obtain information from insurance companies by way of a statutory third party information request however the process of doing so is cumbersome and takes time often requiring the permission of a Judge.

This clearly frustrated HMRC so it persuaded Ministers that it needed to reform the third party information legislation where it wanted to issue a notice to a financial institution. It justified the need for change as cutting down the time required to obtain information to enable the UK to meet international standards for exchanging information to within 6 months of the request – when previously it was taking HMRC 12 months to obtain the information.

The changes

In Finance Act 2021, Section 126, HMRC’s primary information power at Finance Act 2008, Schedule 36 was amended effective from Royal Assent on 10 June 2021. It only applies to those financial institutions that come within the Common Reporting Standard (CRS) reporting obligations.

Typically, an insurance company meets the criteria of a Specified Insurance Company if:

• It’s regulated as an insurance business in the country where it does business
• More than 50% of the company’s gross income in the past calendar year came from insurance, reinsurance, and annuity contracts
• At any time in the last calendar year, the combined value of the entity’s assets associated with insurance, reinsurance and annuity contracts was more than 50% of its total assets for that year.
• The entity issues cash value insurance or annuity contracts

Insurance companies that provide only general insurance or term life insurance are typically not classified as a financial institution and likewise reinsurance companies which provide only indemnity reinsurance contracts and insurance brokers are typically not considered to be financial institutions.

The main details of the new legislation are:

• HMRC can seek documents i.e. information already in existence, or information which typically requires the recipient to create a document from its data / records, that is;
• In the reasonable opinion of the officer giving the notice that is required;
• For the purposes of checking the tax position of a person, or the purpose of collecting a tax debt of a taxpayer. There is no time limitation for either requirement.

The legislation is deliberately widely drawn and it is noted only needs to meet the opinion of the HMRC Officer, not the recipient. There is no right of appeal which is a reflection of how important this legislation is to HMRC. The only legal remedy open to a recipient is Judicial Review.

In response to feedback from the tax and legal profession certain safeguards have been built into the legislation:

• It would not be onerous for the financial institution to provide the requested information.
• An authorised officer of HMRC must approve the decision to issue the notice.
• Documents subject to legal professional privilege cannot be requested.
• For international requests, the requested information must be relevant to the administration / collection of tax in that jurisdiction. The tax authority requesting the information must first exhaust all reasonable domestic ways to get the information.

Taxpayers are to be provided a copy of the notice that is being issued and informed why the information is being sought however, if HMRC is of the opinion doing so might prejudice the assessment or collection of tax, this requirement is not required if the tax tribunal agrees. 

Failing to comply with a notice will result in penalties against the financial institution although there is a right of appeal against a penalty notice.

Our advice to insurance companies

It remains to be seen how liberally HMRC uses this new information power. Given that HMRC has actively targeted legislation to access information financial institutions hold and from our experience of handling HMRC investigations over 30 years, we would however expect it to enthusiastically use this new power.   

For any insurance company that is in receipt of such a notice they should ensure they action the notice promptly as it is likely to be time limited (often only 30 days to comply will be offered).

Also dependent on the terms of the notice, it is possible the recipient will need to access its internal data beyond just policy documents e.g. emails with the client / meeting notes. Full compliance with the notice will be important not only to prevent the insurance company being issued with a penalty notice but also its own reputational risk with HMRC. Non-compliance or the inability to comply will be regarded by HMRC when it considers the insurance company’s own tax affairs.  

Obtaining specialist advice is recommended on receipt of such a notice to protect the insurer’s interests and manage the response process efficiently.

Finally, whilst the new legislation only applies to those insurers with CRS reporting obligations, the existing third party information powers open to HMRC remain and will continue to be used to obtain information from financial institutions. The advice set out above is relevant to any insurance company in receipt of a notice under Finance Act 2008, Schedule 36 paragraph 2. 

If you have any queries relating to the information above, please get in touch with John Claypole or Thomas To.