HMRC failed to obtain audit papers

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Audit papers are confidential and HMRC can’t demand to see them as part of a tax investigation, even if the company’s auditor is also its tax adviser.

John Flood considers the anonymised case of HMRC ex parte a taxpayer [2018] UKFTT 0341 which examined the extent to which HMRC may obtain information and documents from auditors and or tax advisers.


The taxpayer company was audited by a firm of accountants and additionally, but behind a Chinese wall, the same firm provided tax advice and assistance in submitting the company’s accounts and tax return to HMRC.  

The audit team had discovered certain internal transfers and intergroup balances that had not been correctly stated, and accordingly gave a qualified audit opinion on the accounts. After reading the auditor’s comments on the accounts HMRC applied to the FTT for a third-party information notice, (FA 2008, Sch 36 para 3) which required the accountancy firm to provide details of the checks it carried out and of the working papers from its audit files.

HMRC’s mistake

HMRC initially made no mention of the restrictions for information, as set out in FA 2008, Sch 36, para 24. This says that an auditor doesn’t have to provide information held in connection with the performance of its functions, or documents created for the performance of the audit functions.

Additionally, Sch 36 para 25 provides that if a person is acting as a tax adviser then they are not obliged to produce communications between the tax adviser and their client (or another tax adviser). This is provided that documents are for the purpose is giving or obtaining advice relating to tax affairs. There is no definition of a tax accountant or tax adviser.

However, the tribunal judge spotted this breach and HMRC was asked to contact both the taxpayer and the auditor to offer them the opportunity to make submissions to the FTT on the scope of para 24.

HMRC’s arguments

To work around the restriction on audit papers in Sch 36 para 24, HMRC argued it was entitled to the information requested, as Sch 36 para 26 provides that the exemption from providing material does not apply to:

  • Information explaining any information or document which the person to whom the notice is given has, as the tax accountant, assisted any client in preparing for, or delivering to, HMRC; or
  • A document which contains such information.

The above doesn’t apply if the information in question has already been provided to HMRC or a document has already been produced to an officer of HMRC.

Ignoring the Chinese wall

HMRC used the fact that the auditor and the tax adviser were from the same firm to circumnavigate the restriction on access to the audit working papers as follows: 

  • The auditor acts as a tax accountant in preparing corporation tax returns.
  • When submitting tax returns the auditor is obliged to include with those returns a copy of audited accounts.
  • Therefore, the auditor had, as tax accountants, delivered the taxpayer’s audited accounts to HMRC.
  • The documents and information that HMRC required from the auditor was to ‘explain’ the audited accounts, which themselves were documents the auditor had, as the tax accountant, delivered to HMRC.

Tribunal’s decision

The FTT rejected HMRC’s argument. The crucial point was the HMRC claim that the auditor delivered the audited accounts to HMRC in its capacity as a tax accountant and therefore HMRC was entitled to ask questions and require documents to be produced. This was not correct.

The audited accounts were not prepared for HMRC. The audit report is addressed to the company’s shareholders and comments on accounts that the directors have prepared. Those accounts and audit report were certainly sent to HMRC but not delivered as such. This would have involved too literal an interpretation of the concept of delivering.

The clear emphasis under the statute was on documents that a tax accountant, using their professional skill as a tax accountant, helped the taxpayer to prepare or deliver. The conclusion that any document which was merely sent to HMRC falls within the scope of a statutory disclosure requirement is inconsistent with schedule 36, paragraph 26. A client does not need a tax accountant’s professional assistance merely to send documents to HMRC; they need help with the substantive preparation of documents.


The tribunal saw no reason why HMRC should be entitled to disclosure of the documents simply because the auditor also happens to act as the taxpayers’ agent for the preparation and submission of corporation tax returns. The statutory provisions requiring disclosure were not met and the request from HMRC was rejected.

If HMRC wished to challenge this then it had to be by judicial review as there is no right of appeal for this type of application.

About John Flood

About John Flood

John Flood is a retired barrister and ex-employee of HMRC. He is a co-author with George Rowell (Exchange Chambers, Manchester) of the new book, Tax Penalties: A Practitioners Guide (Sweet & Maxwell Thomson Reuters).


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