The Limits of HMRC's Powers of Investigation

In support of HMRC's powers to enquire into and investigate taxpayers' affairs, Parliament has conferred upon HMRC powers to require taxpayers and third parties to provide information and documents.  Among other things, those powers form an important part of the system of self-assessment, and it is likely that few would argue that the powers are unnecessary (though there may be more debate about what limits should be placed on those powers).

However, once HMRC has communicated its determination as to the taxpayer's tax liability (by, for example, the issue of an assessment), the investigatory phase is over; HMRC's investigatory powers cease to be available to it; and the proper course where either party seeks documents or information from the other (or from a third party) is for that party to obtain an order for disclosure from the Tribunal – the body tasked by Parliament with holding the ring between the parties and ensuring that the dispute is disposed of fairly and justly.

HMRC, by action if not by words, seems not to agree that this is the case.  Not infrequently, and especially where it has issued so-called "protective assessments" (in the expectation that the taxpayer will permit its investigations to continue), HMRC purports to exercise its investigatory powers after its decision as to liability has been challenged by the taxpayer, in order to gather evidence in aid of its case in that dispute.  By doing so, HMRC prejudges what orders as to disclosure might be made by the Tribunal, and seeks to put itself in a better position that the taxpayer.

This article explains what should be done by a taxpayer faced with a request for information and documents after the conclusion of an investigation.

HMRC's investigatory powers

Schedule 36 to the Finance Act 2008 ("Schedule 36") confers on HMRC powers to obtain, by notice in writing, information and documents from taxpayers (a "taxpayer notice")¹ and third parties (a "third party notice").²  In either case, the information or documentation must be "reasonably required" for the purpose of "checking" the tax position of the taxpayer with whom HMRC is concerned (or, in certain circumstances, classes of taxpayers whose identity is not known to HMRC).³

In addition to Schedule 36, Schedule 23 to the Finance Act 2011 ("Schedule 23") confers on HMRC power to obtain specific, limited data items from particular classes of data holder (such as merchant acquirers and business intermediaries) (a "data-holder notice").⁴  The power is stated to be exercisable "to assist with the efficient and effective discharge of HMRC's tax functions" and to be "additional to and… not limited by other powers… in Schedule 36…".⁵

Proper purpose

Schedule 36

It is a well-established principle of public law that powers conferred on a public body (such as HMRC) must only be used for purpose for which they were conferred.  If used for some other purpose, or for mixed purposes where the dominant purpose is not the one for which the power was conferred, that use of power is unlawful.⁶

Determining the purposes for which a power is conferred involves an exercise in statutory construction.  That exercise is straight-forward in the case of Schedule 36.  As set out above, the purpose for which the power to issue taxpayer and third party notices is spelt out in the legislation itself: "checking the taxpayer's tax position" or (in the case of third party notices) "checking the tax position of another person…the taxpayer".  Schedule 36 goes on to explain what is meant by the term "checking": "carrying out an investigation or enquiry of any kind".⁷

The purpose for which the power to issue taxpayer and third party notices is, therefore, clear, and is to "carry out an investigation or enquiry of any kind into the tax position of the relevant taxpayer".  The power cannot be used by HMRC for any other purpose.  In particular, there is no reference to the powers having been conferred on HMRC to enable it to gather evidence in support of litigation after the relevant enquiry or investigation has concluded.  Put another way, there is no suggestion that the powers in Schedule 36 have been conferred in order to give HMRC an edge in litigation, providing it with an additional route to obtain disclosure over and above the ordinary route of obtaining an order for disclosure from the Tribunal or Court seized of the relevant litigation.

Accordingly, if it is established that HMRC's purpose, or dominant purpose, in purporting to issue a taxpayer notice or third party notice is to obtain evidence in support of litigation, the notice will be invalid.

Schedule 23

The position in relation to Schedule 23 is slightly less straightforward.  It is clear that a data-holder notice cannot be issued to a taxpayer (who happens to be a data-holder) in order to check their own tax position.⁸  Hence if such a notice were to be issued, it could be resisted.

However, there is nothing in the express language of Schedule 23 which would prevent a data-holder notice being issued to a third party for the purposes of gathering evidence in support of litigation.

The fact that HMRC might be able to use data-holder notices to gather evidence in this way might not be terribly concerning (depending on the nature of the dispute) since the categories of data items that can be requested under Schedule 23 are (as stated above) limited.  That said, the authors are aware of a number of instances in which HMRC have sought to significantly widen the scope of what can be required by a data-holder notice in the following way.

• Paragraph 17 of Schedule 23 permits HMRC to issue a data-holder notice to "a person by whom licences or approvals are issued or a register is maintained", and defines the term "register" as "any record or list that a local authority maintains, and any record or list that any other person is required or permitted to maintain by or under an enactment".  The information that may be requested from such a data-holder is "(a) the name and address of anyone who is or has been the holder of a licence or approval or to whom an entry in the register relates or related; (b) particulars of the licence, approval or entry; and (c) information relating to any application for such a licence or approval or for entry on that register."⁹
• HMRC appear to take the view that anyone who holds "a database" of any sort (no matter how organised or disorganised the data is) is a person who maintains a register and, therefore, that such a person can be required to produce copies of  any item of data so held.¹⁰  If that is indeed HMRC's view, it is wrong.
• It is a fundamental principle of statutory construction that statutes must be construed purposively, and the meaning of particular words is informed by the context in which they are used.¹¹  In particular, a word or phrase in an enactment must be construed in light of the surrounding text.¹²  Indeed, there is a specific principle (the ejusdem generis principle) that the meaning of a general word at the end of a list is to be interpreted as extending only to persons or items of the same class as those already mentioned.
• On the basis of the foregoing, it is clear that the term "register" cannot be given an entirely open ended meaning (ie, any record of particulars) but must be construed by reference to the preceding words "licences or approvals".  In other words, it must be construed as being limited to a register of or pertaining to licences or approvals.  That the words should have this more limited meaning is also born out of the history of the relevant provision: its statutory predecessor (section 18A of the Taxes Management Act 1970) was expressly limited to registers of licences and approvals held by public bodies.

Appeal documents restriction

Schedule 36

Further to what is said above, it is to be noted that the powers to issue taxpayer and third party notices are restricted in a number of ways expressly in Schedule 36.  For example, a notice cannot require the recipient to produce privileged information (that is, confidential information forming part of the continuum of advice between a lawyer and any of their clients).¹³

More relevantly, a third party notice cannot require a person to provide or produce "information that relates to the conduct of a pending appeal relating to tax or any party of a document containing such information" (the "Paragraph 19 Restriction").¹⁴

HMRC takes the view that the phrase "information that relates to the conduct of a pending appeal" only covers documents that have been brought into existence as part of the preparation for the presentation of a tax appeal.¹⁵  HMRC does not accept that the phrase covers information or documents which may be used as evidence in the course of the appeal but which existed before the appeal process began.

There is some judicial support for HMRC's view in the first instance decision of Lightman J in ex parte Banque Internationale Luxembourg SA.¹⁶  However, if that is right, the Paragraph 19 Restriction does no more than provide for that which is already provided for by litigation privilege – namely, protection from disclosure of documents brought into existence (i) when litigation is reasonably in prospect and (ii) for the dominant purpose of that litigation.  In other words, HMRC's view would render the Paragraph 19 Restriction redundant.  Such redundancy militates towards the Paragraph 19 Restriction being given a broader meaning, to include documents in existence before the relevant appeal was lodged.

Proper case management

Schedule 36

Even if HMRC's view is the correct one in relation to the Paragraph 19 Restriction, there is judicial support for the proposition that once a tax appeal is in motion, such that a Tribunal is seized of the matter, the correct process is for HMRC to seek an order for disclosure from the Tribunal rather than seeking to exercise their information gathering powers under Schedule 36.  Thus, Lord Justice Glidewell in ex parte Taylor (No 2),¹⁷ which case concerned section 20(3) of the Taxes Management Act 1970, the statutory predecessor to the third party notice provision in Schedule 36, said:

"…if there is a case in which all the documents the subject of a notice related clearly to assessments which are, at the time when the notice comes to be considered, already under appeal, I think it will generally be appropriate because it will be more convenient and indeed fairer to the taxpayer for the Revenue to serve [an application for disclosure] than under section 20.  I say that because I see the force of the argument."

In other words, even if HMRC could issue a third party notice after proceedings have commenced to challenge a tax assessment, they ought instead, to apply to the Tribunal for an order for disclosure.  Indeed, if it were otherwise, HMRC could, for example – in circumstances where the Tribunal had made an order setting out the timetable for disclosure – circumvent or cut across that order by issuing a third party notice requiring information/documents to be provided at an earlier date or otherwise conflicting in some way with the Tribunal's order.

Indeed, it appears that in the Ingenious film scheme litigation, the First-tier Tribunal refused an application for a third party notice where an appeal was underway.  The First-tier Tribunal considered that it was inappropriate for HMRC to seek to exercise its investigatory powers once an appeal had been launched.  The correct course was for HMRC to make an application to the Tribunal for disclosure in the appeal.  HMRC subsequently sought disclosure as part of the appeal proceedings and obtained an order from the Tribunal for disclosure by the taxpayer but was refused an order for disclosure by the third parties in the face of objections by the taxpayer and the third parties concerned, having regard to the third parties' obligations of confidentiality in respect of the information in question and the scope of the information sought.¹⁸

Schedule 23

The reasoning set out above (namely, the preservation of proper case management) applies equally to data-holder notices issued under Schedule 23 as to notices issued under Schedule 36.

Practical tips

Having regard to the foregoing, what should be done by if HMRC seeks to issue a notice under Schedule 36 or Schedule 23 once litigation has commenced?

If the notice is a taxpayer notice, the taxpayer will have the opportunity to appeal to the Tribunal or else (if HMRC intends to seek pre-approval from the Tribunal) will have the opportunity to make representations to HMRC that must be put before the Tribunal before the issue of the notice is approved by the Tribunal.  The taxpayer should take advantage of these opportunities to appeal/make representations.   In parallel, the taxpayer should apply to the Tribunal seized of the litigation for proper directions regarding disclosure (bringing to the Tribunal's attention HMRC's attempt to circumvent the appropriate course for obtaining disclosure).¹⁹  Similarly, where HMRC contemplates issuing a third party notice, the taxpayer would be notified and should take the opportunity to make representations and/or apply to the Tribunal for directions.

¹ Paragraph 1, Schedule 36.
² Paragraph 2, Schedule 36.
³ Paragraph 5, Schedule 36.  The distinction between third party notices issued under paragraph 2 and those issued under paragraph 5 (commonly referred to as "identity unknown notices") is not material for present purposes.  Schedule 36 also contains a much more limited power to obtain from a third party the name, address and date of birth of a taxpayer whose identity is not known to the relevant HMRC Officer.
⁴ Paragraph 1, Schedule 23.
⁵   Paragraph 2, Schedule 23.
⁶ See, for example, Lord Hutton in ex parte Bowles [1998] AC 641, cited most recently in Gold Nuts and other v HMRC [2017] UKFTT 84 (TC) where the relevant issue was whether HMRC's investigatory powers were being used (impermissibly) to gather evidence for the possible prosecution of one of the taxpayers in that case
⁷ Paragraph 58, Schedule 36.
⁸ Paragraph 2(3), Schedule 23.  This is subject to a limited exception: such a notice can be issued to a taxpayer in order to ascertain whether they are the beneficial owner of particular securities, or payments derived therefrom: paragraph 14(3), Schedule 23.
⁹ Paragraph 15, SI 2012/847.
¹⁰ This expansive interpretation was alluded to publicly at paragraph 32 of HMRC's consultation document on "Tackling the hidden economy: Extension of data-gathering powers" dated 22 July 2015 (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447718/Tackling_the_hidden_economy_-_Extension_of_data-gathering_powers.pdf, accessed 10 February 2017).
¹¹ BMBF v Mawson [2004] UKHL 51 at [29].
¹² Bourne v Norwich Crematorium ltd [1967] 1 WLR 691 at 696.
¹³ Paragraph 23, Schedule 36.
¹⁴ Paragraph 19(1)(a), Schedule 36.
¹⁵ https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch22160, accessed 8 February 2017.
¹⁶ [2000] STC 708 at [17(3)].
¹⁷ [1989] 3 All ER 353.
¹⁸ HMRC v Ingenious Games LLP and Others [2014] UKUT 62 (TCC) at [34].
¹⁹ By the time litigation is on foot, there could be no sensible argument that providing the taxpayer with notice of HMRC's intention to obtain pre-approval from the Tribunal would risk prejudicing the collection of tax (see paragraph 3(4), Schedule 36).