Limitation on who is a "Relevant Data Holder": a snoop too far?

Wilsons Solicitors LLP v HMRC ("the Wilsons case")¹  is an interesting decision of the First-tier Tribunal (Tax Chamber) ("FTT").  It arises out of a campaign by HMRC to require solicitors to produce certain particulars relating to beneficial owners of offshore companies and similar entities, where the solicitors or a person acting on their behalf had provided services relating to the formation of the entities or the settling of funds in them during a particular period.  The particulars required were: "details of beneficial owners of offshore companies and persons who have beneficial interests in offshore partnerships trusts and other like entities."  Examples given of "other like entities" were: "anstalts [sic], stiftungs [sic], foundations and so on."

At least ten firms including Wilsons had been targeted in the campaign, and seven had complied with HMRC's information request.²   At the outset it is worth making the points that solicitors' document storage and correspondence files would not in our experience have been configured so as to allow the information sought by HMRC to have been readily downloaded (electronically or physically) nor is there any statutory obligation on solicitors to configure their files in such a way,  so that the first that Wilsons are likely to have known of any possible need to configure their files in such a way was when they received HMRC's notice to produce the information.

Perhaps recognising that HMRC's requirement had harsh consequences, HMRC's request was expressed to apply only "insofar as" the solicitors (or a person acting on their behalf) had been required under the anti-money laundering legislation to keep records, though whether this limitation would have assisted with retrieval of data to satisfy HMRC's requirement is moot:  the real reason for the limitation was probably to assist HMRC's argument that the material sought was legally required to be disclosed. The requirement was said to be based on FA 2011, Schedule 23 ("Schedule 23"), §17, a provision which applied to "data-holders" and empowered HMRC to obtain "relevant data" from them.  "Data-holder" and "relevant data" are concepts which are, to some extent, explained in the legislation.  The FTT's decision was that the solicitors were not data-holders within the meaning of the legislation, and so the notices given by HMRC could not be enforced.  The FTT also observed (though this was not necessary for the decision) that the money-laundering records of the solicitors were not relevant data. The FTT made a final comment that it was inappropriate for the FTT to vary the notice that had been issued because the notice was "simply invalid".³

Background

HMRC has a wide power under FA 2008 Schedule 36 ("Schedule 36") to obtain information for the purpose of checking a person's tax position, both from the person concerned and from third parties (such as solicitors).  There is an important safeguard with respect to the obtaining of information from third parties, which is that  the approval of the FTT is required to the issue of a third party notice (naturally this requirement does not apply where the taxpayer agrees to the issue of the notice).⁴  Thus, a solicitor may in principle be given a third party notice, but there is a further important qualification.  It is a fundamental legal principle recognised (in the context of HMRC information powers) by the House of Lords decision in Morgan Grenfell v IRC⁵ that a person cannot be compelled to provide information that is protected by legal professional privilege ("LPP"), and, consequently, statutory information powers will normally be construed by the courts so as not to include the production of privileged information, i.e. will, to this extent, be "read down". (In point of fact Schedule 36 expressly recognises the LPP exception at §23.)  In the Wilsons case, HMRC expressly excluded privileged material from the scope of their information request, no doubt in recognition of the likelihood of the Schedule 23 information powers being "read down".

Elements of HMRC's claim that Wilsons was a "relevant data holder" within the meaning of Schedule 23

HMRC's claim was based on §17 of Schedule 23 ("§17"). This is in the following terms:

"(1)  A person by whom licences or approvals are issued or a register is maintained is a relevant data-holder."

Pausing there, one can readily see that a person who issues licences or approvals might reasonably be expected to keep particulars of the licences or approvals and of the persons to whom they are granted in some readily accessible electronic or physical form so that it is not very burdensome for the person to provide them to HMRC.  However, HMRC did not claim that Wilsons was a person by whom licences or approvals are issued.  The claim was instead that Wilsons  was a relevant data-holder because it "maintained a register".  This claim was based on sub-paragraph (2) of §17 which is in the following terms:

"Register" includes-
(a)        Any record or list that a local authority maintains, and
(b)        Any record or list that any other person is required or permitted to maintain under an enactment".

The due diligence requirements of the money laundering legislation required Wilsons to undertake due diligence measures when establishing a business relationship or when carrying out an occasional transaction as well as on other occasions and "[to keep] the documents, data or obtained for the purpose of applying customer due diligence measures up-to-date."

HMRC's analysis then proceeded as follows:

• The documents, data and records obtained for the purpose of money laundering legislation were (HMRC suggested "any record or list" that " a person [other than a local authority] i.e. Wilsons, "was required or permitted to maintain by or under an enactment" i.e. the money laundering legislation.
• The "keep up-to-date" obligation under the money laundering legislation required Wilsons to "maintain the "record/list".
• Therefore, according to HMRC's submissions, Wilsons was a "relevant data-holder" and could be required to provide the information sought.

Initial comments on HMRC's claim

HMRC's claim involved the assertion that "relevant data-holder" meant "A person by whom a record or list was maintained, being a person permitted or required to maintain the record or list by or under an enactment."

HMRC 's argument involved giving a meaning to "register" and "record" separately and aggregating those meanings to give the meaning suggested by HMRC.  Approaches of this kind are often flawed approaches to the construction of multi-word statutory expressions.  For example, a "French window" is a kind of door, not a window, and "German measles" is a disease distinct from measles (the only Germanic thing about the disease is the national origin of the physician who studied it).   As Mr Justice Megarry put it, in dealing with a claim that "general commission agent" extended to almost any agent remunerated by commission:

"I feel little temptation in the process of defining each of the words separately and then adding the bits together; for such an operation is notoriously unreliable, as, indeed, the Holy Roman Empire and the Lord Privy Seal have long testified."⁶

The other remarkable feature about HMRC's claimed meaning was its width.  The net cast by §17 might on the basis of that meaning comprehend not just solicitors but a wide variety of persons carrying on a regulated profession – doctors and pharmacists who are statutorily obliged to keep records of medicines supplied, for example.  Surprisingly wide meanings resulting from syntheses of statutory words will often cause the Court to look closely at the context.  Mr Justice Megarry went on to say, in the case cited:

"But I do derive some assistance from the context in which the expression is used.  Parliament may, of course, do anything; but in the absence of any indication to the contrary, I begin with the assumption that, when a Statute provides that ‘A includes B’, B has a meaning which is ejusdem generis with A, or at least appears to be suitable for inclusion as an expanded form of A."

In the Wilsons case,  a lawyer's money-laundering due diligence records seemed to be neither ejusdem generis with a register nor suitable for inclusion as an expended form of register since there was no feature common to the records on the one hand and a register on the other.  (This point is referred to below as the ejusdem generis point.)

Another important contextual point relates to LPP.  As explained above,  Schedule 36 contains several express exceptions for privileged material, even though the case law is clear that statutory information powers will be read down so as not to remove the protection of LPP.   The natural inference is that Parliament's policy was to provide a statutory exception for LPP when conferring information powers on HMRC, irrespective of any anticipated reading down by the courts.  Yet there is no such statutory exception in Schedule 23.  This, the LPP point, suggests that Parliament did not contemplate that Schedule 23 would be used to obtain material from lawyers.

Would  success in the Wilsons case have benefited HMRC?

HMRC's investigative task, so far as it involves getting information from lawyers, would have been simplified if HMRC had succeeded in the Wilsons case, because the need to obtain the approval of the FTT to the issue of a third party information notice to a lawyer would have been removed (where the notice is designed to obtain production of money-laundering records) save where the lawyer successfully appealed against HMRC's request.⁷  It seems that at least one other firm targeted in the Schedule 23 campaign has successfully appealed.   However, HMRC's stance in undertaking the campaign to use Schedule 23 against solicitors is a strange one.  HMRC has at least one opportunity every year to secure amendments to tax legislation.  The most obvious way of HMRC achieving the desired objective would be a legislative approach, i.e. promoting primary legislation requiring solicitors to produce money laundering records to HMRC (save to the extent that the records are protected by LPP). That would, in practice, have required a consultation, which admittedly would have had the downside of a potentially uncertain outcome for HMRC but, on the other hand, the process would have been completely transparent (and so helped perhaps to encourage taxpayers generally to cooperate with HMRC) and would have given rise to a more certain outcome in a shorter time frame, than the conduct of difficult, costly and potentially very protracted litigation, which has been the result of HMRC's legal challenge.  Furthermore, coordination by HMRC of the campaign with the efforts generally to remove the need for FTT approval to third party notices, would have seemed like an obvious common sense approach, enabling all of the relevant issues to be debated and resolved on an open and comprehensive basis.

The FTT's approach in the Wilsons case

It is disappointing that the FTT seem not to have questioned HMRC's implicit assertion, as a matter of underlying policy, that, despite a long review leading up to the enactment of Schedule 36 in 2008, Parliament suddenly decided only three years later in 2011 not only that there that there was a need for further powers to obtain information from third parties (i.e. data-holders)  but also that the new powers should be free of the safeguard of FTT approval so recently restated in FA 2008.   One possible explanation is that Schedule 23 was designed only to cover cases where the information sought by HMRC was so easily provided and/or mundane – e.g. figures that could simply be downloaded from a computer – that the FTT would never have withheld approval to the issue by HMRC of the information notice and/or that the data-holder and his client could have no reasonable objection to providing the information.  Instead, the matter was approached by the Tribunal as a matter of analysis of the statutory words, even though, on the face of it, it seemed plausible to suggest that Parliament had only intended Schedule 23 to be used where data was kept electronically so that it could be retrieved by a few mouse-clicks, which was unlikely to have been true in the Wilsons case.

The FTT's construction of the statutory words

The FTT concluded that a "register" could only mean something that is maintained, and simply keeping records, including keeping records up to date (as the money laundering legislation requires) is not "maintaining" a register – "maintaining" a register involves altering the register where necessary when the underlying facts change.⁸

That defeated HMRC's claim, but the Tribunal discussed three other matters in support of its conclusion:

• The ejusdem generis point (see above).   The Tribunal observed that this was consistent with Wilsons' case even though the parties had agreed that it was a weak rule of statutory construction.⁹
• The LPP point (see above).  The Tribunal "did not think that this point was particularly decisive one way or the other".¹⁰
• The legislative history.  The forerunner of Schedule 23 was Section 18A of the Taxes Management Act 1970 ("section 18A").  The Tribunal pointed out that neither Wilsons nor HMRC had come to the hearing prepared to make submissions on the Explanatory Notes to Schedule 23.  Nevertheless the Tribunal asked to be shown the Explanatory Notes to Schedule 23 and commented that –

"In so far as the Explanatory Notes carry any weight, it is clear that §17 was not intended to be a wholesale departure from section [18A]: the Notes say that it is based on section [18A(2)].  Moreover the definition of "register" in §17 is said to be there to 'avoid disputes' over the meaning it is not stated to be there to enormously expand the meaning of 'register' over what it had been before… [the Tribunal's] conclusion is that the Explanatory Notes support [Wilsons'] case… "¹¹

¹ [2018] UKFTT 627 (TC)
² See the Wilsons case at §30.
³ The point is of particular significance because the FTT was clearly of the opinion that it had jurisdiction to pronounce on the validity or invalidity of HMRC's notice, i.e. to recognise a nullity for what it was.  Observations in such cases as BT Pension Fund v HMRC (Court of Appeal) [2015] EWCA Civ 713 at [142] – [143] and HMRC v Hok Ltd [2012] UKUT 363 might be read as precluding the Tribunal from considering this point, arguably one of administrative law.
⁴ See Schedule 36 §3.  HMRC  have launched a consultation about removing the need for FTT approval to the issue of third party notices by HMRC, see our Tax Digest 20 September 2018), though no specific proposals for legislation have yet been published.
⁵ R. oao Morgan Grenfell v Special Commissioner {2002] STC 786.
⁶ London Produce Co v Fleming (1968) 44 TC 582 (High Court) per Mr Justice Megarry at 596.
⁷ The right of appeal is set out in Schedule 23 §29.  The alternative grounds of appeal are that it is unduly onerous to comply with HMRC's information request, or that the recipient of the notice is not a "relevant data-holder" or that the data sought by HMRC are not "relevant data".  HMRC have power under Schedule 23 §5 to seek the approval of the FTT to the giving of a notice under Schedule 23 and if the power is successfully exercised (it was not exercised in the Wilsons case) no appeal is possible.
⁸ See the Wilsons case at §§64 – 72.
⁹ See the Wilsons case at §63.
¹⁰ See the Wilsons case at §77.
¹¹ See the Wilsons case at §§80, 81