The extra-territorial reach of HMRC's investigatory powers

In R (on the application of Jimenez) v the First-tier Tribunal (Tax Chamber) and HMRC  ("Jimenez"),¹ the Court of Appeal determined that HMRC had power to issue a compulsory information request to an individual outside the UK (for the purpose of checking that individual's tax position).

The decision is silent about the extent to which HMRC can issue compulsory information requests to third parties outside the UK (ie, requests for the purposes of checking another person's tax position).  The better view is that whether or not such a request will be valid turns on whether the third party is "sufficiently connected" with the UK (see below).

Disappointingly, the Court of Appeal did not comment on the First-tier Tribunal's ("F-tT") practice of approving information requests in the relevant taxpayer's absence (ie, at an "ex parte" hearing).  At first instance, the High Court had been critical of this practice, encouraging HMRC and the F-tT to rethink their approach.  That call for reflection now seems less likely to be heeded.

Background

HMRC's compulsory information powers

HMRC has an impressive collection of powers available to it in support of civil investigations.  As regards its powers to compel the production of documents and information, Schedule 36 Finance Act 2008 ("Schedule 36") confers on HMRC power to compel production from a person:

• for the purposes of checking that person's tax position (a "taxpayer notice");² and
• for the purposes of checking another person's tax position (a "third party notice").^{3, 4}

Schedule 36 is silent about the territorial scope of those powers.  In particular, it says nothing about whether the intended recipient of the notice must be present within the UK, or resident within the UK, for the powers to be operable.

It is of course the case, however, that a person can be a UK taxpayer without ever having set foot within the UK.  This has been highlighted most recently by the imposition of a charge to capital gains tax on non-residents (in respect of disposals of UK real estate).⁵  As such, and although HMRC can ask the authorities in many foreign jurisdictions to obtain and transmit documents and information from persons within that foreign jurisdiction (pursuant to various bilateral and multilateral treaties), it is conceivable that HMRC would want to issue a taxpayer or third party notice to a person outside the UK.⁶

Territorial scope of statutes

It is now relatively uncontroversial that the question of whether a statutory provision applies to persons or matters outside of the UK is a question of statutory interpretation.⁷  The relevant principle of statutory interpretation was expressed by Lord Mance in Masri as follows:⁸

"Unless the contrary intention appears…  an enactment applies to all persons and matters within the territory to which it extends, but not to any other persons and matters…  [That principle] is one of construction, underpinned by considerations of international comity and law."

Another, related, general principle is that (in the absence of, for example, a treaty providing for mutual assistance) courts in one jurisdiction will not enforce the penal or revenue laws of another jurisdiction.⁹

That principle (which relates to enforcement in a foreign jurisdiction) does not, of course, prevent Parliament from enacting legislation with extra-territorial effect.  A good example of Parliament enacting tax legislation with extra-territorial effect can be found in the case of Andre Agassi v Robinson.¹⁰  That case was concerned with a withholding obligation that arose in relation to payments made in respect of certain activities carried on in the UK by a non-UK resident entertainer or sportsman.¹¹  A majority of the House of Lords held that no territorial limitation could be implied so as to limit the obligation of a person resident outside the UK (and with no trading presence in the UK) from the withholding obligation otherwise imposed upon them in respect of payments made to entertainers/sportsmen as described above (even in circumstances where the relevant payment was made outside the UK).

Jimenez

Decision of the High Court

In Jimenez, the F-tT approved the issue of a taxpayer notice to Mr Jimenez (the "Notice").  The Notice had been sought by HMRC in support of a civil investigation into the residence status of Mr Jimenez in prior tax years.  Mr Jimenez was a British national, but was resident in Dubai at the time the taxpayer notice was issued.¹² Mr Jimenez sought judicial review of the decisions to approve and issue the Notice.

At first instance,¹³ the High Court held, in essence, that Schedule 36 does not have extra-territorial effect.  On that basis, the High Court found that the decisions to approve and issue the Notice (to Mr Jimenez in Dubai) were unlawful, and the High Court made a quashing order.

In summary, the High Court's reasoning was as follows:

• The purpose of Schedule 36 is to "provide a credible and effective system of checking and investigating" the tax position of putative taxpayers.  That purpose did not, however, lead inescapably to the conclusion that Parliament intended Schedule 36 to have effect outside the UK.¹⁴
• The argument that the purpose would be subverted if Schedule 36 did not have extra-territorial effect (hence Parliament must have intended to legislate extra-territorially) was undermined by the existence of mutual assistance arrangements (including bilateral double tax treaties containing information exchange provisions), which Parliament would have been aware of when legislating, and which provide a means for HMRC to seek information from abroad about a person's tax liability.¹⁵
• The power to issue taxpayer notices has to be viewed against the backdrop of Schedule 36 as a whole (since, as a matter of statutory interpretation, legislative provisions should be construed in context).  Schedule 36 contains a number of powers pertaining to the inspection of premises, and (in the High Court's view) one would "raise eyebrows" at the notion that Parliament intended those powers to have extra-territorial effect.¹⁶
• Further, Schedule 36 imposes sanctions for non-compliance.  Such sanctions stray into the realm of extra-territorial enforcement / penal legislation which would infringe basic principles of international law.¹⁷

In addition to making the quashing order, the High Court commented on the procedural history of the Notices.  In that regard, the Court invited HMRC and the F-tT to consider whether their usual practice (of holding hearings for the approval of taxpayer notices in private) should be amended in view of basic principles of fairness and open justice.¹⁸

• As usually happens when F-tT approval of a taxpayer notice is sought, the F-tT considered the matter in private (ie, with the benefit of submissions from HMRC, but in the absence of taxpayer concerned).
• The High Court's view was that, unless the F-tT is satisfied that allowing the taxpayer to attend might prejudice the assessment or collection of tax, the F-tT should consider (a) requiring HMRC to provide the taxpayer with a summary of the representations that HMRC intend to make (and allowing the taxpayer to comment on that summary); and/or (b) allowing the taxpayer to attend / take part in the hearing.¹⁹

Decision of the Court of Appeal

The Court of Appeal took a different view to the High Court, allowing HMRC's appeal against the quashing order.

• The Court of Appeal started at the same point as the High Court, approaching the issue as a matter of statutory interpretation,[xix] and accepted that the purpose of Schedule 36 was to supply HMRC with powers to verify a taxpayer's self-assessment position.²¹
• The Court was not persuaded, however, that the fact Parliament most likely intended Schedule 36 inspection powers to be limited in scope to premises within the UK meant that all of the Schedule 36 powers (in particular, the power to issue taxpayer notices) were similarly limited in their international outlook.²²
• The Court noted that a large number of UK taxpayers would be persons resident outside the UK (owing to the diversity of connecting factors by which UK taxes are imposed), and hence concluded it was inherently unlikely that Parliament had intended taxpayer notices to operate on an entirely domestic plane.  Putting it another way, the subject matter of Schedule 36 (checking the tax liability of potential UK taxpayers) supplied a sufficient connection between the (non-UK) recipient of the taxpayer notice and the jurisdiction (ie, the UK) to justify the conclusion that Parliament intended to legislate in an extra-territorial fashion.²³
• In addition, the Court found that there was a strong public interest in allowing HMRC to issue taxpayer notices to persons outside the UK (not least since tax evasion often has a cross-border aspect to it).²⁴
• It is not the case that HMRC would necessarily lack the means to enforce compliance with a taxpayer notice issued outside the UK (on grounds that HMRC are prohibited from enforcing penal/revenue measures in foreign jurisdictions).  To the extent the recipient has assets within the UK, HMRC could enforce against those assets in the event of non-compliance.²⁵

Unlike the High Court, the Court of Appeal did not comment on HMRC's / the F-tT's practice of determining applications for the approval of taxpayer notices at ex parte hearings.

Ramifications

Taxpayers notices and tax treaties

Most information exchange provisions in bilateral tax treaties are exercisable only once the requesting authority has exhausted its normal procedures under domestic law to obtain the information sought.  Since the Court of Appeal has made clear that HMRC's domestic powers (ie, the power to issue a taxpayer notice) can be exercised cross-border, it follows that HMRC should not make use of the relevant tax treaty information exchange mechanism (to obtain information and document from a taxpayer) until it has issued and sought to enforce a taxpayer notice.

Any attempt to use a tax treaty prior to HMRC exhausting its powers under Schedule 36 ought, therefore, to be susceptible to challenge (either by way of judicial review or by whatever domestic means of challenge, if any, is available in the relevant jurisdiction) or in any subsequent penalty proceedings.

Third party notices

The Court of Appeal's decision was concerned only with the extra-territoriality of HMRC's power to issue taxpayer notices.  The position in relation to third party notices was not addressed.

In the author's view, an analogy can be drawn with the SFO's power to issue a notice compelling a third party to produce material pursuant to section 2 Criminal Justice Act 1987.  The territorial scope of that power was considered by the High Court in R (on the application of KBR Inc) v the Director of the SFO (where the SFO had sought to issue a compulsory notice to a corporation in the US in connection with an investigation pertaining to a UK subsidiary).²⁶  In that case, the Court decided that section 2 "extends extraterritorially to foreign [persons] in respect of documents held outside the jurisdiction when there is a sufficient connection between the [person] and the jurisdiction".²⁷ The Court held that whether a "sufficient connection" existed was a fact sensitive issue to be determined on a case by case basis, though it referred to the following factors identified by Nicholls V-C in Paramount:²⁸

• whether the third party is resident, incorporated, or engaged in activities, in the UK;
• whether the request relates to property held by the third party in the UK; and
• whether the request relates to transactions entered into by the third party in the UK.

The author's view is that similar considerations ought to be considered by the F-tT when considering whether to approve a third party notice that is to be issued to a person outside the UK.

¹ [2019] EWCA Civ 51.
² Paragraph 1, Schedule 36 Finance Act 2008.
³ Paragraph 2, Schedule 36 Finance Act 2008.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 information from a third party the name, address and date of birth of a taxpayer whose identity is not known to the relevant HMRC Officer.  In addition to Schedule 36 Finance Act 2008, Schedule 23 Finance Act 2011 confers on HMRC power to obtain specific, limited data items from particular classes of data holder (which power cannot be used to check the data holder's own tax position).
⁴ Both taxpayer notices and third party notices are referred to in Schedule 36 as "information notices".  A person who fails to comply with an information notice is liable to a penalty of £300, and to a daily default penalty of £60 the case of continuing failure to comply (under Paragraphs 39 and 40, Schedule 36 Finance Act 2008).  If a failure to comply with an information notice continues for more than 30 days from the date of notification of the assessment by HMRC of a default penalty, HMRC can apply to the F-tT for an increased daily default penalty of up to £1,000 per day (under Paragraph 49A, Schedule 36 Finance Act 2008).  Where HMRC has reason to believe that a person's continuing failure to comply with an information notice is likely to result in a significant underpayment of tax by that person, they may apply to the Upper Tribunal for a tax-related penalty to be imposed (under Paragraph 50, Schedule 36 Finance Act 2008).  It is an offence for a person who receives or is likely to receive an information notice to conceal, destroy or dispose of (or to arrange for the concealment, destruction or disposal of) documents that are, or are likely to be, required to be produced to HMRC, if the F-tT has approved the giving of the notice or if HMRC have notified the person that they intend to seek the F-tT's approval (under Paragraphs 53 and 54, Schedule 36 Finance Act 2008).  A person guilty of such an offence is liable to a fine or imprisonment for up to 2 years (Paragraph 55, Schedule 36 Finance Act 2008).
⁵ Section 14D Taxation of Chargeable Gains Act 1992.
₆ Among other things, the information obtainable pursuant to bilateral tax treaties may be subject to (a) temporal limitations (such as that in the UK/UAE double tax treaty, which (generally) prevents HMRC from obtaining information about tax years that started prior to 2017); and (b) domestic restrictions on the relevant foreign authority's power to obtain information/documents (for example, the foreign authority may be limited to obtaining documents, and have no power to obtain "information").
⁷ See, for example, Bilta (UK) Ltd v Nazir (No.2) [2015] UKSC 23, per Lord Toulson and Lord Hodge JJSC at [212].
⁸ Masri v Consolidated Contractores Int (UK) Ltd (No.4) [2009] UKHL 43 at [10].
⁹ See, perhaps most famously, Government of India v Taylor [1955] AC 491.
¹⁰ [2006] UKHL 23.
¹¹ Section 555 Income and Corporation Taxes Act 1988
¹² Indeed, the notice was issued to Mr Jimenez at an address in Dubai.
¹³ [2017] EWHC 2585 (Admin) ("Jimenez (HC)").
¹⁴ Jimenez (HC) at [41].
¹⁵ Jimenez (HC) at [43]-[45].
¹⁶ Jimenez (HC) at [47].
¹⁷ Jimenez (HC) at [53]-[60].
¹⁸ As a non-UK lawyer once commented when hearing about the way in which taxpayer notices are procured in the UK, there is something positively Kafkaesque about a process where the taxpayer has no right to attend the hearing; no right to participate in the hearing; no right to appeal against the outcome of the hearing (save by way of the imperfect route of challenge supplied by judicial review); and an exposure to penalties if they fail to comply with the notice (that was approved in their absence).
¹⁹ Jimenez (HC) at [24], [63]-[72].
²⁰ See Jimenez at [49] for a clear articulation of the correct approach to determining the extra-territorial effect of legislation.
²¹ Jimenez at [35].
²² Jimenez at [34].
²³ Jimenez at [36]-[39].
²⁴ Jimenez at [39].
²⁵ Jimenez at [41].
²⁶ [2018] EWHC 2368 (Admin).
²⁷ KBR at [71].
²⁸ Re Paramount Airways Ltd [1993] Ch 223.