Kandore: information notices and the limits of open justice

HMRC's powers under Schedule 36 Finance Act 2008 ("Schedule 36") to obtain information relating to a taxpayer's affairs from a third party are wide-ranging and intrusive.  In many cases the powers can be exercised only where HMRC has applied to the First-tier Tribunal ("FTT") for approval of the relevant third party notice.

The usual practice of the FTT is to hear such applications in private, and without direct submissions from the third party (or taxpayer) concerned.  This practice (in so far as it related to taxpayer notices) was questioned by the High Court in R (oao Jiminez) v the FTT and HMRC [2017] EWHC 2585 (Admin).  In particular, the High Court invited HMRC and the FTT to consider whether that practice should be amended in view of basic principles of fairness and open justice.

Unfortunately, in Kandore Ltd v HMRC [2021] EWCA Civ 1082, the Court of Appeal has now made clear its view that no such reconsideration is required, and that the usual practice of the FTT should continue.

It is not yet known whether an appeal will be sought (or whether permission would be granted).  However, if the matter does arise before the Supreme Court, it seems there must be at least a prospect that it would take a different view (at least, in cases which do not appear to involve avoidance or evasion, hence where the policy reasons for holding hearings in private are less persuasive) given the apparent judicial distaste for "supervision behind closed doors" and Parliament's  increasing appetite for limiting taxpayers' access to justice (notwithstanding the routes of appeal noted by the Court of Appeal).

Background

In 2014, HMRC opened enquiries into Kandore Limited's and other corporate taxpayers' (the "Taxpayers") corporation tax returns for 2013. In December 2017, HMRC applied to the FTT for approval of third party information notices to be sent to certain individuals (the "Third Parties") in relation to the enquiries. In May 2018, the Taxpayers and Third Parties applied to the FTT seeking directions that:

1. HMRC's application for approval should not be heard in private to the exclusion of the Taxpayers and Third Parties;
2. the Taxpayers and/or Third Parties should be given notice of the place and time of the hearing;
3. the Taxpayers and/or Third Parties should be given a summary of HMRC's proposed representations for the hearing and copies of any documents supplied by HMRC to the FTT; and
4. the Taxpayers and/or Third Parties should be given the opportunity to make representations to the FTT in respect of HMRC's application and the question of whether the FTT could or should approve the information notices.

The FTT's decision

The FTT, applying its previous decision in Mr E v HMRC [2018] UKFTT 590 (TC) ("Mr E"), refused the Taxpayer's and Third Parties' application in December 2018.

Essentially, the FTT held that it lacked the power to make the directions sought. The FTT in Mr E had held that the scheme in Schedule 36 is one of judicial monitoring and not an adversarial process. The judicial monitoring exercise was intended by Parliament to be a "streamlined" process and that allowing taxpayers or third parties to participate in the way applied for would frustrate that intention by turning it into a potentially lengthy adversarial process. The open justice principle therefore does not apply in the way it does elsewhere.

The Upper Tribunal's ("UT") decision

In January 2020 the UT refused an appeal by the Taxpayers and Third Parties.

The UT broke down the Taxpayers' and Third Parties' application into two parts: (i) a request (contained in directions (b), (c) and (d) of the directions sought) that HMRC's application should be determined at an inter partes oral hearing (the "Inter Partes Issue"); and (ii) a request (contained in direction (a) of the directions sought) that the oral hearing should not be heard in private (the "Public Hearing Issue"). Given that the FTT's decision turned on whether it had the power to make the directions sought, the question before the UT was whether the FTT was given this power by statute.

Regarding the Inter Partes Issue, the UT held that Schedule 36 excludes the possibility of an inter partes hearing to approve a third party information notice application. As the FTT's case management powers only enable it to give directions that it is authorised by statute to give, it could not give the directions that the Taxpayers and Third Parties sought.

As to the Public Hearing Issue, the UT disagreed with the FTT, holding that there was no bar on the FTT directing that an ex parte hearing be heard in public. However, it would be rare for it to so direct, and there was no need for a public hearing in this case.

The Court of Appeal's decision

The Taxpayers and Appellants appealed the UT's decision on the grounds that it erred in law in respect of both issues. The Court of Appeal dismissed the appeal on both grounds.

The Inter Partes Issue

In respect of the Inter Partes Issue, the Court of Appeal agreed with the UT and approved the FTT's decision in Mr E. The Court of Appeal said that the nature of the scheme in Schedule 36 is the –

"judicial monitoring of a step in an investigation by the executive; it is not like an adjudication in a dispute between parties to litigation. It is not intended to be an adversarial process".

The Court of Appeal referred to its decision in R (Derrin Bros Properties Ltd) v First-tier Tribunal (Tax Chamber) [2016] EWCA Civ 15, in which it said (obiter) that the purpose of the scheme in Schedule 36 is –

"to assist HMRC at the investigatory stage to obtain documents and information without providing an opportunity for those involved in potentially fraudulent or otherwise unlawful arrangements to delay or frustrate the investigation by lengthy or complex adversarial proceedings or otherwise".

It was for this reason that Parliament chose a judicial monitoring process rather than an adversarial one. Consistently with this, Schedule 36 gives taxpayers and third parties very limited, prescribed rights to information regarding applications for approval of notices, and to appeal notices (which, as noted in R (Kotton) v First-tier Tribunal (Tax Chamber) [2019] EWHC 1327 (Admin) do not extend to being able to appeal notices on their merits).

The Court of Appeal there also rejected a complaint on human rights grounds as "an attack on the whole model of… judicial monitoring".

The Court of Appeal in this case rejected the Taxpayers' and Third Parties' arguments based on authorities in different contexts where ex parte applications are used. Most significantly, the Court of Appeal held that the principle of access to justice did not require an inter partes procedure to be adopted in the context of information notices. The Court of Appeal noted that both taxpayers and third parties have a route to justice via judicial review of HMRC's and/or the FTT's decisions in respect of information notices, and, if HMRC's investigation results in an assessment of tax, the taxpayer will have the right to appeal that.

The Court of Appeal also rejected the Taxpayers' and Third Parties' arguments based on the permissive language of para 3(2A) of Schedule 36, which provides that an application for approval "may be made without notice". The Court of Appeal said that this relates to the making of the application by HMRC, and not how the application is dealt with by the FTT.

Further, although the Court of Appeal agreed that the third party who will receive the notice is the "respondent" under the definition in the FTT Rules, those Rules also provided for a matter to be "determined without notice to or the involvement of a respondent".

The Public Hearing Issue

The Taxpayers' and Third Parties' arguments in respect of the Public Hearing Issue centred on the principle of open justice and relied on a long line of authorities regarding that principle. However, the Court of Appeal held that the open justice principle is concerned with a typical, adjudicative hearing by a court or tribunal. It has no application to the process of judicial monitoring.  In the particular context of approval of information notices, the Court of Appeal called the principle of open justice inconsistent with the scheme created by Parliament.

In any event, the Court of Appeal considered that one or more of the exceptions to holding a public hearing in rule 32 of the FTT Rules (requiring a private hearing in order to maintain the confidentiality of sensitive information, to protect a person's right to respect for their private life, or because a public hearing would prejudice the interests of justice) would likely apply to most information notice applications. Such applications require taxpayers' private affairs to be discussed, and may raise the question of whether they have been avoiding or evading tax.

As to whether the FTT could order an information notice application to be held in public, the Court of Appeal noted that HMRC had not cross-appealed on this issue, and so did not opine on this.

Conclusions

The Court of Appeal's decision clearly gives primacy to HMRC's ability to be able to conduct investigations efficiently without being hampered by taxpayer or third party challenges.  To that extent, it will not be welcomed by taxpayers and third parties seeking protections in respect of the exercise of HMRC's powers.

It should be noted, however, that the exclusion of the taxpayer's right to participate in the hearing and to make representations to the Tribunal does not preclude its right to make representations to HMRC in respect of their intention to apply for approval. As noted by the FTT in Mr E, these would have to be provided by HMRC to the FTT consistently with HMRC's duty in an ex parte application to put before the FTT all material for and against the application. The FTT noted that HMRC's position was that they always do so.

Also, as noted by the Court of Appeal, it is possible to challenge by way of judicial review a decision by HMRC to issue a third party notice and/or a decision by the FTT decision to approve it, if there are grounds to do so.

The dichotomy drawn between adjudicative, adversarial judicial procedures on the one hand, and the procedure of judicial monitoring on the other, is also of more general application. The Court of Appeal's comments on the limited/non-existent role of the fundamental principles of access to justice and open justice in this context are likely to be of particular interest and relevance wherever judicial monitoring  procedures apply.