EWCA confirms that HMRC third-party information notices cannot be contested
The case arose in the context of HMRC's investigation into the 2013 corporation tax returns of three companies, which it suspected were being used for significant unrecorded cash extractions that could have led to the companies' tax liabilities being understated. HMRC opened the enquiries in 2014 but three years later had not completed them, so the companies applied for closure notices. HMRC then began to seek information on the financial position of the companies' directors and shareholders and their spouses, among others. It wrote to these individuals asking them to provide information voluntarily, but they refused. HMRC therefore set in motion the procedure for exercising its power to apply to the First-tier Tax Tribunal (FTT) for approval of Schedule 36 third-party notices that would force the individuals to provide the specified information. It notified the individuals of this step through 'opportunity letters.'
The taxpayers responded by asking the FTT to arrange an adversarial hearing in which they would be able to set out arguments as to why the third-party notices should not be approved.
However, the FTT refused, holding that recipients of a third-party information notice have no right to appeal it at a full inter partes hearing. Following the EWCA’s ruling in the Derrin judicial review case (2016 EWCA Civ 15), the FTT decided that HMRC can apply for approval of a third-party notice without the taxpayer hearing the full evidence or even being informed of the date and location of the hearing.
The taxpayers appealed that decision to the Upper Tribunal, which agreed with the FTT that Schedule 36 does not grant any opportunity for an inter partes determination of the application. However, it acknowledged 'room for an argument that Parliament intended to leave matters of procedure to the FTT so that it retained the power to direct an inter partes hearing', leaving the matter open to appeal. The taxpayers duly took their case to the EWCA, arguing that the Upper Tribunal had erred in law.
The EWCA has just given its judgment. Dismissing the taxpayer's appeal, it agreed with HMRC that a power to hold an oral inter partes hearing would be inconsistent with the purpose of the Schedule 36 legislation. That purpose is to make HMRC seek the approval of the FTT for a third-party notice purely as 'judicial monitoring' of a step in an investigation by the executive, not an adjudication in a dispute between parties to litigation. It is not intended to be an adversarial process, which could take years to resolve.
Moreover, third-party notices were intended 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,' said Singh LJ in the judgment. 'It is inevitable in many cases, particularly where there are complex arrangements designed to evade tax, that at the investigatory stage it will be difficult, if not impossible, for HMRC to be definitive as to the precise way in which particular documents will establish tax liability', he added. 'It is also clear that in many cases disclosure of HMRC's emerging analysis and strategy and of sources of information to the taxpayer or those associated with the taxpayer may endanger the investigation by forewarning them'.
The fact that HMRC had sent 'opportunity letters' to the taxpayers did not imply that the taxpayers had the right to contest them, said Singh. 'The reason for the giving of summary reasons to the taxpayer under Schedule 36 is purely to guard against arbitrary conduct by the tax authority and to provide the context for any application to the FTT for approval of the third party notice', he said (Kandore Ltd and 19 others v HMRC, 2021 EWCA Civ 1082).
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