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UK HMRC avoids costs penalty despite 'weak case'

Monday, 10 June, 2019

Law firm Wilsons has failed to recover legal costs from HM Revenue & Customs regarding its successful challenge to a speculative information notice, despite HMRC's resort to a 'weak case' in its defence.

HMRC had issued Wilsons with an information notice under Schedule 23 to the Finance Act 2011, demanding details of clients who were seeking advice on offshore financial structures. It argued that the firm's duty to maintain money laundering records made it a 'relevant data holder' for Schedule 23 purposes.

Last November the First-Tier Tax Tribunal decided the dispute in Wilsons' favour and quashed the notice (Wilsons Solicitors LLP v HMRC, 2018 UKFTT 627 TC). The firm then applied for a costs order against HMRC, arguing that HMRC had behaved unreasonably when defending its challenge to the Schedule 23 notice.

It noted that HMRC had admitted during the case that it had issued the notice in order to test the law, and had sent similar notices to nine other law firms to see what would happen. Instead, said Wilsons, HMRC should have conceded as soon as the firm lodged its notice of appeal, and should have tried to obtain a declaration of the extent of its powers rather than issuing notices to solicitors, obliging them to defend them at great cost.

However, the tribunal rejected Wilsons' claim for costs. Judge Barbara Mosedale held that, though HMRC's case was weak, it was not 'objectively unarguable'. Rather, she said, the very wide statutory definition of the term 'register' in the legislation led HMRC to take the view that it might have been able to persuade the tribunal that a person who kept money laundering records was a relevant data holder (Wilsons Solicitors v HMRC, 2019 UKFTT 0341 TC).

Mosedale found only one part of HMRC's case to be unreasonable - that it had alleged Wilsons sought special treatment and was in breach of the Law Society's anti-money laundering guidance. She awarded the firm the costs involved in rebutting this statement.

The original November 2018 decision was favourable for law firms, because if it had gone the other way, they would now all be vulnerable to Schedule 23 notices. However, according to law-reporting firm Thomson Reuters, this latest ruling on costs 'may encourage HMRC to run novel or controversial arguments concerning the interpretation of new legislation, in the knowledge that it will not be required to bear the other party's costs'.

Sources