Complying with an information notice from the UK's HMRC can be a delicate balancing act. After having spent weeks in informal conversations, the issuance of a formal notice under Schedule 36 of the Finance Act 2008 can feel quite daunting. A shift in the atmosphere takes place: what was once a more relaxed dialogue with HMRC is now a formal exchange. An enforceable legal obligation to comply with their requests arises, and the clock for compliance starts ticking…
Schedule 36 provides HMRC with an arsenal of tools to obtain the documents and information they (reasonably) require in order to check the tax position of a taxpayer. Different types of notices can be issued to a variety of recipients (e.g., to the taxpayer itself, a third-party holder of the taxpayer’s documents, or, more specifically, a financial institution). However, there is one restriction (among others) which applies to them all: the recipient of a notice is only obliged to disclose documents that are within their “possession or power”. Do not be fooled by this formula’s apparent simplicity – there is more to it than meets the eye. Before disclosing any documents to HMRC, one must properly understand the threshold of compliance required by the legislation and carefully assess what does and does not fall within it.
What does “possession” mean?
The “possession” component of the requirement is straightforward. If you physically hold a document, it is most definitely within your “possession”.
What does “power” mean?
In a Schedule 36 context, “power” is currently interpreted to include both legal power (i.e., power that derives from a legal relationship or entitlement) and de facto power (i.e., the pragmatic ability to obtain the documents). However, this was not always the case. A brief journey through the relevant case law shows how throughout the course of the past decades the meaning of this term has been strengthened and expanded for the tax context, gradually raising the bar of what is required to prove that the requested documents are not within one’s “power”.
1980 | In Lonrho Limited v Shell Petroleum [1980] 1 WLR 627, “power” was defined in the context of a non-tax related discovery exercise to mean a presently enforceable legal right to obtain documents without obtaining anyone’s consent. The case concerned Shell’s ability to compel certain of its foreign subsidiaries to disclose documents. The House of Lords found that Shell did not have the power in its legal capacity of shareholder to compel disclosure from its subsidiaries (as the decision to disclose rested with the board of directors of the subsidiaries). |
2004 | In Meditor Capital Management v Feighan [2004] S.T.I. 1280, the meaning of “power” was specifically assessed within a tax context. The UK subsidiary of a Bermudan fund claimed that documents requested by HMRC were not within its “power”, as its parent entity had declined its requests to hand the documents over. The interpretation of “power” adopted in Lonrho was questioned by the judge, who stated that there would be “no reason why power or possession should mean anything other than a de facto ability to obtain the documents or particulars”. This passage is crucial – it hints at an expansion of the Lonhro test which encompasses not only an enforceable legal power, but also a de facto power, to obtain documents. |
2011 | In HMRC v Parissis and others [2011] UKFTT 218 (TC), the FTT agreed with HMRC’s argument that “power” in the information notice context had a different (expanded) meaning than that given to it in a standard civil disclosure context (i.e., in Lonhro). The FTT made it clear that documents were within a person’s “power” so long as they could be obtained from another person, by influence or otherwise, even if that other person had a legal right to refuse the request. Importantly, the case also confirmed the burden of proof: HMRC must first raise a prima facie case, on the available evidence, that the documents are within the recipients’ “possession or power” and it is then for the recipients to show that they are not. |
2014 | In Patel & K Patel (a partnership) v The Commissioners for HM Revenue & Customs [2014] UKFTT 167 (TC), the settlor of a remuneration trust argued that certain documents were not within their "power" because the documents were held by the trustee entity, which had refused to hand them over following the settlor's request (in the shape of a single letter without follow-up). The FTT found that the settlor, due its passive acceptance of the trustee’s refusal, had not made a “serious attempt” to obtain the documents and had therefore failed to show that the documents were not within their “power”. |
2021 | In HMRC v Mattu [2021] UKUT 245 (TCC), the approaches developed in Parissis and Patel were fully endorsed by the UT and therefore crystallised as binding authority rather than merely persuasive precedents. Similarly to Parissis and Patel, this case concerned the use of a trust structure by a taxpayer whose reticent attitude to compliance with the Schedule 36 notice earned little sympathy from HMRC and the UT. |
One Call – nothing new under the sun…
The journey summarised above finds its latest stop in the recently decided case of One Call Insurance Services Limited v HMRC [2022] UKFTT 184 (TC). There is no need to set the facts out in detail; similarly to some of the cases set out above, this case concerns the use of a remuneration trust (although by a corporate entity in this instance). Faced with an information notice, One Call sent a single letter to the trustee seeking disclosure of the documents. No attempt was made to follow up with the trustee, nor with any other entity which could have potentially stored the relevant documents. Nonetheless, One Call argued that the documents were not within their “power”.
By examining the relationship between One Call and the other parties involved in the remuneration trust, the FTT concluded that the documents were, prima facie, within One Call’s “power” due to a number of factors:
- despite the absence of a legal power to obtain the documents under the terms of the trust deed, One Call certainly did have some pragmatic influence over the parties involved in the trust, as they had set it up in the first place;
- since contributions to the trust amounted to approximately £45m over the course of the trust’s lifespan, it was reasonable to assume that that the money had not gone into a “black hole” and therefore that One Call had some ability to obtain information regarding its use; and
- one of the companies to which contributions were made was owned by One Call’s principal shareholder (thereby re-enforcing a reasonable assumption of pragmatic influence).
In the end, One Call’s (minimal) approach to compliance was not deemed enough to discharge the burden of proof, meaning that One Call failed to show that the documents were not within their “power”.
Despite presenting as a fairly standard Schedule 36 case, what has made One Call the subject of interest among legal commentators is the following statement from Judge Tracey Bowler: “My conclusion should make clear that the law requires serious efforts to be made to obtain the documents”. Speculation ensued as to whether there is a difference between making a “serious attempt” (this being the wording deployed by the FTT in Patel) and “serious efforts”, with the latter formulation potentially raising the bar higher than Patel had previously done.
At the moment, it is difficult to see how One Call sets a higher standard. It remains, for now, a non-binding FTT decision bearing the standard hallmarks of a Schedule 36 case. The test applied by the FTT is the same as that crystallised by the UT in Mattu; nothing more, nothing less. However, what the judgment does confirm is that the FTT will want to see a meaningful engagement with the task of retrieving the documents, rather than a superficial, tick-box approach. The interesting aspect of the case lies not in the potential exegesis of Judge Bowler’s concluding comment, but rather in how HMRC was able to successfully establish a prima facie argument that the documents were within One Call’s “power” and how One Call ultimately failed to rebut such argument.
What does it all mean in practice?
“The sum of all I can, I have disclosed” utters a messenger in Richard III. A tax analysis of Shakespeare’s works is (regrettably) beyond the scope of this article. However, the goal for a recipient of a Schedule 36 notice is to be able to comfortably echo that messenger’s words. To do so, the key is to understand what the current law means by “all I can”.
So long as a given document is (i) within your physical possession, or (ii) a document which you can feasibly obtain from another person (whether pursuant to a legal power or simple practical ability), then it is within your “possession or power”. Moreover, if none of the other restrictions contained within Schedule 36 can come to your rescue, you will be under a legal obligation to disclose that document to HMRC – non-compliance will lead to penalties being incurred. Of course, there will also be a question of whether the documents you have retrieved (or have the “power” to retrieve) fall within the scope of the notice. Depending on the specific fact pattern at hand, that separate exercise can be complex and it may be advisable to seek expert legal input.
A final note is that you may not be able to appeal a Schedule 36 notice. So called “financial institution notices” and notices issued with the approval of the FTT, do not carry a right to appeal (although penalties charged in their respect can still be appealed). For such notices, understanding exactly what falls within your “possession or power” is even more critical (as no representations can be made before the FTT to question the validity of the notice itself).
It is advisable to seek legal counsel to understand how best to comply with a Schedule 36 notice. Issues to consider when disclosing information and documents to tax authorities in the context of tax investigations/audits are included in our Contentious Tax Tool. This tool helps businesses navigate risks arising on tax-related disputes and investigations by operating as a checklist to consult both when a tax dispute is on the horizon or a new issue arises in an ongoing dispute.
If you would like to discuss any of the points raised in this blog post in further detail, or for further details about and to request access to our Contentious Tax Tool, please contact our tax investigations and disputes team or your usual Freshfields contact.
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