HMRC allowed to request documents from person abroad says Court of Appeal

Out-Law News | 06 Feb 2019 | 1:03 pm | 3 min. read

UK law allows HM Revenue & Customs (HMRC) to issue a notice to a person resident outside the jurisdiction requiring the production of documents to check that person's UK tax affairs, the Court of Appeal has decided , overturning a decision of the High Court.

"This decision may lead to a more muscular approach by HMRC with multinational enterprises and offshore service providers," said Jason Collins, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com. 

The case concerned Tony Micheal Jimenez, a UK national who had previously lived in the UK but claimed to be resident in Dubai at the relevant time. HMRC were investigating whether Jimenez had actually "broken" his UK residence and wanted information about his bank and credit card accounts as well as details of his visits he had made to the UK.

HMRC has power under paragraph 1 of Schedule 36 of the Finance Act 2008 to issue a notice to a taxpayer requiring the provision of information or documents reasonably required to check the taxpayer's tax position. There are fines for failing to comply with a notice, and criminal offences for destroying or tampering with documents.

Jimenez challenged a notice issued by HMRC and approved by the First-tier Tribunal, which was sent to him at his Dubai address, on the basis that HMRC did not have the power to issue a notice to a person outside the UK.

He argued that the legislation giving HMRC the power to issue notices had to be construed by reference to international law. He argued that international law restricted one country from seeking to exercise an enforcement jurisdiction within the territory of another sovereign state and that use of a civil penalty or criminal regime to encourage compliance was the exercise of such a jurisdiction.  As it was to be presumed that Parliament would not have chosen to confer powers on HMRC which could be exercised in breach of international law, the legislation must be construed as only permitting HMRC to serve notices on a person within the jurisdiction.  The High Court agreed.  HMRC appealed.

The Court of Appeal decided that the notice was valid.

"Delineating the precise boundary between prescriptive (or legislative) and enforcement jurisdiction in international law is far from straightforward. But I do not accept that sending a notice by post to a person in a foreign state requiring him to produce information that is reasonably required for the purpose of checking his tax position in the UK violates the principle of state sovereignty", Lord Justice Leggatt said in his judgment.

Lord Justice Patten said: "A paragraph 1 notice can only be given to someone who is or may be a UK taxpayer and it is this status rather than his place of residence which is key to availability and operation of the power."

"HMRC do not of course contend that the civil penalties for non-compliance with the notice could be directly enforced against the taxpayer in a foreign state but I decline to infer from this that to read paragraph 1 as entitling HMRC to serve the notice abroad would serve no useful purpose. In the case of a UK taxpayer with a residence abroad, there will in many cases be a real possibility that the taxpayer continues to hold assets within the jurisdiction which could be used to recover the civil penalties for non-compliance. Even if only enforceable domestically the civil penalties are likely in many cases to provide an incentive to comply with the notice," he said.

He referred to the fact that it is "commonplace" when proceedings are brought in England against a foreign defendant for orders to be made requiring the defendant to disclose documents or information, with the possible sanction of committal for contempt if the order is not obeyed. He said that the making and service of these orders is not regarded as infringing the territorial sovereignty of the state where the defendant is located and there is no difference in principle between such an exercise of state power and HMRC giving a taxpayer notice to a person situated abroad.

As well as having the power to issue a notice to a taxpayer requiring information to check the taxpayer's tax position, HMRC can also serve notice on a third party, such as a bank or an adviser, requiring information or documents to check the tax position of the taxpayer.

"Although this case related to a notice issued to the taxpayer himself, the decision may lead to HMRC issuing more third party notices to persons outside the UK, for example offshore trust and company service providers or a non-UK parent/subsidiary in a multinational group," Jason Collins said.