HMRC can’t fish for client information

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Jessica McLellan discusses a case that revealed the lengths to which HMRC is prepared to go in obtaining client information about offshore dealings from lawyers and accountants.

The first tier tribunal (FTT) held that the appeal by Wilsons Solicitors (TC06778) against an information notice should be allowed. However, the judge went considerably further in concluding that HMRC’s notice was wholly incorrect and its interpretation in parts “requires violation to be done to the wording and meaning” of the legislation.

The facts

HMRC had served an information notice on the Wilsons partnership under FA 2011, Schedule 23, para 1. Wilsons was one of ten legal firms to receive such a notice from HMRC. The notice required Wilsons as a “relevant data holder” to provide “relevant data”.

The required data consisted of details of beneficial owners of offshore companies and persons who had beneficial interests in offshore partnerships, trusts and other like entities where Wilsons had provided services related to the formation of such entities, the creation of beneficial interests or the settling of funds into them. The details HMRC sought related to a number of years.

The legislation allows appeals against a Schedule 23 notice on three grounds:

  • the notice is unduly onerous;
  • the recipient is not a “data holder”; or,
  • the information is not “relevant data”. 

The appeal

Wilsons appealed on the latter two grounds and the FTT dealt with both, albeit with the question of their status as a “data holder” as the primary consideration. Professional firms have an equal obligation to consider the provision of third-party information within the context of client data protection, and whether such information is properly required to be produced under the law. Questioning an information notice is not driven by a lack of cooperation, but a careful balancing of legal obligations to both HMRC and the client.

HMRC’s argument

HMRC’s justification for issuing the information notice was that Wilsons was required under Money Laundering Regulations to carry out due diligence on clients. This due diligence resulted in the partnership retaining records pertaining to beneficial ownership and interests. In HMRC’s view, these records met the test in the legislation of maintaining a register (a record or a list) under an enactment (the Money Laundering Regulations). 

Decision

The FTT reached a different view: that maintaining a register involved more than fulfilling the obligation to hold records on clients. Otherwise, the Schedule 23 test would mean a register comprised any records held by a person that they were required to keep.

If the legislation had intended to be interpreted so widely, then there would not have been the need for other categories and definitions in the same section of the schedule. In addition, the judge noted that there had been a choice to use the terms “register” and “maintain” rather than simply say “records” and “keep”.

The conclusion was therefore that Wilsons was not a “data holder” by virtue of keeping records to comply with the Money Laundering Regulations.

On the matter of whether such records are “relevant data”, the tribunal concluded that in this context the Schedule 23 powers would cover the provision of copies of entries on a register but did not cover records that were simply held.

HMRC was seeking records in relation to clients that had been given advice on offshore structures – there had been no entry of these records onto a register. Therefore, there was no “relevant data” for HMRC to request.

For these reasons, the tribunal did not vary HMRC’s notice on appeal by amending the scope of the information to be provided. The decision was that the notice was invalid as a whole and that HMRC’s interpretation was a considerable step too far.

Far-reaching ramifications

A high level, it is clear why HMRC would be interested in obtaining significant amounts of information around beneficial interest and ownership in relation to offshore structures.  Alongside the common reporting standard (CRS), growing international transparency and requirement to correct (RTC), HMRC has a continuing strategic focus on tackling offshore avoidance. 

This does not, however, give HMRC sweeping powers to obtain information from advisers complying with the Money Laundering Regulations. Had this appeal been quashed, then the ramifications for professionals in the legal, accounting and tax world could have been considerable. Any records that they were required to keep could be deemed by HMRC to be “registers” and covered by Schedule 23, riding roughshod over the definitions and restrictions already in the legislation. 

In this case, sense has prevailed, but not before seven out of the ten legal firms had already complied with HMRC’s notices.

About Jessica McLellan

Jessica McLellan

Jessica McLellan is a tax risk and dispute resolution director at Blick Rothenberg Limited. She specialises in advising on proactive tax risk management for high net worth individuals, dealing with HMRC and resolving complex tax disputes. She is also a CEDR-trained mediator and has resolved a number of cases through Alternative Dispute Resolution, both as a HMRC mediator and an external mediator.

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By NJM
13th Dec 2018 15:52

Your article attracted me because I had a client who recently had an unannounced visit from HMRC, under the guise of a National Minimum Wage visit, which drifted into self assessment and land and property transactions, nothing to do with the reason for the visit. It also ignored the client agent relationship, going directly to the business keeping the agent out the loop and in this particular case asked question to staff which were completely inappropriate and in some cases out with their pay grade.

Has anyone else experienced this as it looks like a fishing expedition, using the NMW route to bypass the correct channels HMRC should use to investigate these areas ( self assessment and property transactions) and I would have thought the RTI regime itself would highlight an infringement of NMW.

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14th Dec 2018 15:58

Good decision. Your money laundering checks are not a "register". It is an assault to the English language to suggest that they are.

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19th Dec 2018 20:03

Judge Barbara Mosedale judgements are always worth a read and she certainly seems correct on the interpretation of the scope of the TMA section in this case. So much so I would be surprised to see it appealed but unsurprised to see the Schedule 23 coverage extended in an amendment as part of the DAC6 implementation

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