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England and Wales High Court (Administrative Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> Banque Internationale A Luxembourg SA, R (On The Application Of) v Inland Revenue [2000] EWHC Admin 360 (23 June 2000)
URL: http://www.bailii.org/ew/cases/EWHC/Admin/2000/360.html
Cite as: [2000] EWHC Admin 360
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IN
THE HIGH COURT OF JUSTICE |
CO/2100/99 |
Royal Courts of Justice
Strand
London WC2A 2LL
23rd June 2000
MR JUSTICE LIGHTMAN
BETWEEN:
THE QUEEN
and
COMMISSIONERS OF INLAND REVENUE
Respondents
ex parte
BANQUE INTERNATIONALE A LUXEMBOURG SA
Applicant
- - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - -
Mr Gerard Clarke (Instructed by Messrs Norton Rose) appeared on behalf of the Applicant.
Miss Ingrid Simler (Instructed by the Solicitor of Inland Revenue) appeared on behalf of the Respondents.
Judgment
As Approved by the Court
Crown Copyright ©
INTRODUCTION
1. In these proceedings (pursuant to permission) Banque Internationale a Luxembourg SA ("BIL") seeks orders of certiorari quashing decisions of the Commissioners of the Inland Revenue ("the CIR") to issue and serve on BIL on the 7th April 1999 5 notices ("the Section 20 Notices") under Sections 20(3) of the Taxes Management Act 1970 ("Section 20") and on the 22nd June 1999 3 notices ("the Section 767 Notices") under Section 767 of the Income and Corporation Taxes Act 1988 ("Section 767").
2. The CIR are investigating large scale corporate tax avoidance schemes under which tax relief companies make contributions to an Employee Share Ownership Trust ("ESOT") set up and operated by Abbey Consultants S.A. ("Abbey") and Farndale Consultants Limited ("Farndale") of which the beneficiaries are Mr David Sinclair ("Mr Sinclair") and his wife. The finance and banking facilities for the schemes are provided by BIL. Over a £150 million of tax is at stake. In furtherance of these investigations the CIR have issued the notices requiring specific classes of documents from BIL in relation to named taxpayers. BIL is willing to cooperate with the CIR, but owes duties of confidentiality as their banker to the taxpayers. The taxpayers however refuse their consent to BIL furnishing the documents requested, and in view of the stance adopted by the taxpayers and at their instance BIL challenges the validity of the notices.
3. The history of the investigation is set out in the affidavit of Mr Nicholas Miller ("Mr Miller") of the Special Compliance Office ("the SCO") and one of HM Inspectors of Taxes. The Inland Revenue's Special Investigations Section ("the SIS") is a department responsible for monitoring and acting against corporate tax avoidance schemes, which often involve a high degree of technicality, substantial sums of money and the use of corporate vehicles in more than one tax jurisdiction. Such are believed to be the schemes in course of investigation. In 1996 SIS Inspectors became aware that a number of United Kingdom resident companies ("Vendors") had sold a number of companies ("Targets") to Fedelm International Limited ("Fedelm"), an Irish registered company resident in Monaco or to companies controlled directly or indirectly by Fedelm. Most of the Targets are engaged in the trade of leasing assets.
4. It is a feature of the tax regime concerning the leasing trade in the United Kingdom that companies which obtain and lease assets to third parties qualify for tax reliefs which have the effect of reducing or extinguishing tax liabilities in the early years of a leasing contract. The effect in particular of Sections 24 and 39-50 of the Capital Allowances Act 1990 is that a lessor is entitled to claim capital allowances on expenditure on assets which he leases. The allowances are often sufficiently large in the early years of a lease to reduce or extinguish the tax liability on the income stream from the lease. The effect of the legislation is to "front load" the allowances.
5. Enquiries established the apparent association of Mr Sinclair and Mr Michael Charlton ("Mr Charlton"), both of whom were based in Monaco and actively involved in tax avoidance schemes, with Fedelm's activities. The SIS embarked on detailed investigation of Fedelm's activities. It became clear that Fedelm or its subsidiaries had acquired some 30-40 Targets since 1992 and both Mr Sinclair and Mr Charlton became directors of the Targets at the time of acquisition. In each case, shortly after the change of ownership, the Target made a large contribution to an ESOT established by Abbey, a company of which Mr Sinclair was a director. The contributions claimed to have been made by the Targets in this way were to the order of £424 million, and further contributions to the order of £26 million probably have been made. Genuine contributions to an ESOT qualify for tax relief, subject to certain conditions being fulfilled. During the same period of account that they made the contributions to the ESOT, the Targets disposed of most or all of their leased assets. This would have two effects. First, it would bring money into the Targets because, typically the Targets would be assigning their contractual rights to the income streams under the leases as well as selling the underlying assets. Second, it would crystallise the deferred tax liability the existence of which had been directly relevant in fixing the price of the Targets.
6. The genuineness and efficacy of the contributions to the ESOT were (and are) therefore of considerable interest to the Inland Revenue, for they were the proffered basis for the claim made by the Targets that the tax liability which arose on disposals of the leased assets by the Targets was reduced or eliminated altogether. The potential tax at stake is of the order of £150 million. One particular case, taken alone, involves tax of some £35 million. The CIR do not accept that these large payments into the ESOT were made at all, but even if (as is more than possible) these large sums of money changed hands, the CIR regard it as a reasonable inference, indeed likely, that the money travelled full-circle in a short period of time and that any so-called contribution to the ESOT was not a contribution to a trust in any real sense. They believe that, on enquiry, the aim and effect of the transactions is likely to prove to have been to eliminate a liability to corporation tax on the part of the Targets and to put into the hands of Mr and Mrs Sinclair (as beneficiaries of the ESOT), Fedelm or associated companies a proportion of the value of the assets of the Targets which would otherwise have met that liability. The SIS inspectors made enquiries with a view to establishing whether the contributions to the ESOT qualified for relief and attempted, with little success, to obtain supporting documentation from the Targets.
7. The enquires by SIS established that the London branch of BIL had provided funds and/or other banking facilities to Fedelm, Mr Sinclair, the Targets and other companies owned by Fedelm. In particular, BIL had on a number of occasions acted in a fiduciary capacity for Fedelm during negotiations to acquire Targets. In two particular cases the close involvement of BIL resulted in a BIL employee, David Fordham, becoming a director of a Target. In a letter dated the 5th November 1993 written by Mr Sinclair in relation to the acquisition of a Target he referred to:
"the creation of other allowable deductions ... using arrangements disclosed in some detail to Banque Internationale a Luxembourg in the normal course of our (i.e. Fedelm's] group banking arrangements with them."
Mr Miller concluded that BIL had a close and continued involvement with the activities of Fedelm and Mr Sinclair and that it was highly likely to have documentation of considerable relevance to his enquiries. The SIS accordingly approached BIL in early 1998 and subsequently held discussions with representatives from BIL. At a meeting on the 10th September 1998, the SIS requested access to the complete BIL files for a sample of the transactions under enquiry. BIL cooperated to a limited extent, providing information, a report and supporting documentation relating to fees received for services provided to Fedelm and its subsidiaries. The request by SIS to be permitted to visit BIL to examine complete files on a sample basis (which was put to BIL again in a letter of the 5th November 1998) however did not receive a direct answer. A telephone message of the 6th November 1998 stated that BIL's customers (the Targets and Mr Sinclair) had declined to give consent to the disclosure of a number of documents.
8. Mr Miller says that, when he assumed responsibility for the current enquiry, his principal objective was to investigate the circumstances surrounding, and the financial arrangement underlying, the contributions to the ESOT because those contributions gave rise to a large potential loss of tax. He took the view, which he still holds, that in order to carry out this investigation and establish the true facts, it is necessary to obtain access to the underlying documents. His starting point was to consider where such documents might be held and by whom. He looked at the previous papers, including a report and documents provided by BIL, and concluded that there was strong evidence of a close and enduring business relationship between BIL and the individuals controlling Fedelm. He drew the conclusion that it was likely that BIL would hold the bank statements, correspondence and other papers that are now specified in the Section 20 Notices. Mr Miller was aware that BIL had an association with Mr Sinclair and that, according to BIL, it had provided banking facilities to him. He was also aware that banking facilities had been provided by BIL to a Panamanian registered company indirectly controlled by Mr Sinclair. This company has held and may still hold a significant minority shareholding in Fedelm. There was evidence that BIL has been closely involved, in the course of providing banking facilities to Fedelm and its subsidiaries, with most (if not all) of the cases which have come to notice. He did not however wish to burden BIL with requests for documents concerning over all the 30-40 Targets. He deliberated how best he could minimise the burden on BIL of complying with statutory notices, while at the same time effectively pursuing his enquires. After consultation with senior colleagues in the SCO, including one of the Deputy Directors, he decided to restrict the request to 4 Targets only and to Mr Sinclair.
SECTION 20(3) AND THE SECTION 20 NOTICES
9. Section 20(1) provides that an inspector may by notice in writing require a taxpayer to deliver to him documents or provide information relevant to, or to the amount of, his tax liability. Section 20(3) provides that:
"an inspector may, for the purpose of inquiring into the tax liability of any person ("the taxpayer"), by notice in writing require any [other person] to deliver to the inspector ... such documents as are in his possession or power and as (in the inspector's reasonable opinion) contain, or may contain, information relevant to any tax liability to which the taxpayer is, or may be, or may have been, subject or to the amount of any such liability ..."
Section 20(7), (8D) and (8E) are designed to provide protection to the taxpayer in respect of the exercise of this jurisdiction. So far as relevant, they provide as follows:
(7) Notices under [subsection (3) above] are not to be given by an inspector unless he is authorised by the Board for its purposes: and
(a) a notice is not to be given by him except with the consent of a General or Special Commissioner;
and
(b) the Commissioner is to give his consent only on being satisfied that in all the circumstances the inspector is justified in proceeding under this section.
(8D) ... references in this section to documents and particulars are to those specified or described in the notice in question: and-
(a) the notice shall require documents to be delivered (or delivered or made available), ... within such time (which ... shall not be less than thirty days after the date of the notice) as may be specified in the notice ...
(8E) An inspector who gives a notice under subsection ... (3) above shall also give to ...
(b) the taxpayer concerned (in case of a notice under subsection (3) above).
a written summary of his reasons for applying for consent to the giving of the notice.
Section 20B contains restrictions on the powers conferred by Section 20.
"(1) Before a notice is given to a person by an inspector [under Section 20(3)] ... the person must have been given a reasonable opportunity to ... deliver or make available the documents in question and the inspector must not apply for consent under [Section 20(7) ... until the person has been given that opportunity.
(1A) ... where a notice is given to any person under Section 20(3) the inspector shall give a copy of the notice to the taxpayer to whom it relates ...
(2) ... a notice under Section 20(3) does not oblige a person to deliver ... or make available ... documents relating to the conduct of a pending appeal by the [taxpayer] ..."
10. In accordance with the statutory requirements:
(a) on the 16th February 1999 Mr Miller sent precursor requests required by Section 20B(1);
(b) when by letter dated the 12th March 1999 BIL stated that it was unable to comply because the Targets had expressly not consented, Mr Miller prepared a detailed briefing for the general commissioner;
(c) he invited Mr Anthony Bunker, the agent representing Fedelm to make written representations to be placed before the general commissioner and Mr Bunker did so by letter;
(d) on the 15th March 1999 in advance of the hearing before the general commissioner Mr Miller lodged the briefing document;
(e) on the 7th April 1999 a hearing took place attended by Mr Miller and the general commissioner at the close of which the general commissioner gave his consent;
(f) Mr Miller sent to each of the taxpayers concerned (pursuant to Section 20B(1A)) a copy of the notice together with (pursuant to Section 20(8E)) a written summary of the reasons why consent to issue the notices had been sought.
11. The four Section 20 Notices addressed to the four Targets concerned the tax affairs of those companies. The stated purpose of those notices was to ascertain whether contributions alleged to have been made to Abbey were eligible to tax relief. They required production of all documents relating to the payment of contributions to Abbey, the subsequent application of those contributions, the underlying financial arrangements, the funding and associated security arrangements and any other document relating to tax mitigation. They were in the same terms and read as follows:
"1. I, the undersigned, being one of Her Majesty's Inspectors of Taxes authorised for the purposes of Section 20 of the Taxes Management Act 1970,
For the purpose of enquiring into the tax liability of [the Target]
Hereby require you under subsection (3) of that section not later than 7 May 1999
to deliver to me at the above office or, if you so elect, make available for inspection by Mr N A Miller all such documents in your possession or power as are specified or described in the Schedule below....
Schedule
(i) A copy of the ledger for all accounts operated by [the Target] whether in its own name or in any other name or names.
(ii) Any document, any earlier drafts of the same documents and any correspondence or notes concerning the document, relating to the creation of any security for monies advanced to [the Target], or for any security given by [the Target] for monies advanced to another party.
(iii) Copies of ledger entries for all accounts operated by the trustees of the Abbey Consultants SA Employee Share Ownership Trust covering the period commencing with the receipt of any contribution from [the Target] and ending with the expenditure by the trustees of that sum.
(iv) All correspondence (including faxes) notes of telephone conversations and notes of meetings between any director, officer, employee, agent or representative of Banque Internationale A Luxembourg ("BIL") and any director, officer, employee, agent or representative of [the Target] or of Fedelm International Ltd or of any direct or indirect subsidiary of the latter which contain any reference to:-
a. Any contribution by [the Target] to the Abbey Consultants SA Employee Share Ownership Trust.
b. Any loans made to [the Target] by Fedelm International Ltd or any direct or indirect subsidiary of the latter.
c. Any overdraft facilities used by Fedelm International Ltd or by any direct or indirect subsidiary 7 days or less before the making of any contribution described at (a).
d. Any arrangements for the mitigation of tax otherwise payable by [the Target].
(v) All internal correspondence, memoranda, notes of telephone conversation, notes of meetings, reports, submissions and evaluations which make any reference to the matters in (iv) a - d.
(vi) All correspondence, faxes, notes of telephone conversation and meetings between any director, officer, employee, agent or representative of BIL and any other party which contain any reference to the matters in (iv) a - d.
In accordance with S 20B(5) Taxes Management Act 1970, this request applies to all documents originating within the six year period ending with the date of this notice."
The summaries of reasons for those notices read as follows:
"In accordance with S 20(8E)(b) TMA 1970, I am also providing a summary of the reasons why I applied for the consent of a Commissioner to give the notice. These were as follows:-
I wished to obtain all documents held by BIL (including internal and external correspondence and other paperwork) relating to the payment of a contribution to the Abbey Consultants SA Employee Share Ownership Trust by [the Target] and to the subsequent application of that contribution by the trustees together with all documents relating to the underlying financial arrangements, including the funding provided to the company, the specific funding for the contribution and associated security arrangements. I also wished to see any documents relating specifically to arrangements for tax mitigation. These documents may contain information relevant to the question of whether the contribution to the trust shown in the accounts of [the Target] in question qualifies for tax relief and therefore to the tax liability of the company."
12. The Section 20 Notice addressed to Mr Sinclair related to the tax affairs of Mr Sinclair. This notice is much wider in scope. It covers all the above matters and any documentation held by BIL concerning Mr Sinclair. The stated purpose of this notice was to investigate Mr Sinclair's general liability to United Kingdom tax. The Section 20 Notice reads as follows:
"1. I, the undersigned, being one of Her Majesty's Inspectors of Taxes authorised for the purposes of Section 20 of the Taxes Management Act 1970,
For the purpose of enquiring into the tax liability of Mr David Sinclair
Hereby require you under subsection (3) of that section not later than 7 May 1999
to deliver to me at the above office or, if you so elect, make available for inspection by Mr N A Miller all such documents in your possession or power as are specified or described in the Schedule below.
2. Your attention is drawn to subsection (4) of Section 20B and subsections (1) and (5) of Section 20BB attached.
Schedule
(i) Statements for all accounts operated by Mr Sinclair solely or jointly whether in his name or in other name or names.
(ii) Statements for all accounts operated by the trustees of the Abbey Consultants SA Employee Share Ownereship Trust ("the trust").
(iii) All correspondence (including faxes), notes of telephone conversations and notes of meetings between any director, officer, employee, agent or representative of Banque Internationale A Luxembourg ("BIL") and Mr Sinclair or any person representing or acting for him.
(iv) All correspondence (including faxes), notes of telephone conversations and notes of meetings between any director, officer, employee, agent or representative of BIL and any third party which make any reference to Mr Sinclair.
(v) All correspondence (including faxes), notes of telephone conversations and notes of meetings between any director, officer, employee, agent or representative of BIL and its Head Office which make any reference to Mr Sinclair.
(vi) All internal correspondence, memoranda, notes of telephone conversation, notes of meetings, reports, submissions and evaluations which make any reference to Mr Sinclair.
In accordance with S 20B(5) Taxes Management Act 1970, this request applies to all documents originating within the six year period ending with the date of this notice."
The summary of reasons for that notice reads as follows:
"... In accordance with S 20(8E)(b) TMA 1970, I am also providing a summary of the reasons why I applies for the consent of a Commissioner to give the notice. These were as follows:-
I wished to obtain documents (including all internal and external correspondence and other paperwork held by BIL) relating to payments made to you by the Abbey Consultants Employee Share Ownership Trust and to any other payments made or received through accounts operated by you. These documents may contain information relating to a tax liability of yours in the UK and the extent of any such liability. I also wished to obtain any other documents held by BIL which might contain evidence of your business activities in the UK and which might therefore be of relevance in determining whether and to what extent these have given rise to UK tax liabilities."
SECTION 767 AND THE SECTION 767 NOTICES
13. In the course of the investigation into the activities of Fedelm, there were revealed facts which led the CIR in May 1999 to consider issuing Section 767 Notices in respect of 3 Targets. The circumstances are set out in paragraphs 7-16 of the affidavit of Mr Edward Jukes ("Mr Jukes"), the Assistant Director Compliance Division ) of the SIS. These read as follows:
"7. First, a number of United Kingdom resident companies (`Vendors') had sold a number of companies (`Targets') to Fedelm or to companies controlled directly or indirectly by that company. The majority of Targets were engaged in the trade of leasing assets.
8. Second, under the tax legislation applicable to companies carrying on a leasing trade in the United Kingdom, such companies normally build up large deferred tax reserves in the early years when capital allowances exceed taxable rental income. Although the lessor's accounts normally provided for the deferred tax which would become payable in later periods, the Targets, following acquisition by Fedelm or an associated company, had made claims to tax relief in respect of contributions to an Employee Share Ownership Trust.
9. Third, such payments left the Targets without funds to pay any tax which might be assessed in the event that the claim to tax relief in respect of the payments made to the Employees Share Ownership Trust were not allowed. The Revenue was then aware of approximately forty companies that had used the Employees Share Ownership Trust (`ESOT') device. The amount of tax potentially as risk in those companies was in the region of £150 million.
10. Fourth, the Inland Revenue had become aware during the course of its enquiries into the Fedelm Group that Fedelm Holdings Ltd (a direct subsidiary of Fedelm International Ltd) had acquired three Target leasing companies from Yamaichi Bank (UK) Plc (`Yamaichi') as Vendor. The three companies in question were renamed Y L Leasing No 1 Ltd, Y L Leasing No 2 Ltd and Y L Leasing No 3 Ltd. All three companies made large payments to an ESOT shortly after the change of ownership. The payments totalled £25.4 million and had the potential to eliminate tax liabilities of over £8 million.
11. Fifth, the payments in question were made to an ESOT established by Farndale Consultants Ltd. This ESOT was used in a number of the later company purchase schemes entered into by the Fedelm Group. The funding for the payments had, according to information filed with Companies House, been largely provided by loans from the Fedelm Group.
12. Sixth, Section 767AA(1) was potentially applicable because there had been a change in the ownership of each of the three leasing companies and the seller, Yamaichi, was potentially chargeable to corporation tax because it controlled the transferred companies within the period of three years before the change in ownership.
13. Seventh, the companies' accounts for the period immediately following the change in ownership were expected to show: (a) the companies' contribution to an ESOT and (b) significant liabilities in the form of loans received from the Fedelm Group.
14. Eighth, the pattern was that Targets had been sold for more than their net asset value indicating that Fedelm Holdings Ltd entered into the transaction on the assumption that any potential tax liability would be unlikely to be met if it arose since the assets would have been stripped out by means of the payment to the ESOT.
15. Ninth, it was reasonably foreseeable that a liability to Corporation Tax would arise. The contributions to the ESOT were made shortly after the change in ownership of the companies. There was no apparent reason for such substantial payments being made at such a time unless a substantial Corporation Tax liability was expected to arise either within the same accounting period or shortly thereafter.
16. Tenth, a new accounting period started the day following the change in ownership. It was therefore likely to be some time before any assessments could be made on the companies. The reason for this was that accounts would be due no earlier than 12 months after the end of the accounting period. There could be a further delay if there was a change of accounting date.
14. On the 9th May 1999 the CIR notified BIL that they were considering issuing Section 767 Notices. Again for reasons of confidentiality insisted on by the Targets, BIL declined to provide the documents requested. On the 22nd June 1999 the CIR served the three Section 767 Notices, all in the same terms.
15. The relevant provisions of Section 767 read as follows:
"767AA Change in company ownership: postponed corporation tax
(1) Where it appears to the Board that-
(a) there has been a change in the ownership of a company (`the transferred company'),
(b) any corporation tax relating to an accounting period ending on or after the change has been assessed on the transferred company or an associated company,
(c) that tax remains unpaid at any time more than six months after it was assessed, and
(d) the condition set out in subsection (2) is fulfilled,
any person mentioned in subsection (4) below may be assessed by the Board and charged to an amount of corporation tax not exceeding the amount remaining unpaid.
(2) The condition is that it would be reasonable (apart from this section) to infer, from either or both of-
(a) the terms of any transactions entered into in connection with the change, and
(b) the other circumstances of the change and of any such transactions,
that at least one of those transactions was entered into by one or more of its parties on the assumption, as regards a potential tax liability, that that liability would be unlikely to be met, or met in full, if it were to arise....
(4) The persons mentioned in subsection (1) above are-
(a) any person who at any time during the relevant period had control of the transferred company;
(b) any company of which the person mentioned in paragraph (a) above has at any time had control within the period of three years before the change in the ownership of the transferred company.
(5) In subsection (4) above, `the relevant period' means-
(a) the period of three years before the change in the ownership of the transferred company; or
(b) if during the period of three years before that change (`the later change') there was a change in the ownership of the transferred company (`the earlier change'), the period elapsing between the earlier change and the later change.
(6) For the purposes of this section a transaction is entered into in connection with a change in the ownership of a company if-
(a) it is the transaction, or one of the transactions, by which that change is effected; or
(b) it is entered into as part of a series of transactions, or scheme, of which transactions effecting the change in ownership have formed or will form a part....
767C Change in company ownership: information
(1) This section applies where it appears to the Board that-
(a) there has been a change in the ownership of a company (`the subject company'); and
(b) in connection with that change a person (`the seller') may be or become liable to be assessed and charged to corporation tax under section ...
(2) The Board may be notice require any person to supply to them-
(a) any document in the person's possession or power which appears to the Board to be relevant for determining any one or more of the matters referred to in subsection (3) below; or
(b) any particulars which appear to them to be so relevant.
(3) Those matters are-
(a) whether the seller is or may become liable as mentioned in subsection (1) above and the extent of the liability of potential liability;
and
(b) whether the subject company or an associated company is or may become liable to be assessed to any tax in respect of which the seller is or could become liable as mentioned in subsection (1) above, and the extent of the liability or potential liability of the subject company or associated company.
(4) Without prejudice to the following provisions of this section, the references in subsection (2) above to documents and particulars are references to the documents and particulars specified or described in the notice.
(5) A notice under subsection (2) above must specify the period, which must not be less than 30 days, within which the notice must be complied with.
...
(7) A notice under subsection (2) above shall not oblige a person to supply any documents or particulars relating to the conduct of any pending appeal relating to tax...."
(Section 4A of the Inland Revenue Regulation Act 1890 provides for exercise of any function conferred by or under any enactment on the Board to be exercised by any officer of the Commissioners acting under their authority).
The Section 767 Notices are in the following terms:
"1. TAKE NOTICE that the Board of Inland Revenue, pursuant to the provisions of Section 767C Income and Corporation Taxes Act 1988:
For the purpose of determining whether, in connection with the change in ownership of [the Target], Yamaichi Bank [UK] Plc may become liable to tax as mentioned in Section 767AA(1) and the extent of the potential liability.
Hereby require you not later than 31 July 1999 to deliver to them or, if you so elect, to make available for inspection by N A Miller of Special Compliance Office, Bristol, Inter City House, Mitchell Lane, Bristol BS1 6BG, an officer of the Board, all such documents in your power or possession as are specified or described in the schedule below....
SCHEDULE
1. All documents of whatsoever nature including but not limited to, correspondence, notes of meetings and telephone conversations, reports, attendance notes and internal memoranda which make any reference to the proposed or actual sale of [the Target] to Fedelm Holdings Ltd.
2. Statements for any accounts operated by [the Target] for the period commencing on the 23 January 1998 and ending on the 23 January 1999.
3. Statements for any accounts operated by the Farndale Consultants Ltd Employee Share Ownership Trust from the date of the receipt of any payment from [the Target] to the date on which the payment was expended by the trustees."
..."
THE GENERAL LAW
16. Before I turn to the challenges made by BIL to the validity of the notices, I should make a few general comments on the jurisdiction of the court in judicial review proceedings to challenge Section 20 and Section 767 Notices:
(1) Section 20 gives the CIR powers to call for documents of taxpayers and others. The powers involve varying degrees of intrusiveness appropriate to different situations, the more intrusive the power the greater the statutory safeguard. At the top of the scale are powers of entry and search that require the approval of the Board of Inland Revenue and the leave of a County Court judge. Lower down the scale are less intrusive powers such as the power conferred by Section 20(3) entitling an inspector of taxes to require a third party to make available documents which the inspector reasonably believes may be relevant to the tax liability of a taxpayer. Exercise of this power requires the permission of a general or special commissioner. Perhaps slightly lower down the scale (as judged by the statutory safeguards) is the power conferred by Section 767 entitling service of a notice requiring the supply of documents which must be exercised by the Board or a suitably authorised officer;
(2) In relation to Section 20(3) Notices, Lord Lowry in the House of Lords in R v. CIR ex p. TC Coombs & Company [1991] 2 AC 283 at 300 C-F and 302 E-F made clear that: (a) the commissioner is an independent person entrusted by Parliament with the duty of supervising the exercise of the Revenue's intrusive powers; (b) Parliament designated the inspector as the decision-maker and the commissioner as the monitor of the decision; (c) a presumption of regularity applies to both; (d) where the commissioner gives his consent, he must be taken to be satisfied that the inspector was justified in proceeding under Section 20 and hence that the inspector held, and reasonably held, the opinion required by Section 20(3); (e) the presumption that the opinion was reasonable and that the commissioner was right to be satisfied can be displaced only by evidence showing that at the time of giving the notice the inspector could not reasonably have held that opinion. What must be proved are facts which are inconsistent or irreconcilable with the inspector having had a reasonable (not necessarily a correct) opinion. The answer to this question will usually depend in large measure on confidential evidence which is not put before the court; (f) the commissioner is in a much better position to make a just appraisal under Section 20(7) than the court conducting a judicial review. If this means that the quashing of a Section 20(3) notice, though available in theory, can never be achieved in practice, this is not alarming, for Parliament subjected this intrusive and potentially oppressive (but presumably necessary) power to the effective supervision of Section 20(7);
(3) as Scott Baker J in R v. Inland Revenue Commissioners, ex p Archon Shipping Corp [1998] STC 1151 at 1157 pithily expressed it, the courts should be astute to avoid giving by the avenue of judicial review what is in reality a second look at the commissioner's decision; and where the inspector has satisfied the commissioner, he is not obliged to satisfy the court by, as it were, an appellate process;
(4) Section 767 does not contain the procedural safeguard of an independent person entrusted by Parliament with the duty of supervising the exercise of the intrusive power (which is conferred by Section 20(3)), but there is the requirement for a decision by the Board or an officer to whom the duty is delegated, and the principle applies (relied on by Lord Lowry at p.300) that in the absence of any proof to the contrary credit ought to be given to public officers who have acted prima facie within the limits of their authority for having done so with honesty and discretion. The presumption of regularity likewise applies to the Section 767 Notices, albeit not with quite the same force;
(5) both Section 20 and Section 767 authorise the service of notices requiring the delivery of documents "specified or described" in the notice. The meaning of these terms was considered by the Court of Appeal in R v. IRC ex p. Ulster Bank [1997] STC 832. Morritt LJ (with whom Sir Brian Neill agreed) said as follows:
"In my view the question is one of the true construction of the words specified and described in Section 20(8D). That question can only be resolved by a consideration of the context in which the words are used and the purpose of the statutory powers of which they form part. It does not assist that process to start from a categorisation such as a mere witness.... For this reason I do not find it helpful to refer to the other cases to which we were referred in this context namely Panayiotou v. Sony Music Entertainment (UK) Ltd [1994] Ch 142 [Panayiotou] and R v. Secretary of State for the Home Department ex p. Fininvest SpA [1997] 1 All ER 942 [Fininvest].
The words in question are the same as those used in RSC Order 24 r.7(1) dealing with orders for specific discovery .... But the context in which the words are used is different. The word `described' is wider than the word `specified'; it connotes the recitation of the characteristics of that which is referred to rather than its details or particulars. Thus it is appropriately used for the indication of classes or categories of documents as opposed to a single document. The context in which the words are used is that of an inquiry by the revenue into the tax liability of a person and a desire to obtain documents `relevant to' that liability....
In my view it cannot have been the intention of Parliament, in those circumstances, to restrict the description permissible in a notice under subsection (3) ... to one which excludes classes or categories of documents or documents which are not known to exist or to be in the possession or power of the recipient of the notice and which are to that extent conjectural....
Of course a description may be more or less informative depending on the number of characteristics incorporated in the description ... the description must be genuinely directed to the purpose for which the notice may be given, namely to secure production of documents which in the reasonable opinion of the inspector may contain information relevant to the revenue's inquiries into the tax liability of another taxpayer whether or not named. If it is not, the notice will not come within the purview of subsection (3) ... anyway. Accordingly I see no reason for restricting the meaning of the words `specified or described' in subsection (8D) to less than their normal meaning."
Simon Brown LJ, whilst agreeing with Morritt LJ's judgment, added on the question of the true construction of the words "specified" or described" as follows:
"Whilst agreeing with Morritt LJ that the question can only be resolved by considering the context in which the words are used and the purpose of the statutory powers being granted, I think it important, having regard to the way the rival arguments were presented to us, at least to note the two cases put at the forefront of the respective cases [Panayiotou and Fininvest] .... In short, I see no objection to the use of the S.20 powers for `what is essentially a discovery exercise, whereby the applicant is seeking production of documents with a view to ascertaining whether they are useful'. (see Sir Donald Nicholls V-C's judgment in [Panayiotou]) provided only and always that it is a specific discovery exercise and that in the inspector's reasonable opinion the documents `may contain information relevant to a tax liability' (see Section 20(3))."
It is clear that the view of Simon Brown LJ, that a notice can only be valid if it is a specific discovery exercise, was a minority view inconsistent with that of the majority. As can be seen from the quotation from his judgment, Morritt LJ held that the decisions in Panayiotou and Fininvest were not relevant, that the analogy to specific discovery was not helpful, and the words "specified or described" should be given their full normal meaning. I may add that, with the supercession of the then current Rules of the Supreme Court by the Civil Procedure Rules, it is an added attraction of the majority's viewpoint that it dispenses with any necessity in determining the permissible scope of a notice to refer back to the old rules on specific discovery.
VALIDITY OF THE SECTION 20 NOTICES
17. BIL seeks to challenge the validity of the Section 20 Notices on five grounds, each of which I shall consider in turn.
(1) Width
The first ground is that the five notices are too wide, going beyond what is permissible on an application for specific discovery. A challenge is also made on these grounds to the Section 767 Notices. Support for this proposition is rested on the judgment of Simon Brown LJ in Ulster Bank. For the reasons which I have already given, the judgment of Simon Brown LJ in this respect is at odds with the judgment of Morritt LJ (with which Sir Brian Neill concurred) and I prefer (as I am duty bound) to follow the judgment of Morritt LJ. There is no requirement in case of Section 20 Notices that the notice must comply with the rules which in the past regulated specific discovery. The language is the same and the principle must be the same in case of Section 767 Notices. BIL also complain that the notices in respect of the Targets are unnecessarily wide in the following respects:
(a) the reference to all accounts in item (i) of the schedule;
(b) the breadth of the documentation required in item (ii);
(c) items (iv), (v) and (vi) so far as they relate to any arrangements for mitigation of tax.
But the breadth must be considered in the context of the investigation in question, and Mr Miller in paragraphs 29-32 of his affidavit sufficiently explains and justifies the terms of the request, as also the terms of the request in respect of Mr Sinclair. The request in respect of Mr Sinclair is more far reaching, but so also is the purpose for the request is made in his case. I am not satisfied that the notices are in any case unnecessarily or unfairly wide, let alone that the inspector did not reasonably believe that notices in the terms used were reasonably required. The latter is of course what BIL must establish if it is to succeed in a challenge on this ground.
(2) Privacy and Article 8 of the European Convention on Human Rights
These notices no doubt do impinge on the confidentiality and rights of privacy of BIL and the Targets, and no doubt the inspector and commissioner were required to take these considerations fully into account in exercising the discretionary power to serve the notices. There is no basis for any suggestion that they did not do so. So far as the service of the notices does interfere with rights protected by Article 8(1), it is in my view clear that there was ample justification as required by Article 8(2). For the notices were issued according to law, in pursuit of a legitimate aim and necessary in a democratic society for protecting the taxation system and revenue. The size and sophistication of the tax avoidance schemes in question and what appears to the inspector to have been the dubious (if not dishonest) character of the devices employed required him to take the immediate remedial action, which the legislature in Section 20 provided for in this situation. The decisions of the European Court of Human Rights in Funke v. France (1993) 16 EHRR 297 and in Chappell v. United Kingdom (1989) 12 EHRR 1 amply support the existence of the required justification in this case.
(3) Pending Appeal
Section 20(B)(2) TMA 1970 provides that a notice shall not oblige a person to deliver a document relating to the conduct of a pending appeal by a taxpayer. BIL argued that the existence of documents answering this description invalidated the notices. But it is clear that it does no such thing: it merely provides an exception to (or excuse for non-compliance with) the obligation arising on service of the notice. In view of the debate on the issue before me and in an effort to limit the occasions for further disputes between the parties in the future, I should add a few words on the scope of the exception. The exception is of limited ambit. It does not extend to documents relating to a pending appeal: it extends only to documents relating to the conduct of the appeal. It will accordingly be limited to documents which come into existence for the purpose of, and as part of, the conduct of the appeal and the burden is upon the party withholding documents on this ground to show that they fall within the provision and answer the statutory description. The exception is not limited to privileged documents, but may extend to other communications which answer the statutory description. But the exception cannot extend to transactional documents or (at any rate in the ordinary case) documents which will be in evidence on the appeal; in particular it can extend to very few (if any) of the documents requested by the CIR.
(4) The Sinclair Notice
The notice serviced in respect of Mr Sinclair is (as I have said) much wider than the notices served in respect of the Targets. The stated purpose of the notice is to investigate whether he is liable for UK tax and the inspector and the commissioner must be better judges whether it is sufficiently and properly focused than this court. BIL have argued that there is no evidence before the court of any such liability, but that is no ground for saying that there may not be existing (but undisclosed) evidence as well as evidence which will only become available when the documents requested in the notices are provided.
(5) Unreasonableness
It is submitted that the notices are unduly burdensome on BIL. In paragraph 4 of his second affidavit Mr Brian Walker of BIL speaks of the substantial burden on BIL of complying with the notice relating to Mr Sinclair:
"A preliminary review of the Bank's filing suggests that there are probably in the region of 1000 individual lease files, around 500 loans administration files and perhaps a further 500 transactional files. Each of these files is almost certain to contain documents referring to Mr Sinclair."
Mere proof on this application that the burden is substantial is not, as it seems to me, a matter which advances BIL's case. BIL had the opportunity to make representations to this effect to the inspector and commissioner before the notices were served: it did not do so. BIL could have made representations requesting notices in less burdensome form before or after the date of the notices: it did not do so. The question of the burdensome character of the notices was a matter for the inspector and commissioner when the notice was issued and when and if a request was made for a notice in different form. But I have no doubt that they did appreciate that the notices would impose a burden on BIL. I can see no basis for holding that their decision to proceed notwithstanding such burden was irrational or improper, nor do I consider that Mr Walker's (somewhat hesitant) evidence adduced on this judicial review application takes the matter forward.
18. I accordingly reject the challenge to the Section 20 Notices.
THE VALIDITY OF THE SECTION 767 NOTICES
19. The statutory safeguards in Section 767C(2) required:
(1) that the Section 767 notice was given by the Board or a suitably authorised senior officer (see Section 767C(ii));
(2) it must have appeared to the Board or officer that there had been a change in ownership of a company and in connection with that change a person may be become liable to corporation tax under Section 767A or Section 767AA (see Section 767C (1));
(3) the notice might only require the supply of documents or particulars which appear to the Board or officer to be relevant for determining specific matters identified by subsection (3) (see Section 767C (2));
(4) the documents and particulars must be specified or described in the notice (see Section 767C (4)); and
(5) the notice must identify the period for compliance with it which must be at least 30 days (see Section 767C (5)).
The presumption of regularity is (as I have indicated) applicable, and the onus is upon BIL to establish the contrary.
20. Leaving aside the ground resting on the judgment of Simon Brown LJ in Ulster Bank which I have already dealt with, the grounds of challenge to the Section 767 Notices are threefold and I shall consider each in turn.
(1) Improper Purpose
The first ground maintained is that the Section 767 Notices were served for an improper purpose. The purpose stipulated by Section 767(2) and (3)(a) is that the documents required must be relevant for determining whether Yamaichi Bank as the seller of the Targets is or may become liable to be assessed and charged to corporation tax under Section 767AA. BIL allege that the actual purpose is to further the investigation into Fedelm. In support of this contention, BIL rely in particular on two matters. The first is a passage in the affidavit of Mr Jukes dealing with the circumstances leading up to the issue of the notices. He there said that Mr Miller had made a report to him on the circumstances justifying the issue of the notices and that Mr Miller "had formed the view that the Inland Revenue's enquires into the activities of Fedelm could usefully be advanced by the issue by the Board of a statutory notice under Section 767C ICTA 1988 to obtain documentation from BIL". But whatever may have been in the mind of Mr Miller, Mr Jukes goes on in his affidavit to make it clear that the decision to issue the notices was his and his alone and that he made it for the required statutory purpose. The second is the terms of the notices themselves which in items 2 and 3 of the Schedule (unlike in item 1) are directed, not at Yamaichi Bank, but at accounts of the Target and the ESOT. But the explanation for items 2 and 3 is that the documents sought are believed to be relevant to the question whether the Targets are liable for corporation tax, and under Section 767AA this liability must be established as a precondition to any liability arising on the part of Yamaichi Bank. I reject this challenge.
(2) Irrelevance
The second challenge is that the documents sought are irrelevant to the investigation. I can see no basis for saying that they are irrelevant, still less that the inspector did not or could not reasonably have believed that they were relevant. Mr Jukes explains in paragraph 27 of his affidavit why they are relevant. This paragraph reads as follows:
"27. The documents specified in the notices are relevant, in particular, because:
(i) Given the closeness of the relationship between BIL and Fedelm, as noted above, it is reasonable to assume that the BIL files on the transaction may contain information regarding the financial arrangements and tax planning underlying the acquisition of the leasing companies. This in turn may be relevant to the question of whether a tax liability may arise, initially on the transferred company, and, in the event of non-payment, on the seller, Yamaichi Bank (UK) plc.
(ii) The statements for bank accounts operated by the leasing companies will provide evidence of whether the companies made payments to the ESOT. This is relevant to the question of whether relief may be given and therefore to the question of whether any tax liability will arise.
(iii) The statements for the ESOT itself will contain evidence of how and when the contribution was expended by the trustees. This is relevant to the question of whether relief may be given and therefore to the question of whether any tax liability arises."
The reasons are cogent. They plainly cannot be challenged as reasons which no reasonable officer could believe justified service of the notices.
(3) Irrationality and Disproportionality
BIL attacks the rationality and proportionality of the service of the notices. In particular BIL contend that the CIR could have obtained the documents, or many of the documents, and much of the information therein contained in other ways not, or less, invasive of the "privacy" rights of BIL and the Targets. The first suggestion is made that, if the CIR had approached the Targets directly, they would or might have been willing to furnish the documents without the need for notices. This appears to me to be totally unreal, for it was the Targets whose objections to production of the documents was the occasion for this application to the court by BIL and they have made no offer voluntarily to produce documents. The second suggestion is that the CIR could have used for this purpose its powers under Section 20 with the attendant statutory safeguards and protections. But it is well established that the existence of the Section 20 regime does not militate against the use of alternative provisions specifically drafted for the purpose of obtaining documents under another regime: see R v. Inland Revenue Commissioners ex p. Taylor (No 2) [1990] STC 379. As regards privacy, it is quite clear that the confidentiality of the documents was a factor taken fully into account by Mr Jukes, but (as in the case of the Section 20 Notices) the invasion was considered necessary in the public interest to protect the taxation system and revenues therefrom.
21. In short, the presumption of regularity stands confirmed, rather than rebutted, by the evidence. There is no suggested lack of specificity in the request for documents, the documents are relevant and there is no possible suggestion that the request is onerous. I accordingly also reject the challenge to the validity of the Section 767 Notices.
CONCLUSION
22. For the above reasons I dismiss the applications for orders of certiorari. The Section 20 and Section 767 Notices are valid and BIL is statutorily obliged to comply with them.
Order: application dismissed with costs. Permission to appeal refused for reasons to be given in writing by Lightman J.
(Order does not form part of approved judgment.)