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Cite as: [2007] UKSPC SPC00581, [2007] UKSPC SPC581

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Financial Institution No 2 v Revenue & Customs [2007] UKSPC SPC00581 (09 January 2007)

NOTICE UNDER TMA 1970 s.20 without naming the taxpayer – whether subs (8A) satisfied – yes – whether consent should be given to the Notice – yes

THE SPECIAL COMMISSIONERS

SPC00581

APPLICATION BY THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS TO SERVE A SECTION 20 NOTICE ON FINANCIAL INSTITUTION No.2 IN RESPECT OF CUSTOMERS WITH UK ADDRESSES HOLDING NON-UK ACCOUNTS

Special Commissioner: DR JOHN F. AVERY JONES CBE

Sitting in private in London on 14 December 2006

An Assistant Director, Special Civil Investigations, and [a member of] the Solicitor's Office, for the Applicant

© CROWN COPYRIGHT 2007

ANONYMISED DECISION

This is an ex-parte application by the Commissioners for HM Revenue and Customs for consent to serve a Notice under section 20(8A) of the Taxes Management Act 1970 on Financial Institution No.2 ("the Financial Institution"). The Notice seeks documents about customers with UK addresses with non-UK bank accounts with the Financial Institution. The Revenue were represented by an Assistant Director, Special Civil Investigations ("the Inspector"), and by [a member of] their Solicitor's Office.

In advance of this application I had a written brief from the Revenue consisting of 17 pages with numerous exhibits contained in a ring binder. The Financial Institution's solicitors ("the Solicitors") also made written representations in the form of a 9 page submission. The Solicitors ask me to give a written decision, a procedure that has been adopted before, see another such application relating to a different financial institution reported Re an Application by Revenue and Customs Commissioners to Serve section 20 Notice (No 2) [2006] STC (SCD) 360 ("the previous case"), which I agreed to do in this case.

Relevant parts of section 20 of the Taxes Management Act 1970 are:

"…(3) Subject to this section, an inspector may, for the purpose of enquiring into the tax liability of any person ("the taxpayer"), by notice in writing require any other person to deliver to the inspector or, if the person to whom the notice is given so elects, to make available for inspection by a named officer of the Board, 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; and the persons who may be required to deliver or make available a document under this subsection include the Director of Savings.

…

(6) The persons who may be treated as "the taxpayer" for the purposes of this section include a company which has ceased to exist and an individual who has died; ...

(7) Notices under subsection (1) or (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.

(8) Subject to subsection (8A) below, a notice under subsection (3) above shall name the taxpayer with whose liability the inspector (or, where section 20B(3) below applies, the Board) is concerned.

(8A) If, on an application made by an inspector and authorised by order of the Board, a Special Commissioner gives his consent, the inspector may give such a notice as is mentioned in subsection (3) above but without naming the taxpayer to whom the notice relates; but such a consent shall not be given unless the Special Commissioner is satisfied—

(a) that the notice relates to a taxpayer whose identity is not known to the inspector or to a class of taxpayers whose individual identities are not so known;

(b) that there are reasonable grounds for believing that the taxpayer or any of the class of taxpayers to whom the notice relates may have failed or may fail to comply with any provision of the Taxes Acts;

(c) that any such failure is likely to have led or to lead to serious prejudice to the proper assessment or collection of tax; and

(d) that the information which is likely to be contained in the documents to which the notice relates is not readily available from another source.

(8B) A person to whom there is given a notice under subsection (8A) above may, by notice in writing given to the inspector within thirty days after the date of the notice under that subsection, object to that notice on the ground that it would be onerous for him to comply with it; and if the matter is not resolved by agreement, it shall be referred to the Special Commissioners, who may confirm, vary or cancel that notice."

Section 127 of the Finance Act 1988 provides:

"(1) Any provision made by or under the Taxes Acts which requires a person—

(a) to produce, furnish or deliver any document or cause any document to be produced, furnished or delivered; or

(b) to permit the Board, or an inspector or other officer of the Board—

(i) to inspect any document, or

(ii) to make or take extracts from or copies of or remove any document,

shall have effect as if any reference in that provision to a document were a reference to anything in which information of any description is recorded and any reference to a copy of a document were a reference to anything onto which information recorded in the document has been copied, by whatever means and whether directly or indirectly.

(2) In connection with tax, a person authorised by the Board to exercise the powers conferred by this subsection—

(a) shall be entitled at any reasonable time to have access to, and inspect and check the operation of, any computer and any associated apparatus or material which is or has been in use in connection with any document to which this subsection applies; and

(b) may require—

(i) the person by whom or on whose behalf the computer is or has been so used, or

(ii) any person having charge of, or otherwise concerned with the operation of, the computer, apparatus, or material,

to afford him such reasonable assistance as he may require for the purposes of paragraph (a) above.

(3) Subsection (2) above applies to any document, within the meaning given by subsection (1) above, which a person is or may be required by or under any provision of the Taxes Acts—

(a) to produce, furnish or deliver, or cause to be produced, furnished or delivered; or

(b) to permit the Board, or an inspector or other officer of the Board, to inspect, make or take extracts from or copies of or remove.

…

(6) This section shall be construed as if it were contained in the Taxes Management Act 1970."

Section 20D(3) of the Taxes Management Act 1970 provides:

"(3) Without prejudice to section 127 of the Finance Act 1988, in sections 20 to 20CC above "document" means, subject to sections 20(8C) and 20A(1A) [which relate to personal records and journalistic material], anything in which information of any description is recorded."

The following is a recital of the factual basis as I understand it:

(1) The Financial Institution operates in a number of countries. It holds information on its computers in the UK on [number withheld] individual customers with UK addresses and non-UK bank accounts.

(2) The Revenue are currently investigating the use of offshore accounts by UK residents, which they consider presents a significant risk to the proper collection of UK tax.

(3) The Revenue are aware from information obtained from a source (the identity of which was given to me) relating to debit cards of a number of customers of the Financial Institution with offshore accounts of whom 16% have completed the foreign income pages in their tax returns.

(4) Out of the names identified by this source a sample, which is intended to be representative, has been chosen of 461 cases (not only customers of the Financial Institution) out of circa 11,000 taxpayers who have made self-assessment returns, are UK resident and domiciled, and have not declared any foreign income. As part of a trial agreed with some of the accountancy bodies, letters based on one of four types of standard letter were sent to them in July 2005. Of these 461 cases, 252 enquiries have been opened, and in 113 cases (of which 9 are being dealt with by Special Civil Investigations, which deals with larger cases) further tax liability has arisen or can be estimated. Five further cases have been settled by a minor query approach. This makes a total of 118 cases (26% of the total sample of 461) with an expected yield (references herein to yield include interest and penalties) of £1.9m (an average of £16,100 per case), and many payments on account have been made. If granted, these Notices will also provide further information about transactions entered into by such people. The remaining 204 cases in the sample have been closed with no tax liability.

(5) I was given full details of Special Civil Investigations and local tax office investigations of 10 cases relating to customers of the Financial Institution involving offshore accounts. The total yield was £5,456,288, an average of £545,000 per case. In all cases there was undeclared offshore bank interest and in 6 cases there was also undeclared trading profits. The Inspector accepts that these are unrepresentative and the yield from them is not included in his estimate of the yield if consent to this Notice is granted. However, they demonstrate the likely connection between undeclared foreign bank interest and other undeclared profits.

The Notices seek documents containing the names and addresses of customers of the Financial Institution (other than public limited companies, Governments, charities, churches, mutuals, trade associations and clubs) having a UK address and a non-UK bank account in a number of named jurisdictions or locations, together with documents containing the following information about the customer: whether the account address is noted "gone away" or "not at this address", the account holder's date of birth, the name of the bank at which the account is held, the branch at which the account is held, the sort code of the branch at which the account is held, the account number, the date that the account was opened and the date that the account was closed. The Notice requires documents showing the annual interest credited in the years 2000 to 2005 and the balance on 31 December 2000 and on 31 March in each of the years 2001 to 2005.

The Inspector estimates that if consent to this Notice is granted of the estimated [number withheld] customers affected 17% may be non-domiciled and only remittances will be relevant but nothing has been included in the estimate for these, leaving [number withheld] customers. He estimates that 26% of cases (relating to [number withheld] customers) will give rise to an additional yield of £55m.

I emphasise that no allegation is made against the Financial Institution. Prior to the issue of the precursor letter of 26 October 2006 the Financial Institution and the Revenue have had a number of meetings starting on 8 May 2006, and have corresponded. The draft notice in respect of which HMRC now seeks my consent is a product of such discussions. The Financial Institution pragmatically sought to ensure that if, despite the Financial Institution's objections, a notice was issued, then that notice be drafted in language that is precise and capable of being complied with. As a result of this dialogue the Financial Institution has agreed the form of the Notice, but without agreeing that it should be issued. The time limit of 90 days for complying, if the notice is granted, is agreed; and the Notice provides that if bona fide technical or other reasons arise which might prevent the Financial Institution from complying with the Notice the Inspector will engage in good faith discussions with a view to extending the period.

Information or documents

Part of the Solicitors' objection to the precursor letter has already been met by changes in the wording of the Notice to make it more precise. They argue first, that the Notice is a request for information rather than documents.

While the Solicitors are clearly right in saying that a s 20(3) (and accordingly a subs (8A)) Notice must be in respect of documents, "document" for this purpose is defined to mean anything in which information of any description is recorded. In practice we are dealing with information stored on a computer hard disc; indeed the Notice provides that only documents held in electronic format are to be provided. In these circumstances the distinction between documents and information is much less clear cut than with paper documents. It seems to me that the Notice properly asks for documents containing certain listed information. It may be that the Financial Institution will find it more convenient to extract this information from a larger document (computer file on the hard disc) rather provide a document or documents containing the information. While one might regard the former as providing information rather than a document it does not alter the fact that the Notice requires a document and this is merely that this is a more convenient way of providing a document.

Class

The second main objection raised by the Solicitors is that the Notice does not relate to a proper class of taxpayers. They say that this is a case (quoting my decision in the previous case) where the Revenue are saying "Can we have a section 20 Notice against the Financial Institution because those with UK addresses and non-UK bank accounts form so large a class that we are bound to find some tax defaulters." The Solicitors contend that there must be a linking factor for there to be a class; and there must be the proper linking factors for there to be a proper class. These are determined by the statute providing in subs (8A)(a) that there must be a class "of taxpayers"; in para (b) that there must be the likelihood that there has been a failure by any of that class of taxpayers to comply with any provisions of the Taxes Acts; and in para (c) that the failure by members of that class to comply with those provisions must have led to serious prejudice to the proper assessment or collection of tax. They describe the Revenue's argument that persons with UK addresses and offshore bank accounts form a class as an "impermissible Micawberism." They contend that the class is so wide that it is not even limited to taxpayers; it is likely to include some with no obligations to pay tax in the UK. On the second factor because the class is so wide it is almost certain that there will be within the class a person who has failed to comply with a provision of the Taxes Act. Nor is the third factor, serious prejudice, satisfied. They contend that Inspector must provide me with similar information to that in the previous case, which he has done.

If I thought that the Revenue were on a fishing expedition based on the likelihood of any large class containing members who had not complied with their tax obligations I would have no hesitation in refusing consent to the Notice. But the application before me is very different and far removed from Mr Micawber's "in case something turned up." The Revenue have quite a lot of information about persons with offshore bank accounts derived from their sample of credit and debit card cases described above showing that only 16% of customers of the Financial Institution with UK addresses and non-UK accounts completed the foreign income pages of their tax returns. From the representative sample of the card cases, which include some customers of the Financial Institution, the Inspector concludes that 26% of the taxpayers affected by the Notice will yield tax totalling £55m. Since I assume that most accounts have a credit or debit card associated with them these figures are likely to be representative of the present case. The Revenue also have the admittedly unrepresentative sample of customers of the Financial Institution where in 10 cases all involving offshore bank accounts the average yield was £545,000 per case. I have reviewed the Inspector's estimates and regard them as the best estimates that can be made at present of the likely result of the issue of the Notice. I consider that taxpayers with UK addresses having bank accounts in a number of named jurisdictions form a proper class of taxpayers, notwithstanding that it may contain a few who are not in fact taxpayers, because those with UK addresses are likely to be UK taxpayers. There is no other way of eliminating those who are not UK taxpayers at this stage, particularly as some of them may be people who are not, but should be, taxpayers.

Conclusion

I do not consider that any of these objections should prevent the issue of the Notice. In the light of the above I am satisfied first, that the Notice relates to a class of taxpayers whose individual identities are not known. Secondly, in the light of the figures, that there are reasonable grounds for believing that any of the class of taxpayers to whom the Notice relates may have failed (or may fail) to comply with any provision of the Taxes Acts. Thirdly, that in the light of these figures and the Inspector's estimate of a yield of £55m, any such failure is likely to have led (or to lead) to serious prejudice to the proper assessment or collection of tax. And fourthly, that the information which is likely to be contained in the documents to which the Notice relates is not readily available from another source (and in particular most of the information required by the Notice is not known even for those whose identities are known to the Revenue). Accordingly, section 20(8A) is satisfied.

Finally, I consider whether under section 20(7) I am satisfied that in all the circumstances the Inspector is justified in proceeding under section 20. In doing so I must weigh up the burden imposed on the Financial Institution with the benefit to the Revenue. In my view the information that the Revenue has already obtained raises serious questions that merit investigation and cannot be investigated by any other means. Accordingly I consent to the issue of the Notice.

I have written these reasons for my decision in the expectation that the Revenue will send it to the Financial Institution and their advisers and if it is necessary I authorise them to do so.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER

RELEASE DATE: 9 January 2007

SC 2060/06