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UK tribunal holds that third-party information notices now have global reach

HMRC’s powers to demand information from non-residents have been further extended by the First-tier Tax (FTT) tribunal to include ex parte third-party information notices.

Until this year, it was generally thought that HMRC’s powers to compel disclosure do not extend to individuals resident in overseas jurisdictions. That view was originally supported by the First-tier Tax Tribunal in refusing to approve a Schedule 36 disclosure notice issued to one Tony Jimenez, who lives in Dubai.

The tribunal accepted Jimenez’ argument that the power to issue notices could not be exercised extra-territorially because it offended the sovereignty of the United Arab Emirates. However, that decision was overturned in February this year, when the England and Wales Court of Appeal (EWCA) upheld HMRC’s argument that Schedule 36 is not subject to any territorial limit, and duly ordered the issue of the notice against Jimenez (Jimenez v HMRC 2019 EWCA Civ 51).

The Jimenez ruling did not, however, make clear just what the extraterritorial scope of HMRC’s information power should be, and what kind of notices were affected. In fact, the appellate court was careful to state that its decision related specifically to first-party notices, although some of what it said could apply equally to a third-party notice.

In April, HMRC decided to test this point by asking the FTT to approve the issue of a so-called third-party information notice to two non-residents, Mr and Mrs PQ, requesting information relating to the tax affairs of a UK-resident company. As is usual for third-party notices, the hearing was held ex parte, though the two recipients were entitled to make representations.

Mr and Mrs PQ argued that their non-resident status meant that they could not be served with a third-party information notice, and pointed out that Jimenez did not explicitly apply to third-party information notices. HMRC asserted, without giving grounds, that the Jimenez ruling covered third-party, as well as first-party, information notices.

Mosedale J in the FTT has now ruled on the point. She noted that failure to obey third-party notices would only result in civil sanctions against the recipients, not criminal liability, and thus international law would not thereby be breached. Moreover, the public interest in the collection of taxes was such that it did not offend international law for HMRC to serve an information notice on a non-resident taxpayer, for the purpose of checking his liability to tax in the UK.

And by considering the case of the case of KBR v Serious Fraud Office (2018 EWHC 2368 Admin), which was also cited by the EWCA, she concluded that HMRC must show a sufficient connection between the intended recipient and the information sought before a non-resident may be served with a third-party information notice.

Accordingly, Mosedale ruled that a third-party notice that would be valid if issued to UK residents, is also valid against non-UK residents, provided they are British nationals and had taken the decisions leading to the alleged tax liability. In this case, the condition held because Mr and Mrs PQ were the sole owners of the taxpayer company, and were also its directors (HMRC v Mr & Mrs PQ, 2019 UKFTT 371 TC).

There is no right of appeal against Mosedale’s decision, but Mr and Mrs PQ can challenge it by judicial review.

SOURCE: STEP.ORG