[2009] UKFTT 224 (TC)

TC00174
Reference number: TC/2009/11128

NOTICES to 308 financial institutions under para 5 Sch 36 FA 2008 without naming the taxpayer – whether conditions satisfied – yes – whether approval should be given to the Notices – yes

FIRST-TIER TRIBUNAL

TAX CHAMBER

	APPLICATION BY THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS TO SERVE 308 NOTICES UNDER PARA 5 OF SCH 36 TO THE FINANCE ACT 2008 ON FINANCIAL INSTITUTIONS IN RESPECT OF CUSTOMERS WITH UK ADDRESSES HOLDING NON-UK ACCOUNTS

		TRIBUNAL: 	JOHN AVERY JONES CBE
				NUALA BRICE (TRIBUNAL JUDGES)

Sitting in private in London on 12 August 2009

Timothy Brennan QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Commissioners for HM Revenue and Customs

NOT FOR PUBLICATION

DECISION

1.	 This is an ex-parte application by the Commissioners for HM Revenue and Customs for approval to serve 308 separate Notices under paragraph 5 of Schedule 36 to the Finance Act 2008 on a number of banks and building societies (“the Financial Institutions”) with a presence in the United Kingdom.  The Notices seek documents about customers with UK addresses with non-UK bank accounts with the Financial Institutions. HMRC were represented by Mr Timothy Brennan QC.  
2.	In advance of these applications we had a written brief, plus witness statements and exhibits from HMRC consisting of about 160 pages (excluding copies of previous decisions and of the representations by others) virtually none of which related to particular Financial Institutions.  In addition, we had the benefit of a 13 page representation from Freshfields Bruckhaus Deringer on behalf of the British Bankers’ Association and the Building Societies’ Association, a letter from the Investment Management Association, a 7 page letter from DLA Piper UK LLP on behalf of a number of clients who might be affected by the Notices, plus a letter from them on behalf of a particular bank, and a letter from another bank.  At the end of the hearing we gave our approval to the issue of the Notices.  HMRC asked us to give a written decision.
3.	At the hearing of the application we heard sworn evidence from Mr Stephen Rimmer and Mr Mark Bradley both of the Offshore Accounts Team of HMRC’s Specialist Investigations Directorate, and Mr Robert Schofield, Principal Research Officer of HMRC’s Knowledge, Analysis and Intelligence Directorate, all of whom provided witness statements that were included in the bundle which we had in advance.
4.	These are highly unusual applications to serve notices on each of the Financial Institutions in identical form.  When the Tribunal was first informed of HMRC’s intention to make these applications a preliminary hearing was listed on 23 July 2009 in order to ascertain the nature of the applications and the extent of the material which we would have to consider.  HMRC were also represented by Mr Brennan QC at the preliminary hearing, together with Mr Rimmer and Mr Dennis Dixon of the Solicitor’s Office.  Prior to that hearing we had received letters from the British Bankers’ Association and the Building Societies’ Association, and Freshfields on their behalf, and HMRC asked them to provide more detailed representations in advance of this hearing.  In the past this Tribunal or the Special Commissioners have dealt with 16 applications under paragraph 5 or its predecessor legislation s 20(8A) of the Taxes Management Act 1970 relating to offshore accounts for UK customers of financial institutions.  In all these cases HMRC had carried on an extensive dialogue with the addressee of the notice in advance of the application and the terms of the notice were agreed if we should authorise it, and the addressee made representations why we should not do so.  We understand that HMRC had started a similar dialogue with a number of the Financial Institutions to which these applications relate but decided to terminate this dialogue and make the present applications which have been referred to as generic applications.  Many of the representations consisted of arguments why HMRC should not proceed in this way but our task is to deal with the applications that we have received.  It follows that we have not had the benefit of the addressees’ views on the content of the proposed Notices.  In the circumstances we were greatly assisted by the representations received because we have had the benefit of the views and legal arguments of the Associations concerned although, of course, not directed to the precise circumstances of any of the proposed addressees.  
5.	Before dealing with the applications we start by setting out some background information that is relevant to the applications.  Following some earlier notices to other parties the Special Commissioners consented to the issue of notices between December 2005 and January 2007 to, as is common knowledge although the published decisions were anonymised, five high street banks requiring details of offshore accounts for UK customers.  HMRC then instituted the Offshore Disclosure Facility (“ODF”) under which customers of those banks were given the opportunity to make disclosure of any non-compliance relating to an offshore account. In fact (and we believe to the surprise of HMRC), something like 44 per cent of those notifying under the ODF were customers of other banks, although this figure could be misleading as many customers would have had accounts with the high street banks and also other banks.  Of the current yield from the ODF 48% came from individuals who did not have accounts with banks which had received s 20(8A) notices, the average tax loss in such cases was higher than the s 20(8A) cases, and such individuals accounted for 29 of the largest 50 disclosures.  It was found that many individuals had more than one account (for disclosures over £100,000 the average was four or more—in some cases, many more—accounts, which tended to be spread among several institutions).  HMRC then turned their attention to other financial institutions and we or the Special Commissioners have consented to the issue of a further 9 similar notices so far this year.  HMRC then decided that it was not possible to continue on this piecemeal basis to deal with the remaining financial institutions that were found to number 308 (this figure excludes some institutions who have already convinced HMRC that they do not have accounts within the scope of HMRC’s interest).  Hence they have made the current applications.
6.	From information obtained from the previous notices, which is still being investigated, HMRC have been estimating that between 20% and 26% of cases result in a loss of tax.  Their current figure is 19.30% (we should mention that the 23% figure put forward in the applications made in March 2009 was found to contain an error and should have been 19.1%).  We understand that no significant differences in this percentage have been found between institutions.  We therefore proceed on the basis that while the number of relevant accounts with the institutions affected by these proposed notices is unknown, and consequently the estimated tax yield is unknown, of the order of 20% of all such accounts will show a loss of tax.  The only difference we foresee is that the account holders of financial institutions formed in other countries having UK branches may have a higher proportion of non-domiciled customers, but that does not mean that the customers have no UK tax obligations.  We emphasise that no allegation is made against any of the Financial Institutions.
7.	The Notices require information within 90 days relating to accounts outside the UK of account holders with UK addresses, together with balances at annual stated dates in the last 6 years and transaction information over a three month period (the period depending on when accounts were opened or closed or were continuing).
8.	Paragraph 5 of Schedule 36 to the Finance Act 2008 reads:
“5—(1) An authorised officer of Revenue and Customs may by notice in writing require a person—
(a)     to provide information, or
(b)     to produce a document,
if the condition in sub-paragraph (2) is met.
(2) That condition is that the information or document is reasonably required by the officer for the purpose of checking the UK tax position of—
(a)     a person whose identity is not known to the officer, or
(b)     a class of persons whose individual identities are not known to the officer.
(3) An officer of Revenue and Customs may not give a notice under this paragraph without the approval of the tribunal.
(4) The tribunal may not give its approval for the purpose of this paragraph unless it is satisfied that—
(a)     the notice would meet the condition in sub-paragraph (2),
(b)     there are reasonable grounds for believing that the person or any of the class of persons to whom the notice relates may have failed or may fail to comply with any provision of the Taxes Acts, VATA 1994 or any other enactment relating to value added tax charged in accordance with that Act,
(c)     any such failure is likely to have led or to lead to serious prejudice to the assessment or collection of UK tax, and
(d)     the information or document to which the notice relates is not readily available from another source.
(5) In this paragraph “UK tax” means any tax other than relevant foreign tax and value added tax charged in accordance with the law of another member State.” 
For this purpose “checking” includes carrying out an investigation or enquiry of any kind (para 58); UK tax is income tax, capital gains tax, corporation tax and VAT (para 63); and tax position includes past, present and future liability to pay any tax (para 64).
9.	Mr Brennan for HMRC contends that these conditions are satisfied.  In relation to para (4)(b) the statistics obtained from the ODF and other notices show that there is significant loss of tax related to holding offshore accounts.  On para (4)(c) the statistics show that the prejudice to the assessment or collection of tax is likely to be serious.  This is not only a matter of absolute sums of money.  A small bank may have a comparatively small number of account holders, but one of them may be a person of high net worth (or modest wealth), and he may have accounts with other banks that have not been disclosed.  Checking the tax position of such an individual would contribute to combating the serious prejudice to the assessment and collection of tax caused by non-compliance among many holders of offshore accounts.  The total amounts potentially involved are very large. 
10.	The arguments against the issue of the Notices include the following (we have not, for the reasons given above, included arguments against HMRC proceeding in this way):
(1)	 Practical difficulties in particular Financial Institutions complying within the 90 days (or having to rely on HMRC’s discretion in extending the time), which could lead to them needing to appeal within 30 days resulting in hundreds of appeals with which HMRC will have to deal individually.
(2)	 It is unlawful to issue generic notices.
(3)	 This procedure for giving consent to proposed notices is contrary to the Human Rights Act 1998 relating to a fair trial.
(4)	 The proposed notices are discriminatory under EU law in that it might deter persons from providing banking services outside the UK or customers from exercising their rights to free movement of capital.
(5)	 There is procedural unfairness in that the Financial Institutions have a legitimate expectation that there would be individual consultation before any application is made, and that there is unequal treatment of Financial Institutions.
(6)	 The proposed notices are vague, do not take into account the Financial Institutions’ duty of confidentiality, there are unduly burdensome and oppressive and there is lack of proportionality.
(7)	 Some detailed points were made about the wording of the notices.  To some extent the notices have been redrafted to meet these criticisms (for example deleting the question about arrangements within the group presumably in connection with arguments on possession or power to obtain the documents or information that are not included in the notices before us).  Points made include that non-interest bearing accounts should be excluded; that accounts within the EU Savings Directive should be excluded for all periods; and that some of the terms used in the notice are unclear.
(8)	 The hearing of these applications should have been in public.
(9)	 Certain banks may not have possession or power over the documents or information. 
(10)	A particular institution has only a small number of relevant accounts, many relating to students.
(11)	The Investment Management Association raises concerns about the possible extension of the present exercise beyond banks etc.
11.	Our views on these arguments, following the paragraph numbering, are:
(1)	 The problem is that neither HMRC nor the Associations representing the Financial Institutions have any information about the circumstances of individual institutions.  Given that HMRC have made these applications and similar applications in the past there is nothing about them that leads us to suppose that the proposed recipients will be unable to comply.  Since there is an appeal process relating to the notices being unduly onerous we consider that this is a matter best tested in such proceedings.  Naturally we hope that this Tribunal will not have to deal with hundreds of appeals but it would be wrong to refuse to grant the applications on the ground that it might save us some future work when Parliament has provided for an appeal process.  In any case we expect that particular Financial Institutions will be able to agree with HMRC on matters such as extension of time where this is necessary.  We accept that to some extent the appeal process will mean that HMRC will have to deal with Financial Institutions individually after the issue of the proposed notices but they assured us at the hearing that they were prepared to do this. 
(2)	 There is nothing in the statute preventing the issue of many notices in the same form. Each Financial Institution will receive a separate notice addressed to it alone – we have signed 308 separate notices. 
(3)	 We consider that the Human Rights provisions about a fair trial are irrelevant to applications of this kind which are not a trial at all.  In any event the procedure relating to these applications is contained in primary legislation. 
(4)	 We consider that the matter is covered by Art 58 of the EU Treaty, that a State is entitled “to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation.” The matters mentioned in paragraphs 5 and 6 of this Decision indicate that such infringements are likely and we regard the notices as requisite measures. 
(5)	 These applications represent the statutory safeguards to the issue of the Notices which must be considered on their own.  We do not accept that because HMRC has acted differently on relation to other applications this requires them to act in the same way in all cases.  We consider that the argument goes the other way; what was unusual was HMRC’s negotiations in the earlier cases which are not required by the statute. When each Financial Institution receives its notice it will have an opportunity to discuss with the Revenue matters such as the time for reply. 
(6)	 We consider that these fears are exaggerated.  The proposed Notices are based closely on former ones negotiated with the addressees and the terms are an amalgamation of ones used for high street banks and private banking.  We do not consider that their scope is uncertain or unduly burdensome or oppressive. Each institution will have a separate right to appeal against its notice if it regards the scope as being unduly burdensome.
(7)	 Dealing with the specific points: there is no reason to exclude non-interest bearing accounts as HMRC have at least as much interest in the capital going into offshore accounts (which may represent undeclared income) as the interest earned while it is there; there is no reason to exclude accounts for periods not covered by the EU Savings Directive because there is no reason to suppose that full disclosure has been made for earlier periods; since the notices follow the pattern of earlier ones we consider that the criticisms of the wording of the notices are unlikely to cause problems.
(8)	 The hearing in private was specifically dealt with at the preliminary hearing.  We agree that our rules require us to determine specifically that an ex parte application is in private if that is to be the case, and it was so directed at the preliminary hearing.  This issue was canvassed in R v Special Commissioner ex p Morgan Grenfell 74 TC 511 at [47]-[50] and we are following well established principles.  The nature of the information given to us by HMRC about their previous enquiries required the hearing to be in private.
(9)	 If a financial institution does not have possession or power of documents or information that is a complete answer to its not complying with the notice and so this is not a matter we have to consider.  We can well believe that there could be a dispute over whether this is in fact the case.
(10)	The fact that many account holders are students does not seem to us to indicate that all account holders will have complied with their tax obligations.
(11)	We have been shown by the witnesses how the Financial Institutions were selected and if any members of the Investment Management Association are included among them it is because of their banking activities.  
12.	We do not consider that any of these representations should prevent the issue of each of the Notices.   In the light of the above we are satisfied first, that the documents are reasonably required by Mr Rimmer as the officer concerned for the purpose of checking the UK tax position of a class of taxpayers whose individual identities are not known to the officer.  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, for the reasons put forward by Mr Brennan, and summarised in paragraph 9 of this Decision, 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 HMRC).  Accordingly, paragraph 5 is satisfied.  We also consider whether in all the circumstances the Notices should be given and consider that they should.  Accordingly we approve the giving of each of the Notices.

JOHN AVERY JONES

NUALA BRICE
TRIBUNAL JUDGES
RELEASE DATE: 3 September 2009