SPC00523

NOTICE UNDER TMA 1970 s.20 without naming the taxpayer – whether subs (8A) satisfied – yes – whether documents more than 6 years old can be requested – yes – whether consent should be given to the Notices – yes

THE SPECIAL COMMISSIONERS

APPLICATION BY THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS TO SERVE A SECTION 20 NOTICE ON AN INVESTMENT BANK IN RESPECT OF CLIENTS ENJOYING INSTITUTIONAL STATUS CONDUCTING SHARE TRANSACTIONS 
VIA A TAX HAVEN COMPANY

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in private in London on 20 March 2006

Sean Fallon, HM Inspector of Taxes, Investigator, Complex Group, Special Civil Investigations Bristol, and Dennis Dixon of the Solicitor’s Office HM Revenue and Customs for the Applicant

© CROWN COPYRIGHT 2006

DECISION

1.	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 an Investment Bank (“Bank A”).
2.	The Revenue were represented by Mr Sean Fallon (“the Inspector”), Investigator Complex Group, Special Civil Investigations Bristol, and Mr Dennis Dixon of their Solicitor’s Office.  
3.	The Notice requires in relation to clients for whom Bank A acted as prime broker where the client had traded equities on a non-discretionary execution-only basis, being both non-regulated by the FSA and a non-private customer (as defined in SFA regulations) registered in (or with an address in) a list of tax havens, copies of all compliance and due diligence material provided by the client and persons authorised to conduct, or ostensibly conducting, business on the client’s behalf, including copies of powers of attorney, passports, utility bills and bank guarantees and related correspondence for the period 6 April 1995 to 5 April 2004 (unless the account is frozen and was opened after 31 December 2001).  
4.	In advance of the application I had a 29 page written presentation with a ring binder of exhibits.  The Inspector asks me to give a written decision, a procedure that has been adopted before, see Applicant v Inspector [1999] STC (SCD) 128 (identified on appeal as the Morgan Grenfell case), which I agreed to do in this case.
5.	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 20B provides: 
“…(5) A notice under section 20(3), does not oblige a person to deliver or make available any document the whole of which originates more than 6 years before the date of the notice. 
(6) But subsection (5) does not apply where the notice is so expressed as to exclude the restrictions of that subsection; and it can only be so expressed where— 
(a)    the notice being given by an inspector with consent under section 20(7), the Commissioner giving consent has also given approval to the exclusion; 
(b)   the notice being given by the Board, they have applied to a General or Special Commissioner for, and obtained, that approval. 
For this purpose the Commissioner gives approval only if satisfied, on the inspector’s or the Board’s application, that there is reasonable ground for believing that tax has, or may have been, lost to the Crown owing to the fraud of the taxpayer.”
6.	The factual background to the application is as follows:
(1)	In February 2002 a group of share traders in the City of London made a voluntary disclosure to Special Compliance Office.  They were UK taxpayers who had made profits trading in shares through a British Virgin Islands company described in the disclosure documents as their nominee.  The tax evaded was over £6.1m and the settlement including interest and penalties amounted to over £7.6m (about £1.5m per person on average).
(2)	The Revenue are currently investigating another group of share traders using a BVI company. 
(3)	The method of trading was to use an investment bank as prime broker to provide the account used to fund the purchase and sale of shares.  The trader will deal in shares through another broker with the deal being settled by the prime broker.  The trader by this means obtains institutional investor status with the prime broker, which requires substantial minimum funds (£5m in the cases investigated) and allows preferential dealing terms in the market.  The “institution” will be a tax haven company, which in reality merely acts as a nominee.  As part of their compliance procedures for “know your customer” the brokers will have details of the tax haven company and the people authorised to act on its behalf.  The individuals each have a UK service company through which a small proportion of the profits are routed and are taxed.  
(4)	The Revenue believe from other enquiries they have made that these cases are not unique and that an investment bank might have a number of clients in a similar position.
(5)	Bank A are in the position of the prime broker in the example above.  There have been extensive discussions between the Revenue and Bank A between 13 April 2005 and 7 March 2006 including 6 meetings, a conference call with New York and numerous telephone calls, letters and emails, all of which I have seen.  This has resulted in refinements of the Notice resulting in its being narrowed from potentially affecting 17,000 clients to affecting 59 active clients and 168 dormant (“frozen”) accounts (which are also of interest to the Revenue as such clients may be tax evaders who have stopped trading permanently or temporarily).  The Revenue have dropped their request for transactional data on the ground that this could have involved 12 months work.  From a sample of nine anonymised “know your customer” information shown to the Revenue three are the type of trader that the Revenue want to investigate.  While the sample is small and may not be representative, the initial indication is that there are potentially more than 70 relevant clients out of the 227 affected by the Notice that the Revenue want to investigate.  Bank A’s last email states: “Having reviewed the draft notice I agree that we have no further comments to add and agree to your progression to the commissioners.”  Although they do not say so in terms it seems that they are satisfied that the Notice is not unduly onerous (about which there is in any case a right of appeal) and that all the documents are in their possession or power.  The 90 days allowed for compliance is their suggestion.
(6)	I emphasise that there is no suggestion that Bank A has been involved in any way in any tax evasion.
7.	I turn to consider the requirements of s 20(8A).  For the purposes of paragraph (a) the class of taxpayers is effectively clients for whom Bank A acted as prime broker who are UK resident individuals and who conduct share transactions via a company registered in a tax haven enjoying institutional investor status.  I regard this as a proper class and certainly not in the nature of a fishing expedition by the Revenue.   A large number of exclusions from the class have been agreed leaving about 227 potential members.  The individual identities of members of the class are not known to the Revenue.
8.	Paragraph (b) requires that there are reasonable grounds for believing that any of the class may have failed to comply with their tax obligations.  From the current investigations there is evidence that people in the same position have seriously failed to comply with their tax obligations.  I consider that the Revenue’s grounds for believing that others may be in the same position are reasonable.
9.	Paragraph (c) requires that the failure is likely to have led to serious prejudice to the proper assessment or collection of tax.  Based on the enquiry so far settled which yielded about £1.5m per person, the Revenue estimate that if half of the 70 of the 227 clients affected by the Notice are similar to the ones already investigated and the average yield is £1m per client, the tax yield will be of the order of £35m.  I find that this condition is satisfied.
10.	Paragraph (d) requires that the information is not readily available from another source.  I agree with the Revenue that this is satisfied.
11.	The Revenue very properly drew my attention to an argument (with which they do not agree) that a subs (8A) notice cannot require documents more than 6 years old.  Their principal argument against such an interpretation is that when s 20(8A) was inserted by the Finance Act 1988 a number of consequential amendments were made to the restrictions in s 20B, adding a reference to subs (8A) to references to subs (3) in s 20B(1), (2), (4), (8), and (9) (but not to those in subs (1A), (1B), (3), (5), (7)), thus leaving the 6-year restriction in s 20B(5) to refer only to s 20(3) and not to s 20(8A), implying that where only s 20(3) is mentioned a restriction is not intended to apply to s 20(8A).  This, they argue, is logical because the 6 year limit can be set aside by s 20B(6) if there are reasonable grounds for believing that there is fraud, and subs (8A) is comparable in requiring serious prejudice to the proper assessment or collection of tax.  They also contend that (if s 20B(5) did apply) it would be difficult to be satisfied in accordance with s 20B(6) that tax has or may have been lost owing to the fraud of unknown taxpayers.  If they are wrong so far, they contend that there are reasonable grounds for believing that tax has, or may have been lost, through the fraud of members of the class, although they accept that it may be argued that there is avoidance rather than evasion.  I prefer the argument on interpretation that where s 20B(5) refers to s 20(3) it means that section alone and not that section as extended by s 20(8A) to unnamed taxpayers.  The conditions for subs (8A) to apply are serious, including that the failure is likely to have led to serious prejudice to the proper assessment or collection of tax, and so it is likely that Parliament did not intend to restrict its operation to 6 years.  If I am wrong on this, I am satisfied that there is reasonable ground for believing that tax has, or may have been lost, through the fraud of any of the members of the class.  The cases that the Revenue have settled clearly involved fraud and I consider that there are likely to be members of the class within the Notice who are in the same position.  While it is possible that there is avoidance rather than evasion I consider that there are reasonable grounds for believing that fraud is more probable.
12.	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 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.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 4 April 2006

SC 2006/06