SPC00536

NOTICES UNDER TMA 1970 s.20 without naming the taxpayer – whether subs (8A) satisfied – 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 A FINANCIAL INSTITUTION AND TWO NAMED SUBSIDIARIES 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 13 February 2006

The Director, Special Civil Investigations Offshore Fraud Projects Group, and Mr Dennis Dixon, Solicitor’s Office, for the Applicant

© CROWN COPYRIGHT 2006

ANONYMISED DECISION

1.	This is an ex-parte application by the Commissioners for HM Revenue and Customs for consent to serve Notices under section 20(8A) of the Taxes Management Act 1970 on a Financial Institution and two named UK subsidiaries.  The Notices seek documents about customers with UK addresses with non-UK bank accounts with those companies and their subsidiaries. (In this decision I intend references to the Financial Institution to include the two named subsidiaries unless the context otherwise requires.) 
2.	The Revenue were represented by the Director, Special Civil Investigations Offshore Fraud Projects Group (“the Inspector”), and Mr Dennis Dixon of their Solicitor’s Office.  
3.	On 5 December 2005 I granted an application concerning credit cards linked to offshore accounts of which an anonymised version of the decision was released on 11 January 2006 (“the credit card application” or “credit card decision”).  It was originally intended that the current application would be made at the same time as the credit card one but because of an error in the precursor letter the Revenue withdraw the application in respect of bank accounts and now make it following revised precursor letters of 5 December 2005.  This two-stage process has given the Financial Institution the advantage of being able to make further representations, including commenting on my earlier decision, in which many of the issues were the same as they are in this application, which has removed part of the disadvantage from their point of view of the ex parte procedure, although the Inspector has been able to have the last word.  
4.	Before the credit card application I had a written brief from the Revenue consisting of 35 pages with numerous exhibits contained in three ring binders.  The Financial Institution’s solicitors (“the Solicitors”) also made written representations in the form of a 35 page memorandum plus a ring binder of exhibits.  On 6 January 2006 I received a further 15 page memorandum from the Solicitors commenting on the credit card decision and making further representations.  On 2 February 2006 I received a further written brief of 8 pages and a ring binder of exhibits from the Revenue, and on 3 February 2006 I received 9 pages of their skeleton arguments.  The Solicitors ask 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 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.”
6.	In their latest memorandum the Solicitors question whether, in saying in the credit card decision that I was finding facts, these are final determinations of fact.  I should therefore make clear that the following is a recital of the factual basis as I understand it, which I set out in case they consider that I have come to a conclusion based on incorrect understanding of the facts:
(1)	The Financial Institution operates in more than [number withheld] countries.  They hold information on their computers in the UK on about [number withheld] customers with UK addresses and accounts in [names of foreign jurisdictions withheld].  The data is held in encrypted form but there are employees of the Financial Institution in the UK who have access to it.
(2)	As the Inspector’s job title indicates, 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)	I was given the following statistics which the Revenue have so far obtained. 
Source	The Financial Institution’s customers	Matched to SA returns	Foreign income declared	
Tax Credit Office	668	191	23	
Source 1	3,300	790	27	
Source 2	5,321	866	277	
Total	9,289	1,847	327	
I am aware of the identity of Sources 1 and 2 which relate to debit and other cards. The table shows that of the total of the Financial Institution’s customers with UK addresses and cards associated with non-UK accounts only 19% made tax returns, and only 3.5% of the total (or 18% of those who make returns) who are UK resident have declared any foreign income.  The information from the Tax Credit Office is of individuals claiming Child Tax Credits and Working Tax Credits and having the money paid into a non-UK account with the Financial Institution.  Again there is a big discrepancy between each of the figures.
(4)	Out of the names identified by these sources a sample, which is intended to be representative, has been chosen of 448 cases (of which 61 are customers of the Financial Institution) out of the 1,847 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, specimens of which I saw.  The Solicitors mention that the letters refer to the possibility of prosecution but this is true of only half of them relating to what the Revenue considered to be the most serious cases.  So far, 206 enquiries have been opened, and in 110 cases (24.5% of the sample, of which 8 are being dealt with by Special Civil Investigations which deals with larger cases) further tax liability is expected with an expected yield (references herein to yield include interest and penalties) of £2.1m (this figure was £1.4m at the time of the credit card application), and many payments on account have been made.  Of these, 25 cases relate to customers of the Financial Institution, including 2 being investigated by Special Civil Investigations.  The Inspector expected that in half the total number of cases in the sample there would be additional tax.  If granted, these Notices will also provide further information about transactions entered into by such people.
(5)	Out of the names identified from the same sources a second sample of another 500 people (of which 66 are customers of the Financial Institution) has recently been chosen out of the 7,442 people who have not made self-assessments returns.  So far an enquiry has been opened into 3 customers of the Financial Institution, one by Special Civil Investigations in which the expected yield is £300,000.
(6)	I was previously given full details of Special Civil Investigations and local tax office investigations of 21 cases contained in 2 ring binders, all relating to customers of the Financial Institution, and the latest brief gives details of the additional case referred to in the previous paragraph.  Seven of these have been completed.  Sixteen of these cases include (and in one case, relates exclusively to) interest on non-UK bank accounts, and the remaining 6 cases relate solely to other types of undeclared income. There is an estimated total settlement yield from these cases of £3.74m, or £170,000 per case (£1.7m, or £106,250 per case, if one takes only those where there is undeclared non-UK interest).  Two of these cases involving undeclared non-UK interest, with estimated yields of £100,000 and £300,000 respectively (the second being the one mentioned in paragraph 6(5)) started from information from Sources 1 or 2.  
(7)	The Inspector estimates that if consent to these Notices is granted 20% of cases will give rise to additional tax with a total yield of £1,508m (2% being cases where Special Civil Investigations will be involved and the remaining 18% dealt with by local offices).  In making this estimate the total number of [number withheld] accounts has been reduced by the estimated number of credit card cases and by the 9,289 cases from sources in the table above to avoid any duplication.
7.	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, together with documents containing the following information about the customer: the date of the application or account opening, the type of account, any other address of the customer, the nationality, the country of birth, the date of birth, the business name and address of the employer, the annual income, the initial deposit and its source and the likely source of income into the account, plus statements relating to six specified months.  The Notices are limited to the period of six years before issue and up to 5 April 2005.  If the Notices are granted the Inspector informs me that the Revenue will first try to match the information with tax returns electronically.  If this shows that foreign interest is declared no further action will be taken and the customer will not even know about the Revenue’s Notices.  If foreign income is not declared, the Revenue will first ascertain whether there is a good explanation, for example that no interest is earned on the account, the person with a UK address is not resident, or is non-domiciled and does not remit any interest, or that interest from, say, the Channel Islands has incorrectly been returned as UK source interest.  Only if there is no such explanation will the Revenue pursue their investigation of the undeclared interest.  I mention this evidence because the Solicitors suggest that innocent customers of the Financial Institution will find themselves “wrongly caught up in an extensive fraud investigation,” and they state that “one can have little confidence that taxpayers’ affairs will be reviewed individually and discretely upon a case by case basis.”
8.	I emphasise that no allegation is made against the Financial Institution and, as one would expect, the Solicitors’ memorandum states that the Financial Institution does not condone or seek to facilitate tax evasion and they have made representations so that their duty of confidentiality to their customers is properly considered.  Prior to the issue of the precursor letter of 5 December 2005 the Financial Institution and the Revenue have had a number of meetings starting on 7 September 2004, and have corresponded frequently by letter and email.  I have seen copies of notes of meetings and of the correspondence.  While very properly reserving their position to argue against the validity of any Notices, it is extremely helpful for me to know that there has been this dialogue during which a number of concessions have been made by the Revenue (which the Solicitors in their latest memorandum describe as minimal and including little element of compromise by the Revenue), and as a result the Financial Institution has been able to explain any difficulties they would have in complying.  I am slightly surprised by the Solicitors’ objection that it is for the Revenue to prepare a valid demand and not for the Financial Institution to do it for them, and that “If HMRC needs the co-operation of the noticee in order to frame a notice which is reasonable, not excessive, and addressed to the right person, that, it is submitted, is a plain sign that the proposed notice goes too far upon the basis of too little evidence.”  It seems to me that the dialogue that has taken place is exactly what one would expect from a responsible taxpayer like the Financial Institution.
9.	As a result of this dialogue the Solicitors accept that the Notices are not onerous. Since their original representation was written, public limited companies, charities, churches, mutuals, trade associations and clubs have been excluded from the precursor letter.  The notices have also been limited to 6 years.  If the Notices are granted, the time limit of 60 days for complying is also agreed.
10.	As the Solicitors remind me, section 20(8A) was enacted in 1988 following a recommendation of the Keith Committee, of which I should declare that I was a member.  I agree with them that one should not regard the Report of the Committee as indicating the intention of Parliament in enacting the provision.  While I consider that the Report is admissible as a statement of the mischief that Parliament was aiming to correct I thought it better not to reminded myself of what the Report said on this topic as my task is to interpret the statutory provision.
Possession or power
11.	I turn to the Solicitors’ objections.  The first is one that did not apply to the credit card application.  The Solicitors contend that the documents requested by the Notices are not within the Financial Institution’s possession or power.  The Financial Institution contracts to provide services to its foreign subsidiaries (which have their own contractual, or regulatory or legal restraints on the use of data) subject to a duty of confidentiality.  The Solicitors describe the information as being under the electronic equivalent of a lock and key.  A particular individual may have access only to part of the information held.  They contend that the phrase “possession or power” was first adopted in s 35 of the Finance Act 1942 and was obviously derived from Order 31 of the Rules of the Supreme Court, in which possession meant factual possession plus the right to possess, and power meant an enforceable right to inspect the document or to obtain possession or control of the document from the person who ordinarily has it in fact.  They summarise the principles established by the authorities, which they cite, as “(i) sole legal possession is required for ‘possession’; (ii) actual physical possession is insufficient, though it may be necessary; (iii) if a person has ‘possession’—including possession via his agent—then an obligation of confidence (other than legal privilege) may be no bar to production; but (iv) an obligation of confidence will however negate ‘power’ over a document because it eclipses the relevant ‘right’.”  Accordingly they contend that it is necessary that the Financial Institution have a right to possession of the document or the right to inspect it.  Here their right is contractual and subject to a condition of confidentiality and they are not disclosable (relying on Unilever plc v Gillette (United Kingdom) Ltd [1988] RPC 416).
12.	The Revenue point to the definition of document in s 20D of the Taxes Management Act 1970 and s 127 of the Finance Act 1988, set out above, that document means “anything in which information of any description is recorded.”  This looks to the hard disc on which information is stored.  The question is then whether the hard disc is in the Financial Institution’s possession or power.  “Possession” has two possible meanings: its ordinary meaning, which includes documents in the mere custody of the person; and the technical meaning adopted by the Courts of Chancery when ordering the inspection of documents, which excludes cases of joint possession or custody.  The Rules of the Supreme Court adopted the former meaning in respect of discovery, and the latter in respect of inspection (see Kearsley v Philips (1883) 10 QBD 465 at 466).  They describe the Solicitors’ argument as based on viewing the information on the hard disc as paper documents received by the Financial Institution for safe keeping only.
13.	I do not find the history of the meaning of “possession” in the Rules of the Supreme Court helpful, even though they are concerned with aspects of disclosure.  I have to construe a tax statute passed in 1976 and I see no reason to give “possession” anything other than its ordinary meaning.  We are not concerned with inspection; the Revenue are not trying to obtain access to the Financial Institution’s computer records (as was the case in Derby & Co Ltd v Weldon (No.9) [1991] 2 All ER 901).  It is common ground that the hard disc is in the Financial Institution’s possession on the ordinary meaning of that word.  There are also employees of the Financial Institution who have the necessary passwords to access the information stored on the hard disc.  Accordingly I find that the documents are within the Financial Institution’s possession or power.
14.	In an earlier submission the Solicitors state that it is a crime under the operative law in some foreign jurisdictions in which it operates to disclose documents relating to the accounts in that jurisdiction.  I have no information about the operative law in those foreign jurisdictions other than this assertion, and in any case it is not obvious to me that such law is relevant to a notice given to a UK company to make available documents situated in the UK.
Class
15.	The second main objection raised by the Solicitors is that customers with UK addresses holding non-UK bank accounts is too wide a class.  They say that any large class is certain to contain persons who have failed to meet their tax obligations.  It seems to me that there are two different questions, first whether this is a class, and secondly, if it is, whether it is a proper class for using section 20(8A), or whether it is an excuse for conducting a fishing expedition, which is not answered by analysing the meaning of class.  Thus a proposed notice addressed to all those with a surname beginning with A might be a class, but would certainly not be a proper class (in the credit card decision I used the expression “rational class,” to which the Solicitors have objected as failing to identify the objectives and principles to be rationalised, and I accept that this was not the best expression) in relation to the question whether there are reasonable grounds for believing that any of the class may have failed (or may fail) to comply with the provisions of the Taxes Acts.  As to the first question, the only issue to my mind is whether it is certain that a member falls within the class.  I can see no uncertainty here.  I should add that although Parliament refers to them as a “class of taxpayers” it is clear from the context that the section is intended to be used for enquiring into whether such persons have complied with their tax obligations, if any.  Certainly it was so understood in R v IRC ex p. Ulster Bank Ltd [2000] STC 537.  
16.	On the second question of whether the Notice relates to a proper class of taxpayers, the Solicitors’ latest memorandum summarised the earlier representations as whether the class had “homogeneity in respect of likely tax transgression.” They submit that the question to be asked is “Did Parliament intend that a group of this size and diversity should be targeted on the evidence as presented?”  The Revenue reply that whether a group is homogenous or not can only be on the basis of those characteristics which can be identified at the start.  Any group ceases to be homogenous the more one knows about it. 
17.	It seems to me that the Financial Institution’s real objection is that they consider that 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.”  If that were the case I would have no hesitation in refusing consent to the Notices.  But the application before me is very different.  The Revenue have quite a lot of information about customers of the Financial Institution, including customers with debit or credit cards, from their existing enquiries as summarised in the table in paragraph 6(3).  They have some information (although less than is required by the Notices) about 9,289 of them, of which 668 relate to payments of tax credits to an non-UK account, and the remainder relates to debit or credit cards issued to customers with UK addresses linked to non-UK accounts with the Financial Institution obtained from Sources 1 and 2.  I do not think that this information had been disclosed to the Financial Institution before the credit card application and they have now commented on it.  I can summarise their points as follows:
(1)	The tax credit cases concern people of the margins of taxability; that it is unlikely that a person would direct the Revenue to make a payment to an account on which they did not intend to declare the interest; they question placing reliance upon them as a basis for extrapolation to a wider population.  
(2)	There is a large discrepancy between the results for Sources 1 and 2, which they say cannot be random.  They suggest that there cannot be many false positive matches and so this discrepancy may be caused by mismatching.  The higher percentages from Source 2 are more likely to be representative.  
(3)	There may be overlaps between the two sources.  
(4)	Sources 1 and 2 relate to cardholders and are not relevant to this application relating to bank accounts.
(5)	Only one investigation has started as a result of these sources.
(6)	If additional tax is expected in only 20 per cent of cases it follows that some 60 per cent of their customers will be “caught up in a fraud enquiry.”  They make the point that if the expected yield from the 500 cases is £1.4m this is only £5,600 from each defaulting taxpayer.  
(7)	The conclusion about similar percentages to those from the source in the table being likely to relate to the whole sample is based in part on the (then) 21 cases, which from their yield are much larger than the other ones being investigated.
(8)	The evidence is insufficient to support this larger application.
(9)	The 16 out of the 21 cases may contain only a trivial amount of non-UK interest.
18.	The Revenue’s reply to these points is:
(1)	Tax credits are not restricted to those on the margins of taxability and can apply to people with incomes over £50,000.  Such persons, even if non-domiciled, are more likely to remit interest on the non-UK account to the UK.
(2)	 Any discrepancy is unlikely to be caused by errors in matching the data, which has been matched using name and postcode (or National Insurance number for the tax credit data).  Mismatches would arise only if there are errors in such information, which they believe are likely to be minimal.  Customers using Sources 1 and 2 are more likely to be compliant than the others because “they are willing to leave a UK footprint of their offshore account.”
(3)	It is unlikely that a customer would use both sources, which is the assumption that I made in the credit card decision but without stating it.
(4)	The Sources include not only credit cards but debit cards that are related to bank accounts.  It should be representative of accountholders generally.
(5)	The one case referred to is a case dealt with by Special Civil Investigations.  The current statistics of cases under investigation are included at paragraph 6(4) to 6(6) above.
(6)	The £1.4m (now £2.1m) expected yield from the 448 cases is merely the current figure, which is expected to increase.  The 20% are those that will need investigating and from which further tax is expected.  The remaining cases will not be “caught up in a fraud investigation” but are expected merely to require clarification about why the interest is not taxable, for example that the remittance basis applies and the interest has not been remitted.
(7)	 The conclusion that the 9,289 cases will prove typical of the total is not based on the 21 (now 22) cases.  Those cases demonstrate that undeclared foreign bank interest often goes with other undeclared income.
(8)	The information relating to cardholders is applicable to non-UK accounts generally.
(9)	Their experience is that not declaring non-UK bank interest may indicate that the funds going into the account may also comprise undeclared income.  The new case mentioned at paragraph 6(5) above illustrates this.  The Revenue’s knowledge of less than £1,000 of undeclared non-UK bank interest led to the disclosure of over £576,000 undeclared business takings going into the account.
19.	Of these, several items give further factual information.  As to the rest, I agree with the Revenue in relation to the relevance of the tax credit information in (1); as to the discrepancy between Sources 1 and 2 in (2), I do not have any evidence to draw either the conclusion that Source 2 is to be preferred, or that those using the Sources are more likely to be compliant, and so I continue to use the totals as the best evidence I have that may be representative of the larger number of cases.  On (3) and (4) I agree with the Revenue.  On (7), the Solicitors’ objection to the 21 (now 22) cases being used to conclude that similar percentages as disclosed from the sources in the table seems to have based on a misunderstanding probably caused by my mentioning this immediately before the statement in the credit card decision that the Revenue expected similar percentages as in the table to apply to all of the Financial Institution’s credit card customers with related non-UK accounts.  The only conclusion that I intended to draw from the 21 (now 22) cases was that in a high proportion of cases (now 16) being investigated there was undeclared non-UK bank interest and other undeclared income so the two tend to go together.  I accept that these are unrepresentative of cases generally, as they include some large cases dealt with by Special Civil Investigations.  On (8) I assume that most accounts will have cards of some type associated with them and so I regard the statistic as likely to be representative of non-UK accounts generally. 
20.	The totals in the table show that only 19% of the total make self-assessment returns, and of those who do, only 3.5% of the total (or 18% of those who make self-assessment returns) have declared any foreign income.  In the credit card decision I stated at this point that “On any basis these figures need investigating, which the Revenue are in the course of doing,” to which the Solicitors object as not considering the question whether the Notices should be permitted under s 20(8A).  I should therefore make clear that this statement, which is equally applicable here, related to investigations that the Revenue were already undertaking based on information already in their possession, and this was not the sole reason for my conclusion that the Notice should be permitted. The first 448 representative sample of cases where there are self-assessment returns for resident and domiciled individuals is currently in the short time since letters were sent out in July 2005 expected to raise £2.1m, and the Inspector expects there to be additional tax in half of the total.  Lastly, of the 22 cases of the Financial Institution’s customers under investigation, but not specifically as part of the current investigation into non-UK accounts, where the expected tax yield is £3.74m (£170,000 per case), 17 of them (total £1.7m or £106,250 per case), are cases where there is undeclared interest on non-UK accounts.  The recent second sample of 500 cases where there are no self-assessment returns has already started to yield results, although it is too early to draw any conclusions as to the likely total.  These statistics taken together leads the Revenue to suspect that similar percentages that apply to the 9,289 customers of the Financial Institution with non-UK accounts they know something about will be revealed for the rest of the possible [number withheld] cases for which they are requesting consent to issue the Notices (although the cases identified by the credit card application should be deducted from this total).  It is worth pointing out that the number of customers of the Financial Institution to which the Notices relate exceeds the total number of persons in the UK who have completed the foreign income pages in their returns.  Far from being a fishing expedition it seems probable that some 76% of cases will raise questions, in many of which there will be an innocent explanation, but in others there is likely to be default in complying with tax obligations.  The Inspector’s estimate is that 20% of cases will result in an additional yield of about £1,508m.  In the light of these statistics I am satisfied that the class of taxpayers specified is a proper one. 
21.	Another objection is that the Notices include information not contained in current documents of current customers and documents not relevant to customer identification.  I see no objection to either.  The investigation is properly made in respect of the last 6 years and section 20 is not limited to matters of customer identification.  Indeed, it is obvious from the figures quoted above that there will be cases where the customer is known to the Revenue but who has not returned foreign interest or, if non-domiciled, the existence of remittances of such interest.  I assume from the fact that the Financial Institution does not rely on the Notices being onerous and that the information is available electronically there is no difficulty in providing this information (although, as noted below, this may not be the case for the Financial Institution’s private banking subsidiary).  
22.	Further, the Solicitors say that the Revenue are not asking for documents relating to a class of taxpayers whose individual identities are not known to the Revenue (s 20(8A)(a)) because the class will include persons whose identities are already known to the Revenue.  They argue that “Unless they are removed, [the Financial Institution] will know any notice to be invalid in relation to some thousands of customers ostensibly caught by it; but the Financial Institution will not know which, with the result that it cannot know in respect of any customer whether it has a duty to disclose or not.”  In their latest memorandum they clarify this by saying that known to the Revenue means known in this context, ie in the context of seeking an order for disclosure under s 20(8A).  There are 9,289 customers of the Financial Institution with non-UK accounts whose identities are known to the Revenue, which the Solicitors say shows that the evidence includes irrelevant names.  It is important to note that the paragraph immediately following, s 20(8A)(b), requires that there are reasonable grounds for believing that any of the class of taxpayers may have failed (or may fail) to comply with any provision of the Taxes Acts.  In spite of the Solicitor’s clarification of their argument I still consider that there is a logical flaw in it.  If the class includes any members of the class who may have failed to comply, it must equally include other persons who have complied, whose identity will obviously be known to the Revenue.  Their reading effectively rewrites paragraph (b) so as to require that there are reasonable grounds for believing that all members of the class may have failed to comply with their tax obligations.  The inclusion as members of the class of persons who the Revenue know have complied with their tax obligations cannot possibly have been intended by Parliament to invalidate the whole of the Notices.  Taxpayer confidentiality prevents the Revenue from disclosing to the Financial Institution the names of the customers known to them.
Human rights
23.	The Solicitors suggest that the ex-parte procedure is incompatible with articles 6 and 8 of the Human Rights convention.  The Revenue respond that in Funke v France (1993) 16 EHRR 297 the Court’s objection with regard to article 8 was not the French customs officers’ powers of search and seizure as such, but the lack of safeguards against abuse of their power.  The Judgment states:
 “56. Undoubtedly, in the field under consideration—the prevention of capital outflows and tax evasion—States encounter serious difficulties owing to the scale and complexity of banking systems and financial channels and to the immense scope for international investment, made all the easier by the relative porousness of national borders.  The Court therefore recognises that they may consider it necessary to have recourse to measures such as house searches and seizures in order to obtain physical evidence of exchange-control offences and, where appropriate, to prosecute those responsible.  Nevertheless, the relevant legislation and practice must afford adequate and effective safeguards against abuse.
57. This was not so in the instant case.  At the material time…the customs authorities had very wide powers; in particular, they had exclusive competence to assess the expediency, number, length and scale of inspections.  Above all, in the absence of any requirement of a judicial warrant the restrictions and conditions provided for in law, which were emphasised by the government, appear too lax and full of loopholes for the interferences in the applicant’ right to have been strictly proportionate to the legitimate aim pursued.”
24.	The Solicitors’ latest memorandum points out that the circumstances in Funke were far removed from the present and that the most that can be read from the case is that the Court considered that a judicial warrant procedure was an indispensable minimum requirement for a “dawn raid” type of case, in which it was clearly necessary to take the target by surprise.  They say that that is an uncontroversial conclusion which provides no support at all for the adoption of an ex parte procedure in s 20(8A), in circumstances in which it is evidently not necessary to take the recipient of the notice by surprise.  The Revenue respond that, unlike a search case, the interference with Convention rights in this application are at the margin and so a low intensity review is appropriate, as in X v Belgium, Application No.9804/82 31 DR 231, in which the Court declared the application inadmissible where the demand was for information about private expenditure and no judicial sanction was required before the demand.  
25.	I believe that the Court would approve of the ex parte procedure as being proportionate in the circumstances of this application, particularly where the Financial Institution has been able to raise legal arguments before me and to comment on my credit card decision.  I do not, of course, have power to dispense with the ex parte procedure even if I agreed with their contentions, which I do not.  I do not think that any issues relating to article 6 arise at this stage; I am not making any determination of civil rights or obligations.
Other objections to the ex-parte procedure
26.	In their latest memorandum the Solicitors describe s 20(8A) applications as unique in being an ex parte final determination that cannot be reviewed in inter partes proceedings.  I do not consider that this is the case.  It is not unusual for the extent of powers to be challenged in penalty proceedings for non-compliance with a notice.  If the Financial Institution wish to challenge any point relating to these applications I am sure that the Revenue will arrange for a penalty for non-compliance to be issued, against which the Financial Institution can appeal and the Special Commissioners will arrange an expedited hearing. 
27.	In relation to the Solicitors’ objections to ex-parte proceedings as a breach of internationally recognised “fundamental taxpayers’ rights,” it is worth stating that there are two sides to the argument.  The procedure is itself a recognition of such rights in that it is a safeguard against abuse of the Revenue’s powers.  And it is because the proceedings are ex parte that the Revenue have been able to give me detailed and highly confidential information about the investigation of 22 taxpayers, and of their sources of information which they could not have disclosed to the Financial Institution because of taxpayer confidentiality or prejudicing their investigations.  As a result I am in a far better position to assess the merits of the application than if the Financial Institution had been allowed to be present.  The benefits of the procedure were accepted by the Court of Appeal (the point not being in issue in the House of Lords) in R (on the application of Morgan Grenfell) v Special Commissioners [2001] STC 497 in which the Revenue argued (at [49]) that the self-evident risk of compromising the investigation shuts out any possibility of an oral procedure, which the Court accepted (at [50]) saying that an inter-partes procedure would lead to the accidental disclosure of material to which the taxpayer was not entitled, the disclosure of which would run counter to Parliament’s purpose.  That point is clearly demonstrated here.  The Solicitors suggest in their latest memorandum that it is tenuous to extend the principle in Morgan Grenfell, which was a notice to that company in relation to their own affairs, to a third party application, at least when the recipient of the notice does not have a personal or especially close relationship with the taxpayers concerned.  The opposite seems to me to be the case; disclosure to the Financial Institution would breach the confidentiality of all its customers.  Finally, the Solicitors suggest that an ex-parte procedure is irrational when there is no equivalent in indirect taxes.  It is publicly known that a review of powers is currently taking place following the merger and that is the correct forum for such matters to be considered.  In any case I have no power to override that Parliament has laid down an ex parte procedure.
EU law
28.	So far as EU law is concerned, the Solicitors have provided a seven-page appendix of arguments.  They appreciate that foreign suppliers of banking services will not be put in a worse position than UK banks.  Nor is there any discrimination against UK persons who use such services.  However, they contend that the Notices involves a restriction on the provision of such services, and of the free movement of capital (which is not restricted to the EU), and possibly the freedom of establishment, as in their example of a law firm with offices and client accounts in a number of countries.  They argue that a general presumption of tax evasion cannot justify fiscal measures which compromise the objectives of the free movement of capital, citing Leur-Bloem, Case C-28/95, [1997] ERC I-4161 and Commission v Belgium, Case C-478/98, [2000] ECR I-7587.  In their latest memorandum the Solicitors point out that the only thing known to unite the people affected by the Notices is that each of them has exercised a fundamental freedom by opening a non-UK bank account.  
29.	The Revenue contend that there is no objection to the Notices on EU grounds.  They argue that in Arblade, Case C-376/96, it was the creation of a double burden that was the restriction.  There foreign employers had to pay employers’ contributions to a fund in the host state in addition to any in the state of establishment, which was an additional expense for undertakings established in another member state and accordingly a restriction (at [50]).  So was the obligation to draw up and keep documents in accordance with Belgian legislation (at [58]).  Here there is no double compliance burden.  In Finalarte, Case C-49/98, the restriction which required to be justified, was that employers established outside Germany had to provide more information to the fund for providing holiday pay to construction workers than German employers.  The Court stated that it was not a justification if the State can check on the basis of documents required by the rules of the state of establishment (at [74]).  The Revenue cannot use such documents here.  They contend that the Court decided in Leur-Bloem, in relation to whether tax relief on a merger could be denied in accordance with article 11 of the Mergers Directive that an operation not carried out for valid commercial reasons may constitute a presumption of tax evasion or avoidance (at [44]), that states cannot have a general rule automatically excluding certain categories of operations, but must observe the principle of proportionality in determining the internal procedures necessary for this purpose (at [48(b)]).  They point out that Commission v Belgium decided that a prohibition against Belgian residents acquiring Eurobonds issued by Belgian state in Germany on account of the likelihood of tax evasion was not proportionate.
30.	Assuming that the persons with UK addresses whose information is sought by the Notices are UK residents (if they are not, the information about them is of no interest to the Revenue), the Notices are sought for the purpose of taxing them.  If they have declared their foreign interest they will not even know about the Revenue’s enquiry.  If they have not paid tax the only disadvantage that they might suffer is that they are likely to be asked to demonstrate that the interest is for some reason not taxable, which is a burden that any UK resident (and I presume, any resident of any other Member State) may have to undertake.  Had they opened a UK bank account, the UK bank would automatically give the Revenue information about interest earned on that account every year, which is arguably more onerous than under the proposed Notices.  While I accept that a presumption of evasion cannot justify a breach of the fundamental freedoms, such as would be involved if, for example, the UK tried to prevent residents from having bank accounts abroad, I do not consider that the Notices are in this category.  They are seeking to obtain information that will determine the extent of tax evasion, not because there is any presumption that such evasion exists, but because a sample of cases derived from information already in the Revenue’s possession has demonstrated that the extent of evasion is likely to be substantial.  The real question is whether the Notices are proportionate.  The only restriction on opening non-UK bank accounts is that people may have to explain to the Revenue why interest on the account is not taxable.  I consider that the Revenue are pursuing a legitimate purpose, which the information so far obtained shows they are right to pursue and, since there is no other way of identifying the persons concerned, their approach is, in my view, proportional.
Savings Directive
31.	The Solicitors also point out that from July 2005 the Savings Directive enables the Revenue to obtain at least some of the same information by another route.  Section 20(8A)(d) requires that the information which is likely to be contained in the documents to which the notice relates is not readily available from another source.  The Revenue reply that the first returns where information from the Savings Directive will be received are those for 2005-06 due by 31 January 2007.  These Notices request documents for the six years before the Notices and ending on 5 April 2005 and so there is no overlap.   They also say that some banks will in accordance with the Directive impose a withholding tax and will not have any information to supply; and those customers who are really intent on tax evasion may have moved their money out of complying jurisdictions or into a company (to which the Directive does not apply) before the Directive came into force.  I agree with the Revenue on all these points.
The Financial Institution’s private banking subsidiary and the Financial Institution’s trust company subsidiary
32.	In relation to these two subsidiaries of the Financial Institution, the Solicitors contend that there is no factual basis for the issue of the Notice.  In relation to the private banking subsidiary they confirm that that they do not hold any information as described in paragraph 6(1) above and there is no systematic record of information in paper or other form.  They believe that there are few relevant persons in its customer base and where they do exist the customer is likely to be non-domiciled and to have foreign accounts.  It will be a matter of chance whether they possess any documents, which cannot be established without an onerous file by file search.  The supplementary information required by the Notice is unlikely to be available.  Even if the documents can be found the private banking subsidiary may not have “possession” within the statutory meaning and there may be contractual or foreign law constraints.
33.	So far as these specific arguments relating to the private banking subsidiary are concerned, they have agreed that the Notice is not onerous and that the 60 day time limit is appropriate.  In the light of this I do not consider that these particular arguments should prevent the issue of the Notice.  If it transpires that difficulties arise which may require a longer time limit or there are problems of constraints on disclosure, it seems to me that an appeal against penalties (see paragraph 26 above) would be a suitable way of resolving them. 
34.	So far as the Notice to the Financial Institution’s trust company is concerned, if there are no relevant documents there will be no burden on that company to confirm this.
Conclusion
35.	As to all the Notices, I do not consider that any of these objections should prevent the issue of the Notices.   In the light of the above I am satisfied first, that the Notices relate 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 Notices relate 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 £1.5bn, 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 Notices relate is not readily available from another source (and in particular most of the information required by the Notices is not known even for those whose identities are known to the Revenue).  Accordingly, section 20(8A) is satisfied.
36.	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 Notices.
37.	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.
Postscript to the anonymised decision
38.	The previous paragraphs of this decision were released by the Revenue to the Solicitors.  The Solicitors thereupon objected that the first and last sentences of paragraph 9 were incorrect: the Solicitors had not accepted that the Notices were not onerous but on the contrary had argued that they were onerous and should not be allowed on that account (amongst others).  Likewise they had not agreed a time limit of 60 days (or any other period) for complying.  I accept that these are valid criticisms.  I take the view that it would be inappropriate to amend the main body of my decision as it correctly records the reasoning which led me to consent to the issue of the three Notices in question. 
39.	I should also record that the Financial Institution and the Revenue inform me that they have now agreed a programme of disclosure which is more specific and more limited than that which would have flowed from the Notices as they came before me.

JOHN F. AVERY JONES
SPECIAL COMMISSIONER
RELEASE DATE:16 February 2006

SC 2047/05