In Derrin Brothers Properties Limited & Others v HMRC [2016] EWCA Civ 15, the Court of Appeal  has dismissed the Appellants' appeal against the High Court's refusal to quash third party information notices issued by HMRC pursuant to paragraph 2, Schedule 36, Finance Act 2008 (the Notices).

Background

These judicial review proceedings originated from a request received by HMRC from the Australian Tax Office (the ATO), made pursuant to Article 27 of the UK/Australia Double Taxation Convention, for HMRC's assistance with investigations into the tax position of Mr Gould and Mr Leaver. The ATO suspected that certain UK companies should be treated as resident in Australia as they were managed by Australian taxpayers.

The ATO requested documents from Lubbock Fine LLP (Lubbock) and a number of banks to determine the beneficial ownership and residence of some 40 companies, establish whether any false claims were made for interest relief, their source of funds and to identify undeclared income. The ATO suspected that certain arrangements had been entered into which had been designed to avoid Australian tax on income of some 230 million Australian dollars.

In order to obtain the documents requested by the ATO, HMRC intended to issue the Notices. It issued 'pre-cursor' letters pursuant to paragraph 3(3)(c), Schedule 36, Finance Act 2008, to the intended recipients, including Lubbock, notifying them of HMRC's intention to seek approval to issue the Notices from the First-tier Tribunal (FTT) and providing them with an opportunity to make representations to HMRC.

Lubbock made representations in response to the precursor letter, informing HMRC that judicial review proceedings had been issued in Australia by a number of companies, including Derrin Brothers Properties Limited (Derrin) and Chemical Trustee Limited (Chemical), challenging the ATO's exercise of the Article 27 power.

Derrin, Chemical and Ind Suez Investments, also made representations to HMRC for onward transmission  to the FTT. The representations claimed, amongst other things, that HMRC had not provided a summary of reasons. 

HMRC made an ex parte application to the FTT, seeking approval for the issue of the Notices. The FTT (Judge Berner) approved the issuing of the Notices as it was of the view that all of the statutory conditions contained in paragraph 3, Schedule 36, Finance Act 2008, had been satisfied. Judge Berner's decision did not, however, record the reasons why he considered the conditions to have been satisfied.

The validty of the Notices were challenged by way of judicial review proceedings. The Appellants sought a quashing order against the Notices and an order prohibiting the issue of further Notices. They argued that:

  1. Only some of the Appellants had been treated as taxpayers when all should have been; as a result of not being provided with HMRC's reasons and adequate time to make representations their had been a breach of their rights under Article 6 (right to a fair trial) and Article 8 (right to respect to private and family life) of the European Convention on Human Rights.
  2. The request for information and documents was too wide.
  3. The summary reasons given to three of the Appellants (as taxpayers) were inadequate and they were given insufficient time to make representations.

High Court decision

The High Court (Simler J) dismissed the Appellants' application for judicial review on the basis that not all of the Appellants were taxpayers for the purposes of Schedule 36, and there was no reason to displace the 'presumption of regularity' which applied to HMRC's conclusion as to which documents were required.

The Appellants appealed to the Court of Appeal on the basis that the Notices were wrongly approved by the FTT as they breached the requirements of Schedule 36, or violated the Appellants' Article 6 and Article 8 rights.

Court of Appeal decision

The Court of Appeal dismissed the Appellants' appeal.

Before the Court of Appeal, the Appellants contended:

  1. That they had an absolute right to a fair hearing under Article 6 and that the availability of judicial review proceedings did not satisfy this right.
  2. Schedule 36 should be interpreted so as to avoid unfairness, either on a purposive approach to construction or by reading it in accordance with section 3, Human Rights Act 1998 (such a construction required all the Appellants to have been informed of the names of the taxpayers under investigation and why the documents were reasonably required, in sufficient time and detail before the FTT hearing, to enable them to make representations to the FTT).
  3. The FTT should have stated in its decision the reasons and factual basis for its decision in sufficient detail to enable that to be properly examined on judicial review.
  4. All of the Appellants should have been treated as taxpayers.

The Court accepted that the Appellants' Article 6 and Article 8 rights were engaged but was of the view that the facts were inconsistant with a breach of Convention rights

The Court rejected the Appellants' argument that in order to avoid unfairness, Schedule 36 had to be construed in a purposive manner. It was of the view that their was no unfairness and, properly interpreted, Schedule 36 had been applied correctly. Schedule 36 had been applied in a standard way in accordance with its provisions.

The Appellants argued that their Article 6 and Article 8 rights had been infringed because the mechanism for challenging third part notices (an application for judicial review) was inadequate. This was because the FTT's failure to explain why it was satisfied that the documents were reasonably required meant that the High Court was unable to determine the factual question of whether the documents referred to in the Notices were reasonably required. The Court rejected this argument. In its view, the judicial oversight provided by Schedule 36, together with judicial review, was sufficient to satisy the Appellants' Article 6 and Article 8 rights.

On the issue of whether each of the Appellants ought to have been treated as taxpayers, the Court agreed with the High Court's reasoning for finding that the Appellants (other than the three taxpayer appellants) were not taxpayers and therefore were not entitled to receive a summary of reasons. The Court did not agree that the Appellants had not had sufficient time to make representations. The letters were sent four clear working days before the FTT hearing and therefore were delivered in time to enable any representations to be made, which HMRC would then present to the FTT. The Court rejected the Appellants' argument that the summary of reasons provided was inadequate. The Appellants had not identified any specific information omitted from the notices and had not requested any further information from HMRC.

Comment

The Court's confirmation that the judicial approval mechanism contained in Schedule 36, together with the availability of challenging the validity of the notice once issued by way of judicial review proceedings, is a sufficient safeguard for taxpayers against the inappropriate use by HMRC of its information gathering powers, is not surprising. However, given that it is unusual for Defendants in judicial review proceedings to provide witness evidence, in practice, it may be difficult for claimants  to displace the 'presumption of regulatory', which is frequently invoked by HMRC in judicial review proceedings. It is therefore incumbent upon HMRC to fully comply with its duty of candour in judicial review proceedings and to provide claimants with all relevant information and documents pertaining to the decision under challenge.

For the full judgment click here.