The powers available to HMRC to request information or documents from a third party (a Third Party Notice) where it is reasonably required by HMRC for checking the tax position of a taxpayer are generally well known. What is not so well known is the limited opportunities available to a third party who might wish to challenge the terms or scope of a Third Party Notice.
In the recent decision of Commissioners of Revenue & Customs v John Ariel, Trustee of the Estate in Bankruptcy of Simon Halabi, the High Court has held that the decision to issue a Third Party Notice is one for HMRC and the decision to approve it is one for Tax Tribunal. There is no scope for any other body, other than the court in judicial review proceedings, to have any role in assessing what a Third Party Notice should require a third party to do.
At first instance, Registrar Derrett had considered that the Bankruptcy Court could issue directions to the trustee in bankruptcy which in effect “trumped” the decision of the Tax Tribunal. HMRC appealed and Mann J, in allowing the appeal held that the Registrar was wrong on the grounds that the process whereby HMRC applied for a Third Party Notice was a self-contained regime that did not come under the jurisdiction of the Bankruptcy Court.
Mann J relied heavily on a recent Court of Appeal decision in the case of Derrin Brother Properties Limited v HMRC  All ER (D) 124 (Jan) in deciding that the job of assessing what a Third Party Notice should require a third party to do is one for the Tax Tribunal, when it considers the notice proposed by HMRC. There was no role for any other body in deciding what should be produced, even where the third party was a trustee in bankruptcy with the ability to apply to the Bankruptcy Court for directions “in relation to any particular matter arising under the bankruptcy”.
Mr Halabi was declared bankrupt in 2010. Mr Ariel was appointed as Mr Halabi’s trustee in bankruptcy in 2013 and thereafter carried out extensive investigations into Mr Halabi’s financial affairs. Mr Ariel was successful in getting the bankruptcy recognised in Jersey and Switzerland and obtained a number of documents from financial institutions pursuant to that recognition.
It was the prospect of having to hand over such documents that led Mr Ariel to make his application for directions to the Bankruptcy Court under section 303 of the Insolvency Act 1986. The matters on which he sought guidance were as follows:
- Whether as trustee he could properly provide documents in response to a Third Party Notice, and, if so:
- who should meet the costs of complying the notice; and
- which categories of documents would the trustee be obliged to provide to HMRC.
HMRC’s application for a Third Party Notice
It will be helpful at this point to outline the process followed by HMRC when they are seeking to obtain information or documents from a third party:
- In order to issue a Third Party Notice, HMRC must first (a) have the agreement of the taxpayer, or (b) the approval of the Tax Tribunal.
- Prior to making its application to the Tax Tribunal, HMRC are required to give the third party a reasonable opportunity to make representations, and thereafter provide the Tax Tribunal with a summary of any representations made.
- Where a Third Party Notice has been approved by the Tax Tribunal, there is no appeal available to the third party against the notice. The only challenge would be by way of judicial review.
In this case, HMRC notified Mr Ariel of its intention to apply to the Tax Tribunal for a Third Party Notice. Mr Ariel was concerned that:
- He held documents that had been produced under compulsion, some of which were obtained pursuant to orders of courts outside the jurisdiction.
- There was a large volume of materials that would need to be investigated in order to properly comply with the notice.
- There would be a significant cost to the estate in complying with the notice.
In his representations, Mr Ariel indicated that if a notice was issued, the Trustee would need to seek directions from the Bankruptcy Court in relation to compliance with the notice. It would appear that the Tax Tribunal were heavily influenced by Mr Ariel’s representations as they took the unusual decision to adjourn HMRC’s application pending the outcome of the trustee’s application to the Court for directions.
The Trustee’s application for Directions
When the application for directions came before Registrar Derrett, she rejected HMRC’s contention that she had no jurisdiction to order what documents the trustee could or could not disclose and proceeded to issue a very detailed order specifying the extent of the trustee’s obligations to comply with a Third Party Notice. Of course at this stage, no notice had been made as the Tax Tribunal had decided to adjourn HMRC’s application.
HMRC’s appeal allowed the High Court to examine the extent to which the Bankruptcy Court could overrule or usurp the jurisdiction of the Tax Tribunal in relation to the matter of a Third Party Notice. Mann J felt that the application was “oddly constituted and oddly conceived” by the trustee as in his view, the only direction that a Bankruptcy Court could legitimately give to the trustee was that he should comply with the terms of that notice. The Court did not have the ability to order what the trustee could or could not disclose to HMRC or place conditions on any such disclosure. The fact that the trustee held information and documents obtained under compulsion did not place the trustee in a special position. The trustee was in no different position at any other recipient of a Third Party Notice who has information in his hands in respect of which duties of confidentiality were owed.
There was an appreciation that a trustee in bankruptcy is an officer of court and has statutory powers to obtain information and documents under compulsion which did raise difficult questions. However, this did not change the fact that the trustee was subject to a Third Party Notice as much as anyone else. It was for the Tax Tribunal to factor in the specific circumstances that applied where a Third Party Notice was applied for in relation to information held by an officeholder like a trustee in bankruptcy. It was for the Tax Tribunal to consider how it should deal with material that may be sensitive and also about who should bear the costs of providing the information under the Third Party Notice.
While an insolvency practitioner is not going to be able to look to the Bankruptcy Court for assistance when faced with this situation, Mann J did suggest that this type of case might justify a Tax Tribunal hearing the application on an inter partes basis as opposed to the ex parte basis that would normally be the case. While it was clear that the intention of Parliament had been for the whole regime to be subject to a judicial monitoring scheme rather than a system of adversarial appeals from a Third Party Notice, an inter partes hearing with direct submission from the office holder might help the Tax Tribunal to be properly informed of matters which might not otherwise be grasped.
Therefore, while insolvency practitioners will see this as an unhelpful decision, it does highlight the need for early engagement with HMRC in relation to any a Third Party Notice and the importance of being able to quickly identify potential issues with HMRC regarding the documents requested. In some cases, the officeholder will want to suggest to HMRC that there is an inter partes hearing to ensure that the Tax Tribunal can be fully appraised of the situation and particularly where the officeholder wants to ensure that the costs of complying with the notice will be borne by HMRC and not the estate.