When the Inland Revenue and HM Customs & Excise merged in 2005 to form HM Revenue & Customs (HMRC) one of the main drivers was increased efficiency not only in terms of costs, but also in relation to the administration and collection of taxes in general.
Although the two administrations became one, powers in terms of verifying a taxpayer’s position varied depending on the tax in question. This disparity resulted in Schedule 36 (Schedule 36) of the Finance Act 2008 (FA 2008), which unifies the rules in relation to verifying a taxpayer’s position with effect from, generally, 1 April 2009.
This article considers the meaning of ‘document’ for the purposes of Schedule 36 and considers the impact of a recent High Court judgment19 where the issue of whether a computer is a document was considered.
Schedule 36 is divided into 3 parts:-
- powers of HMRC to obtain information and documents;
- powers of HMRC to inspect businesses; and
- further powers.
Power to obtain information and documents
Under this power an officer of HMRC may, by notice in writing, require a person:-
- to provide information to HMRC; or
- to produce a document to HMRC
provided that the information or document (as defined below) is ‘reasonably’ required by the officer for the purpose of checking the taxpayer’s tax position. ‘Tax position’ for this purpose is very wide and relates to any time in relation to any period as regards any tax (and extends to past, present and future liabilities to tax).
This power can be exercised by HMRC at any time, even before a tax return has been filed and so allows HMRC to obtain information and/or documentation in relation to future tax liabilities of a taxpayer.
Power to inspect business premises
Under this power an officer of HMRC may enter a taxpayer’s business premises and inspect:-
- the premises;
- assets of the business that are on the premises; and
- business documents that are on the premises
provided that the inspection is reasonably required for the purposes of checking the taxpayer’s tax position. This power does not extend to any part of the premises in question that are used solely as a dwelling.
‘Business premises’ are those that an officer of HMRC has reason to believe are used in connection with the carrying on of a business by or on behalf of the taxpayer concerned. ‘Assets of the business’ means assets that HMRC has reason to believe are used in connection with the carrying on of a business and does not include documents. ‘Documents’ for this purpose are defined as documents (or copies of documents) used by any person that relate to the carrying on of a business by any person and which form part of any person’s statutory records.
HMRC further has power to copy and, in certain circumstances, remove relevant documents. In short, an officer of HMRC may take copies of or make extracts from documents produced to or inspected by him. In addition, any such document may be removed at a reasonable time and may be retained for a reasonable period ‘if it appears to the office to be necessary to do so’. Needless to say, if the latter power is exercised the taxpayer should retain a copy of the document(s).
The meaning of ‘document’
The term ‘document’ is not per se defined, but it is expressed by Schedule 36 as including a part of a document and is deemed to extend to “anything in which information of any description is recorded, and … anything onto which information recorded in the document has been copied, by whatever means and whether directly or indirectly” (section 114(2) FA 2008). This on the face of it is extremely wide. The issue as to whether a computer can constitute a document in the context of section 114(2) FA 2008 has now for the first time been considered by the High Court.
HMRC entered the claimant’s premises purporting to exercise powers under the Customs and Excise Management Act 1979 (CEMA) and removed a number of computers. Although HMRC were purporting to exercise powers under CEMA the wording of the relevant provision of CEMA was almost identical to that set out in Schedule 36. Moreover, section 114 FA 2008 equally applies to CEMA and Schedule 36. Accordingly, the term ‘document’ for the purposes of CEMA has an almost identical meaning as the meaning of ‘document’ for the purposes of Schedule 36.
The claimant contended that the provisions in CEMA did not permit the removal of computers because they do not fall within the statutory meaning of ‘documents’.
The claimant fought a valiant battle and made a number of submissions, the main ones of which are that:-
- section 114 FA 2008 is subject to the dictionary definition and that overriding the dictionary definition would greatly extend the dictionary meaning of ‘document’. The Court rejected this submission on the grounds that section 114 FA 2008 is not strictly a definition of the term ‘document’ but “a provision extending the application of the provisions to which it applies”, thus preventing reliance on the usual meaning of ‘document’ as limiting the application of section 114.
- if the meaning of document included a computer such a conclusion would also mean that the definition would include other forms of media such as, for example, mobile telephones, an iPod, a camera or a USB memory stick. The Court did not consider that this would be an absurd result and that such items are routinely used for recording information.
- if the meaning of document included a computer and HMRC were therefore permitted to remove a computer it would lead to a disruption of the taxpayer’s business. The Court accepted that the exercise by HMRC of its powers could cause a disruption to business but that the relevant legislation had contemplated this, generally, by obliging HMRC to give notice to a taxpayer;
- only the contents of a hard disk can be copied – the computer itself cannot. Here the Court considered that to draw a distinction between a hard disk and the computer was artificial; and
- the hard disk of a computer will invariably contain information other than information falling within HMRC’s powers and that to remove the entire computer would lead to HMRC exceeding their statutory powers – a computer or, more accurately, its hard disk, should be compared to a physical filing cabinet. The Court referred at length to existing relevant case law which pointed to the fact that a hard disk cannot be regarded simply as a container of the files visible to the computer’s operating system and stated that trying to draw such analogies is not helpful; it is a single object containing a variety of materials.
The Court also, by way of obiter, suggested that the taxpayer would have a remedy in private law if needed.
The Court therefore rejected the claimant’s application for judicial review of the legality of HMRC’s removal of computers from the claimant’s premises.
Although strictly speaking the above case relates to the application of CEMA it should not be ignored for the purposes of Schedule 36. This is supported by the fact that the wording adopted is similar and that, in particular, section 114 FA 2008 applies equally to CEMA and Schedule 36. It is therefore prudent to assume that a court considering the application of section 114 FA 2008 to Schedule 36 would reach much the same conclusion.
Of particular interest is that HMRC appear to have the power to remove a computer notwithstanding that the computer’s hard disk may contain information that is not relevant to the particular line of enquiry being pursued by HMRC. More importantly, of course, is the situation where a hard disk may contain information that is protected by privilege (whether or not relevant to HMRC’s line of enquiry).
In this regard, The Information Notice: Resolution of Disputes as to Privileged Communications Regulations 2009 (SI 2009/1916) will apply. This statutory instrument sets out a detailed procedure for establishing whether HMRC will agree that a ‘document’ (remember the extended definition) is privileged. If HMRC do not agree that a document is privileged the taxpayer will ultimately need to make an application to the Tax Chamber of the First-Tier Tribunal to consider and resolve the dispute. This will if the dispute arises during an inspection of business premises involve the document(s) in question being sealed and sent by HMRC to the Tax Tribunal to be considered by it.
Subject to arguments concerning the application of privilege it seems clear that HMRC (exercising within statutory powers) do have the power to inspect and remove computers and in all probability other forms of electronic media. Accordingly, it is more important than ever for a business to be in a position to function with minimal disruption if HMRC ever exercise their powers in relation to it.