In Jimenez v (1) HMRC & (2) The First Tier Tax Tribunal  EWHC 2585 (Admin), the High Court has quashed an information notice given by HMRC to a non-UK resident taxpayer.
This blog is based on an article first published in Tax Journal on 16 November 2017. A copy of the article can be found here.
The issue for the Court to determine concerned the jurisdiction of HMRC to issue a notice under Schedule 36, Finance Act 2008 (Schedule 36) to Tony Michael Jiminez (the Claimant), who lived in Dubai.
The Claimant brought his challenge on the basis that HMRC's information gathering powers do not have extra territorial effect. The Claimant argued that, as a non-resident living abroad, he was not subject to the demand issued to him by HMRC under Schedule 36.
HMRC argued that the Claimant was a taxpayer, for the purposes of Schedule 36, and it had the power to issue a notice under Schedule 36 to any such taxpayer outside the UK to assist it to establish that person's UK tax position. In other words, HMRC argued that there is no territorial limit to the giving of a notice to a taxpayer under Schedule 36.
HMRC's information powers
Under Schedule 36, HMRC has significant information powers at its disposal to compel taxpayers and third parties to provide information and documents, or open up their business premises for inspection.
HMRC is able to issue:
(1) 'taxpayer' notices;
(2) 'third party' notices; and
(3) 'unknown party' notices.
All types of notice can be issued to request information/documents on/from the recipient where that information/document is 'reasonably required' to check the taxpayer's tax position. Where a third party notice is issued, it must name the taxpayer to whom it relates unless the First-tier Tribunal (FTT) has approved the giving of the notice and disapplied that requirement. A taxpayer notice can be given without the approval of the FTT as can a third party notice (if the taxpayer has agreed that it can be given).
When it is able to issue an information notice without the approval of the FTT, HMRC can still seek the approval of the FTT to the giving of a taxpayer and a third party notice. Such approval has the result that the person who is given the information notice cannot appeal against the notice or any requirement in it. The approval of the FTT is a condition of the offences of concealing documents, included in Part 8, Schedule 36.
Pursuant to paragraph 3, Schedule 36, HMRC sought the approval of the FTT for the giving of the notice to the Claimant and the FTT gave its approval. As the Claimant had no right of appeal from the FTT's decision, his only remedy was by way of judicial review and he submitted such an application to the High Court.
High Court judgment
The Court (Charles J) observed that Schedule 36 is silent as to its territorial limits. The principle established in Clark v Oceanic Contractors Inc  STC 35 is that, unless the contrary is expressly enacted, UK legislation is applicable only to British subjects or to foreigners who have made themselves subject to British jurisdiction by being present in the jurisdiction. In Masri v Consolidated Contractors  UKHL 43, Lord Mance expressed the conclusion of a unanimous House of Lords as follows:
"The principle relied upon is one of construction, underpinned by consideration of international comity and law. It is that “Unless the contrary intention appears …an enactment applies to all persons on matters within the territory to which it extends, not to any other persons and matters”… The principle may not apply, at any rate with the same force, to English subjects, but that is presently irrelevant. Whether and to what extent it applies in relation to foreigners outside the jurisdiction depends ultimately as Lord Wilberforce said in Clark (Inspector of Taxes) v Oceanic Contractors Inc upon who is “within the legislative grasp, or intendment” of the relevant provision."
The Claimant also relied on the case of Perry v SOCA  4 All ER 795, in which it was held that the courts had no power under the Proceeds of Crime Act 2002 to make disclosure orders relating to persons outside the jurisdiction. The judge observed that, when having regard to the Masri principle, Perry may not apply to British nationals. He therefore sought further submissions from the parties. HMRC argued that:
(i) the Claimant’s nationality is determinative, but in line with its earlier submissions; and
(ii) the information notice served on the Claimant would have been valid if he was not a British national as there is no territorial limit on who can be given a taxpayer notice.
The Claimant argued that the fact that he is a British national did not render the information notice valid because such an extra-territorial interpretation and application of Schedule 36 would be inconsistent with the approach to the interpretation of domestic legislation against the relevant background of international law. In particular, the Claimant relied on the distinction between (i) an enforcement provision/jurisdiction, and (ii) a prescriptive jurisdiction. He argued that an information notice is an enforcement provision and so cannot be given to a British national outside the jurisdiction.
The Court, preferring the argument advanced by the Claimant, said that whether a taxpayer notice can be given to a British national who is resident or living abroad must be assessed by considering Schedule 36 as a whole. This accorded with the proper approach to the interpretation and application of legislation because it addresses the territorial limits on the giving of taxpayer notices in their statutory context. It does not preclude a different conclusion being reached in respect of taxpayer notices and other information notices, but it does require the justification of such a conclusion as a matter of statutory construction.
HMRC placed considerable reliance on R (Derrin Bros. Properties Ltd) v First-tier Tribunal (Tax Chamber)  EWCA Civ 15 and its confirmation that the purpose underlying Schedule 36 is to provide a credible and effective system of 'checking and investigating', which encourages self-regulation and compliance. The Court did not disagree with that submission, however, it was of the view that the principles "do not of themselves found a conclusion that Parliament intended Schedule 36 or parts of it, to have effect outside the UK."
HMRC argued that Schedule 36 permits the seeking of information for checking the liability of persons to tax in States in respect of which international tax enforcement arrangements have been made. However, the Court concluded that this matter pointed to the conclusion that its reach extends only to the UK and that if HMRC wants to seek information about liability to UK tax from persons who are abroad, it should rely on such mutual assistance arrangements with the relevant State. The existence of such mutual assistance arrangements was also held to undermine HMRC's arguments based on the public interest in promoting its investigative regime. Mr Justice Charles commented that there were a number of provisions in Schedule 36 itself which "raise eyebrows" at the notion that Parliament intended the Schedule to have extra-territorial effect.
The Court also agreed with the Claimant’s argument that the relevant jurisdiction or issue should properly be classified as 'subject matter jurisdiction' rather than 'in personam jurisdiction', because it relates to whether a Court can regulate a person’s conduct abroad. The classification of the jurisdiction is relevant to the application of the approach in international law in construing in UK legislation.
Perry, which was relied on by the Claimant, provided persuasive authority in favour of the Claimant’s contention that Parliament did not intend to give HMRC (with or without the approval of the FTT) the power to issue an information notice to persons outside the jurisdiction because, although criminal offences only arise if such approval is given, penalties are not so dependent, and in any event a territorial distinction cannot be made between information notices on the basis of such approval being given. Mr Justice Charles concluded:
"In my judgment, the application of (i) the Masri principle, and (ii) the approach that Parliament is presumed to have intended to act in accordance with international law, and so not to offend against the sovereignty of another state, found the conclusion that Schedule 36 does not provide a power to give the taxpayer notice that was given to the Claimant in Dubai and so the Revenue should not have given it, the First-tier Tribunal should not have approved it and it should be quashed."
This case is significant for a number of reasons. Not only does it confirm that Schedule 36 does not have extra-territorial effect, but the Court was critical of the fundamental process regularly used by HMRC to issue Schedule 36 notices through ex parte applications to the FTT. At the outset of his judgment, Mr Justice Charles observed:
"… it seems to me that the Revenue and the First-tier Tribunal may wish to address whether the Ariel decision, and more generally their approach to the determination of applications under Schedule 36, merit reconsideration having regard to basic principles of fairness and the general approach taken by courts to ex parte hearings and the application of the principle of open justice … ".
Mr Justice Charles further commented that the FTT, as the "monitor charged with ensuring that arbitrary conduct by the executive is avoided" should consider a number of reforms to its processes. Such reforms included:
(i) holding the hearing in public;
(ii) directing that a full record of what is said and done at any hearing and all documents put before the FTT are provided to the taxpayer; and
(iii) permitting the taxpayer to take part in the hearing.
Although, strictly speaking, the comments made by the judge did not form part of the ratio of his judgment, if changes are not made to the way in which such notices are issued and approved, HMRC and the FTT will run the risk of future public law challenges on substantially the same grounds.
Given that HMRC appear to be relying on its information powers with increasing frequency, it is to be hoped that this judgment will encourage a period of review and reflection on the part of HMRC with a subsequent improvement in the process by which Schedule 36 notices are issued.
A copy of the judgment can be found here.