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“The sum of all I can, I have disclosed”: how to understand if something is in your “possession or power”

Complying with a UK HMRC information notice can be a tricky balancing act. After spending weeks in informal conversations, issuing a formal notice under Schedule 36 of the Finance Act 2008 can seem quite daunting. A change of atmosphere is taking place: what was once a more relaxed dialogue with HMRC is now a formal exchange. An enforceable legal obligation to comply with their demands arises, and the time for compliance begins to turn…

Schedule 36 provides HMRC with an arsenal of tools to obtain the documents and information it (reasonably) needs to verify a taxpayer’s tax position. Different types of notices can be issued to a variety of recipients (for example, to the taxpayer himself, to a third party holder of the taxpayer’s documents or, more specifically, to a financial institution). However, there is one restriction (among others) that applies to all: the recipient of a notice is only required to disclose documents that are “in his possession or control”. Don’t be fooled by the apparent simplicity of this formula – there’s more to it than meets the eye. Before disclosing any documents to HMRC, one should understand the threshold of compliance required by the legislation and carefully assess what falls within it and what does not.

What does “possession” mean?

The possession component of the requirement is straightforward. If you physically hold a document, it is most certainly in your “possession”.

What does “power” mean?

In the context of Schedule 36, “power” is currently interpreted to include both legal power (i.e. power that derives from a legal relationship or right) and power de facto (i.e. the pragmatic ability to obtain the documents). However, this was not always the case. A brief journey through the relevant case law shows how, in recent decades, the meaning of this term has been strengthened and broadened for the tax context, gradually raising the bar of what is necessary to prove that the documents requested are not not in “Power”.

1980

In Lonrho Limited v Shell Petroleum [1980] 1 WLR 627, “power” has been defined in the context of a non-tax discovery exercise to mean a currently enforceable legal right to obtain records without obtaining anyone’s consent.

The case concerned Shell’s ability to compel some of its foreign subsidiaries to release documents. The House of Lords held that Shell did not have the power, in its legal capacity as a shareholder, to compel its subsidiaries to disclose (the decision to disclose rests with the subsidiaries’ board of directors).

2004

In Meditor Capital Management vs. Feighan [2004] STI 1280, the meaning of “power” was specifically assessed in a tax context. The British branch of a Bermudian fund claimed that the documents requested by HMRC were not in its “power” because its parent company had refused its requests to hand over the documents.

The interpretation of “power” adopted in Lonrho was questioned by the judge, who said that there would be “no reason for power or possession to mean anything other than a de facto ability to obtain the documents or details”. This passage is crucial – it alludes to an expansion of the Lonhro a criterion which encompasses not only a legally enforceable power, but also a power in fact, to obtain documents.

2011

In HMRC v Parissis and others [2011] UKFTT 218 (TC), the FTT agreed with HMRC’s argument that ‘power’ in the context of the information notice had a different (extended) meaning to that given to it in a disclosure context standard civilian (i.e. in Lonhro). The TTF clarified that the documents were in the “control” of a person so long as they could be obtained from another person, by influence or otherwise, even if that other person had the legal right to refuse the request.

Importantly, the case also upheld the burden of proof: HMRC must first establish a prima facie case, based on available evidence, that the documents are in the “possession or power of the recipients and it is then up to the recipients to show that they are not.

2014

In Patel & K Patel (a partnership) v The Commissioners for HM Revenue & Customs [2014] UKFTT 167 (TC), the settlor of a remuneration trust argued that certain documents were not in his “authority” because the documents were held by the trust entity, which had refused to hand them over when asked of the settlor (in the form of a single letter without continuation).

The FTT concluded that the settlor, by virtue of his passive acceptance of the trustee’s refusal, had not made a “serious attempt” to obtain the documents and had therefore not demonstrated that the documents were not in his ” power “.

2021

In HMRC v Mattu [2021] UKUT 245 (TCC), the approaches developed in Parissis and Patel have been fully endorsed by UT and have therefore crystallized as a binding authority rather than merely compelling precedents.

Similar to Parissis and Patelthis case concerned the use of a trust structure by a taxpayer whose reluctant attitude to comply with the Schedule 36 notice had met with little sympathy from HMRC and UT .

One Call – nothing new under the sun…

The journey summarized above finds its final stop in the recently decided case of One Call Insurance Services Limited v HMRC [2022] UKFTT 184 (TC). It is not necessary to state the facts in detail; like some of the cases described above, this case concerns the use of a compensation trust (albeit by a corporation in this case). Faced with an information note, One Call sent a single letter to the trustee requesting the communication of the documents. No attempt was made to follow up with the trustee, or any other entity that may have potentially stored the relevant documents. Nevertheless, One Call argued that the documents were not in their “power”.

In reviewing the relationship between One Call and the other parties involved in the compensation trust, the FTT concluded that the documents were, At first glancein the “power” of One Call due to a number of factors:

  • despite the absence of a legal power to obtain the documents under the terms of the trust, One Call certainly exerted some pragmatic influence on the parties involved in the trust, as they had first established it venue ;
  • given that contributions to the trust amounted to around £45 million over the lifetime of the trust, it was reasonable to assume that the money had not gone into a ‘black hole’ and therefore that One Call had some ability to obtain information regarding its use; and
  • one of the companies to which contributions were made belonged to the principal shareholder of One Call (thus reinforcing a reasonable assumption of pragmatic influence).

Ultimately, One Call’s (minimal) approach to compliance was deemed insufficient to meet the burden of proof, meaning that One Call failed to demonstrate that the documents were not in his “power”.

Even though this is a relatively standard case of Schedule 36, which made A call the topic of interest to legal commentators is the following statement by Judge Tracey Bowler: “My conclusion should state that the law requires that serious efforts be made to obtain the documents”. Speculation ensued as to whether there was a difference between making a “serious attempt” (this is the wording used by the FTT in Patel) and “serious efforts”, the latter formulation potentially raising the bar higher than Patel had done before.

For now, it is difficult to see how A call sets a higher standard. There remains, for the time being, a non-binding TTF decision bearing the standard characteristics of an Annex 36 case. The test applied by the FTT is the same as that crystallized by the UT in Mattu; no more no less. However, what the judgment confirms is that the TTF will want to see a meaningful engagement in the task of retrieving the documents, rather than a superficial, box-ticking approach. The interesting aspect of the case lies not in the potential exegesis of Justice Bowler’s final comment, but rather in how HMRC managed to establish a At first glance argument that the documents were within the “power” of One Call and how One Call ultimately failed to refute that argument.

What does all this mean in practice?

The sum of all I can, I revealedsays a messenger in Richard III. A tax analysis of Shakespeare’s works is (unfortunately) beyond the scope of this article. However, the goal for a recipient of a Schedule 36 notice is to be able to comfortably echo the words of that messenger. To do this, the key is to understand what current law means by “everything I box”.

So long as a given document is (i) in your physical possession, or (ii) a document that you can reasonably obtain from another person (whether by virtue of legal authority or mere practical ability) , then it is in your “Possession or Power”. Additionally, if none of the other restrictions in Schedule 36 can come to your rescue, you will be under a legal obligation to disclose this document to HMRC – failure to comply will result in penalties. Of course, there will also be a question of whether the documents you have retrieved (or have the “power” to retrieve) fall within the scope of the notice. Depending on the specific fact model at hand, this distinct exercise can be complex and it may be advisable to seek expert legal advice.

A final note is that you may not be able to appeal a Schedule 36 notice. So-called “financial institution notices” and notices issued with the approval of the TTF do not include right of appeal (although penalties imposed on them can always be appealed). For such reviews, understanding exactly what is within your “possession or power” is even more critical (as no representations can be made to the TTF to challenge the validity of the review itself).

It is advisable to consult a lawyer to understand how best to comply with a Schedule 36 notice. Issues to consider when disclosing information and documents to tax authorities for investigations/audits taxes are included in our Litigation Tax Tool. This tool helps companies manage the risks arising from tax-related litigation and investigations by functioning as a checklist to consult both when a tax dispute is on the horizon or when a new issue arises in a ongoing litigation.