JJ Management – Court of Appeal confirms HMRC can conduct informal enquiries

In JJ Management Consulting LLP v HMRC [2020] EWCA Civ 784, the Court of Appeal confirmed that HMRC can conduct informal enquiries and do not  need to open a formal enquiry pursuant to section 9A, Taxes Management Act 1970 (TMA).

Background 

Mr Bryan Robertson, who was resident and domiciled in the UK, and five companies in which he held a beneficial interest (the Claimants), sought a judicial review of HMRC's decision to conduct informal enquiries into Mr Robertson's and the companies' tax position.

Through the companies, Mr Robertson operated a number of supermarkets in Spain and Portugal. Three of the companies were incorporated in the UK and the remaining two were incorporated in Spain and Portugal. Since mid-2016, HMRC had been investigating Mr Robertson's tax affairs, suspecting that he had paid insufficient tax in connection with gains and/or income derived from his offshore interests. HMRC had not opened any formal enquiries under section 9A, TMA.

In 2017, HMRC issued an information notice to Mr Robertson under paragraph 1, Schedule 36, Finance Act 2008 (FA 2008) and in 2018 it made requests of the taxing authorities in Spain and Portugal, seeking copies of the Spanish and Portuguese companies' bank account statements.

The investigation involved numerous requests from HMRC for information and documents. In some instances, information notices were appealed and HMRC withdrew those notices. Third party information notices were also issued under paragraph 2, Schedule 36, FA 2008. 

The Claimants argued that HMRC's enquiries had become protracted, invasive, and were causing severe emotional and financial distress. The Claimants challenged HMRC's decision to conduct the informal enquiries, by way of judicial review, on the following grounds:

1. the enquiries were ultra vires because HMRC did not have a general power to conduct informal enquiries; 
2. the informal nature of the enquiries had deprived them of access to justice, and/or the decision to conduct informal enquiries was irrational, disproportionate and unreasoned; and
3. the requests to the Spanish and Portuguese authorities made under the UK/Spain and UK/Portugal Double Taxation Conventions and Council Directive 2011/116/EU, were unlawful.

The Claimants invited the High Court to quash HMRC's investigation, order the return of material obtained by HMRC in the course of its investigation (as "fruits of the poisoned tree"), and require HMRC to notify third parties that any documentation/information previously requested pursuant to it was no longer required. The Claimants' claim for judicial review was dismissed by the High Court and they appealed to the Court of Appeal.

Court of Appeal judgment 

The Court of Appeal upheld the High Court's decision and dismissed the appeal.   

The Claimants advanced the following three grounds in support of their contention that the High Court judge had erred in law:

1. The judge was wrong to find that the general power in section 9(1), Commissioners for Revenue and Customs Act 2005, empowers HMRC to conduct "informal investigations".
2. The judge was wrong to find that judicial review of HMRC's power to conduct "informal investigations" was only available in wholly exceptional circumstances.
3. Even if there was a high (or exceptional) threshold before the court could intervene, the judge was wrong to find that the circumstances of the present case did not meet that threshold.

With regard to the first ground, the Court of Appeal agreed with the High Court that HMRC's functions include checking tax returns without opening a section 9A enquiry, including after the enquiry window has closed, with a view to determining if there are grounds for making a discovery assessment and that such checking can include not just carrying out internal investigations by rereading the file and any documents contained in it, but conducting external enquiries, including contacting the taxpayer, to obtain information and documents on a voluntary basis. 

In relation to the second ground, again, the Court of Appeal agreed with the High Court stating that "… in practice it will take a wholly exceptional case on its legal merits to justify judicial review of a discretionary decision by HMRC to conduct an informal investigation of the kind conducted here".

The Court of Appeal also agreed with the High Court in relation to the third ground. In the view of the Court of Appeal, in the absence of any basis for concluding that the investigation was being conducted unlawfully, it was not for the Court to dictate the way in which the investigation should proceed or to limit its scope. HMRC's informal enquiries were not on their face irrational or misconceived and the Court therefore saw no legitimate basis for it to step in and micromanage HMRC's conduct in respect of its enquiries. 

Comment

The Court of Appeal has confirmed that as HMRC has a power to collect tax and is indeed under a duty to do so, the carrying out of  informal enquiries are ancillary to those functions and are permissible.   

The endorsement by the Court of informal enquiries does lead one to question the purpose of section 9A, TMA. If HMRC can simply choose to conduct an informal investigation why should it open a formal enquiry under section 9A? Indeed, it may be advantageous to HMRC not to open a formal enquiry, given that if a formal section 9A enquiry is opened, a taxpayer has the right to ask the First-tier Tribunal (FTT) to intervene and direct HMRC to close its enquiry. 

Following this decision, should HMRC commence an informal enquiry, a taxpayer has a number of options. Assuming HMRC had a proper purpose in commencing the enquiry (if it did not, there may be grounds for a  challenge by way of judicial review proceedings), each formal request for information from HMRC should be carefully considered in order to ascertain whether the information is "reasonably required" by HMRC "in order to check the taxpayer's tax position". There is a substantial body of case law on the meaning of "reasonably required" in this context (see, for example, Perfectos Printing Co Ltd & Ors v HMRC [2019] UKFTT 388 (TC)).

If the information requested by HMRC is not "reasonably required", the information notice can be challenged on appeal before the FTT, in the usual way.

Should the enquiry become inappropriately protracted and it is considered that HMRC has been supplied with sufficient information to enable it to reach a decision on the taxpayer's tax position, although the taxpayer is unable to apply to the FTT for a direction that HMRC issue a closure notice, a taxpayer may be able to challenge HMRC's decision to continue with its enquiry by way of judicial review proceedings and seek an order requiring HMRC to end its enquiry. 

There is a concern that this judgment may encourage HMRC to conduct more informal enquiries as the taxpayer in such circumstances is unable to seek a direction from the FTT compelling HMRC to close its enquiry. 

The judgment can be viewed here.