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Tribunal decides that taxpayers must attempt to obtain information held by trustee!

27 March 2014. Published by Natalie Drew, Associate

In the recent case of H A Patel & K Patel (a partnership) v HMRC [1], the First-tier Tribunal (Tax Chamber) (‘FTT’) dismissed an appeal by the taxpayers that information and documents held by a trustee were not ‘in their possession or power’ for the purpose of paragraph 18, Schedule 36, Finance Act 2008.

Background

On 14 September 2012, HMRC issued an information notice to the taxpayers pursuant to paragraph 1, Schedule 36, Finance Act 2008, requesting various information and documentation, which extended to information and documentation held by a trustee ('the Information Notice').

As readers will be aware, under paragraph 18, Schedule 36, Finance Act 2008, a taxpayer information notice only requires a person to produce a document if it is in the person's

'possession or power’.

The taxpayers contended that certain, unspecified items referred to in the Information Notice were not in their ‘possession or power’, and therefore, they were not required to produce them. They argued that the documents were in the control and possession of a remuneration trust, which had been set up by the taxpayers ('the Trust').

The FTT had previously issued a direction requiring the taxpayers to serve a witness statement: ‘stating which, if any, documents requested in the information notice dated 14 September are not in their possession or power but are in the possession of Bay Trust International Limited; describing the Appellants’ relationship and communications with the Trustee generally, and, in relation to any copies of the documents in the Trustee’s possession, setting out the steps taken to obtain the documents from the Trustee’.

 In October 2013, a joint witness statement was served. In this statement, the taxpayers contended that ‘the following documents … are not in our possession, or power of possession, but are in the possession of Bay Trust International Limited’ and listed various items, including remuneration trust accounts, details and evidence of all loans made by the Trust and details of payments made to the beneficiaries.

Furthermore, the taxpayers argued that despite various attempts and requests (including a letter sent in October 2012, and a chaser email sent a year later) the trustee had refused to pass on the requisite information and documentation. The letter of response provided by the trustees in October 2013 specifically stated: ‘please note that we are not in a position to provide you with such documentation as we believe that it is our right as Trustee to keep certain matters private. We consider such information highly sensitive and confidential and therefore not privy to third party inspection or review’.

The FTT's decision

The FTT (Judge Greg Sinfield) dismissed the taxpayers' appeal. In the view of the Judge, following the issue of the Information Notice, the taxpayers should have made a proper and serious attempt to obtain the relevant information that HMRC had requested.

The FTT made it clear that as it was the taxpayers who were asserting that they did not have the documents, or the means to obtain them, it was they who also had ‘the burden of proving, on the balance of probabilities that the information and documents are not in their possession or power’.

In coming to his decision, Judge Sinfield considered the attempts made by the taxpayers to obtain the documents in question and concluded that they were inadequate. He commented that the letter to the Trust (of October 2012) was ‘extremely brief’, and did not set out ‘any of the relevant background to the request or make any attempt to persuade the Trustee to provide such information and documents’.  

Similarly, the Judge reviewed the witness statement in which the taxpayers claimed that a further reminder had been sent to the trustee. This assertion was criticised on the basis that no evidence had been produced to support it, and with the burden being on the taxpayers it was their duty to produce such evidence.

The Judge also considered the background to the relationship between the taxpayers and the trustee. He noted that in 2010 the taxpayers had asked for, and obtained, substantial loans from the trustee. This led the Judge to comment that it was clear that ‘the Trustee does accede to the Appellant’s requests’ and ‘the Appellants can influence, and in practice, require the Trustees to comply with their lawful and reasonable requests’.

Comment

In Lonrho v Shell [1980][2], when considering whether documents in the possession of a company's foreign subsidiary were within the 'power' of the parent company for the purposes of the predecessor to Rule 31 of the Civil Procedure Rules (which deals with disclosure and inspection of documents), Lord Diplock said in the House of Lords:

'in the context of the phrase 'possession, custody or power' the expression 'power' must, in my view, mean a presently enforceable legal right to obtain from whoever actually holds the document inspection of it without the need to obtain consent of anyone else.'

Given the comments of Lord Diplock in Lonrho, it is perhaps surprising that in this case the FTT concluded that documents held by a third party trustee were in the 'possession or power' of the taxpayers.

HMRC will no doubt welcome this decision, but it is important to consider this case in its specific context, and in light of the actions (or lack of) of the taxpayers, the evidence (or lack of) that was placed before the Judge, and the past relationship between the taxpayers and the trustee. In appropriate cases taxpayers will be justified in maintaining that documents held by a third party are not in their 'possession or power' for the purposes of paragraph 18, Schedule 36, Finance Act 2008.

[1] [2014] UKFTT 167 (TC).

[2] [1980] 1 WLR 627.