Sheep on bridge

The need for checks and balances

21 December 2012

A recent article in the Daily Telegraph Newspaper "How one family were brought to their knees by the Taxman" by Alasdair Palmer

1 December 2012, has shed an interesting light on what can happen when the full weight of HMRC's resources are exercised against taxpayers and hitherto blameless members of the business community.

The Telegraph article

The article concerned an ex parte application made by HMRC to the court for the appointment of a liquidator to liquidate a family company, Abbey Forwarding. Although not stated in the article, it seems likely that HMRC were making the application under section 135 of the Insolvency Act 1986. In their application to the court, HMRC apparently provided evidence that sought to prove involvement of the directors of Abbey Forwarding in "large scale fraud". Consequently, the judge agreed to the appointment of a provisional liquidator. The first that the directors knew of the appointment of the liquidator was when they discovered 20 officers from HMRC "changing the locks on the doors and going through the company's documents and computers, packing them up to take them away".

The article continues, however, that HMRC's evidence was fatally flawed, but this only emerged during proceedings taken by the liquidator against the former directors for failure in their duty to "operate the company honestly". A subsequent hearing before Judge Lewison, the article records, found that there was no evidence that the directors had been involved in any form of criminal activity.

HMRC's powers

HMRC are in possession of enormous powers, a fact which is often not appreciated by the ordinary citizen. In a civil context, HMRC have wide-ranging powers (see Schedule 36 Finance Act 2008) to require documents to be produced and/or information to be provided to them and to enter business premises to inspect business assets and documents on such premises. They also have powers to access computers on which documents are produced. Where tax evasion is suspected, HMRC may use their police powers provided under the Police and Criminal Evidence Act 1984 ('PACE') and the Serious Organised Crime and Police Act 2005 ('SOCPA'). HMRC may:

  • enter and search premises (section 8 and Schedule 1, PACE);
  • require production of documents (section 8 and Schedule 1, PACE);
  • seize items such as computers (sections 8 and 19, PACE, Section 50 and Schedule 1, Criminal Justice and Police Act 2001);
  • arrest persons (sections 17 and 24(2), PACE);
  • require persons to hand over relevant material which could be of substantial value in an investigation (sections 62 and 63, SOCPA).

Duty to make full disclosure to the court

The issue of a warrant under PACE or SOCPA does require the prior authority of a magistrate or, in some circumstances, a Circuit Judge. However, the hearing will almost invariably be ex parte because HMRC will not wish to "tip off" a suspect that they are about to undertake a search and seizure operation. It is, therefore, absolutely critical that HMRC make full and frank disclosure of their case for obtaining a warrant, including any material adverse to their position, to the court. In our blog (Court quashes HMRC warrants – October 24, 2012) we reported on the recent decision of the Divisional Court in the case of R (on the application of Anand) v HMRC (unreported). In that case the sole director of the claimant company applied for judicial review of the lawfulness of a search warrant obtained by HMRC. The Administrative Court granted the application of the sole director, holding that the warrant obtained by HMRC did not comply with section 15(6), PACE, as it was too widely drafted and failed to identify, so far as practicable, the articles that HMRC were actually searching for. This decision followed the high profile decision in the case of Harry Redknapp, R (Redknapp and Another) v Commissioner of The City of London Police [2009] 1 WLR 2091, where warrants to search Mr Redknapp's home were quashed because HMRC had not supplied sufficient information to the court when obtaining the warrant in accordance with the statutory requirements of PACE (Mr Redknapp was of course subsequently acquitted of tax fraud following his later trial at Southwark Crown Court).

Comment

Whether exercising powers specifically granted to them (such as Schedule 36), or when relying on more general civil and criminal procedure rules, it is vital that HMRC exercise their powers properly. This is perhaps more important than ever, given the immense political pressure HMRC are under to close the 'tax gap'.

Stay connected and subscribe to our latest insights and views 

Subscribe Here