What Are HMRC Fishing Expeditions?
Let’s not beat (or bleat) about the bush – what does one think HMRC fishing expeditions actually are?
It appears (depending on your own construction of the term ‘fishing expedition’) to conceivably be a consequence of an HMRC tax investigation.
What Is An Investigation?
What does the dictionary say? Well, “The Concise Oxford Dictionary” (Sixth Edition edited by J. B. Sykes) defines “investigate” as follows:
Examine, inquire into, study carefully; make office inquiry into; …
The online Cambridge Dictionary defines “investigation” as follows:
the act or process of examining a crime, problem, statement, etc. carefully, especially to discover the truth
So an investigation appears to be a careful review of information in searching for facts.
A key component of an investigation is the unknown facts that the investigator may seek to hoover up, conceivably with alacrity.
Are HMRC Fishing Expeditions Permitted?
Here’s an interesting question, so lets with an excess of zeal zoom (gratuitous alliteration is permitted), in on paragraph 20 of Derrin Brother Properties Ltd v HM Revenue and Customs [2014] EWHC 1152 (“Derrin”):
… HMRC may not use their Sch.36 powers for a fishing expedition – whether for their own or the purposes of another revenue authority. A broadly-drafted request will not be valid if in reality HMRC are saying “can we have all available documents because they form so large a class of documents that we are bound to find something useful”. What is required is that the request is genuinely directed to the purpose for which the notice may be given, namely to secure the production of documents reasonably required for carrying out an investigation or enquiry of any kind into another taxpayer’s tax position. It is no objection however, to the issue of a third party notice that it seeks disclosure of ‘conjectural’ documents; in other words documents that might not exist: R v Commissioners of Inland Revenue ex parte Ulster Bank Ltd [1997] STC 832, 841f-h (Morritt LJ).
“HMRC may not use their Sch.36 powers for a fishing expedition” seems rather clear cut does it not?
How about if we realign, and set sight on Spring Capital Ltd v Revenue & Customs [2015] UKFTT 8 (TC) (“Spring”), and take a look at what this case had to say about fishing expeditions:
“HMRC are entitled to undertake ‘fishing expeditions’ when checking returns: they do not need suspicion in order to check a tax return.”
It appears not really possible to decipher if ‘fishing expeditions‘ are permitted by HMRC because in these two cases the construction of the same by the relevant Court or Tribunal was different.
In Derrin, the proposition fishing expedition appears to have been put in the context of a hypothetical HMRC Tax investigator, seeking however to hoover up every sumptuous detail available.
Whereas in Spring, the fishing expedition was considered from the vantage point of the mindset (in terms of suspicion) of the hypothetical HMRC Tax investigator.
Oliver Elliot Comment: HMRC Fishing Expeditions
It seems as though disposal of the ‘fishing expedition’ question may have to default to the well-known exit route of “it depends on the facts of the case“. It seems that the words “reasonably required” from paragraph 1 of Schedule 36 of the Finance Act 2008 might however be particularly germane.
Yerou v HMRC [2022] UKFTT 79 (TC)
In the case of Yerou v HMRC [2022] UKFTT 79 (TC) (“Yerou”) HMRC issued an HMRC Tax Information Notice because of a share transfer of a company called Ascot Sinclair Associates Limited (“ASAL”).
Ascot Sinclair Associates Limited
ASAL was incorporated on 11 July 2001. Its business activities are currently listed at Companies House as accounting, auditing and tax.
Its shareholding was structured in the form of alphabet shares. This is commonly a structure for tax efficiency when paying out dividends to shareholders.
In the case of ASAL, early accounts said that all dividends ranked equally for voting and asset purposes.
What Sprouted On HMRC’s Radar?
It would appear that on 12 July 2012, B shares in ASAL were transferred to the father of one of the shareholders (“the Father”) who was, and remains, resident in Cyprus. The Father it is reported had little or nothing to do with the ASAL but had received up to 90% of the fruits of a successful business:
These suspicions arose because GY had been paid the “lions share” of the profits of the Company although he had little or no involvement in the business. The substantial dividends had started shortly after the shares had been transferred. HMRC contended that the appellants’ explanation, that the shares were given to assist JY’s parents in their retirement and allow them to have a comfortable life, were inconsistent with the fact that a significant proportion of the dividends have been made available to the appellants.
The case that sprouted was from HMRC’s point of view all about:
(1) a charge under the transfer of assets abroad legislation, on the basis that the active shareholders of ASAL who operated the company had the ability to enjoy the fruits of the income arising from dividends paid out to the Father. HMRC says a relevant transfer under Section 721 Income Tax Act 2007 in respect of the B shares has arisen.
(2) whether the Director and Company Secretary were in fact the beneficial owners of the 100 B shares and are entitled to the dividend income from those shares either directly or under the settlements legislation (Chapter 5 of Part 5 Income Tax (Trading and Other Income) Act 2005), and thereby taxable on those dividends.
To cut a short story shorter, HMRC say that the dividends arising in certain years paid to the Father had instead in effect been deployed for the benefit of the Director and Company Secretary of ASAL.
HMRC Tax Information Notice
An HMRC Tax Information Notice was issued and resisted by the Director and Company Secretary of ASAL on grounds amongst other things that it was a fishing expedition and they had provided the information required by HMRC.
A key point that the Director and Company Secretary (“the Appellants”) put forward was:
the requests for information were unreasonable as HMRC had already reached final conclusions and issued discovery assessments which have been appealed. It was submitted that to allow HMRC to continue to issue and enforce information notices after the issue of an assessment and the submission of a related appeal would usurp the powers of the Tribunal, including those relating to disclosure and witness summons, which apply to both parties in equal measures.
This appeared to echo the position in Paragraph 19(1)(a) of Schedule 36 of the Finance Act 2008 which says:
An information notice does not require a person to provide or produce—
(a)information that relates to the conduct of a pending appeal relating to tax or any part of a document containing such information, or
Tax Tribunal Assessment
The Tax Tribunal summed matters up as follows:
On review of the information put to the Tribunal, we consider that it is clear that HMRC have concluded that there is a tax charge and have raised discovery assessments accordingly. The appellants have argued that there should be no such tax charge, and HMRC wish to check the appellants’ arguments as to this point. That is, HMRC wish to check the appellants’ explanations as to their tax position. That is, we consider, seeking information to check the appellants’ tax position.
The question is whether the information is reasonably required to check the tax position. The appellants have provided explanations but have declined to make available information which HMRC say they require in order to satisfy themselves that (as stated by Officer Cafer) these explanations are accurate and that JY and PY are not the beneficial owners of the shares or have not otherwise benefitted from the dividends.
HMRC clearly believe that there has been an understatement of tax, and now require the information in order to test the appellants’ explanations, rather than to establish whether there has been an understatement.
In other words, the Tax Tribunal said that HMRC had already formulated a position on the ‘understatement‘ question. It appears capable as a result of being inferred from this that testing of the explanations might risk encroaching upon the matter of the appeal of the discovery assessments and so it rejected HMRC’s position and upheld the taxpayers’ appeal:
On the facts of this particular case and taking into account the overriding objective, we do not consider that any useful purpose would be achieved by prolonging matters by ordering that the information notice be complied with before any Tribunal proceedings are entered into. We do not consider that the information is therefore reasonably required, in context, for the purpose of checking (prior to any appeal to this Tribunal) the appellants’ tax position or their explanations as to what they consider to be their tax position.
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