Service of HMRC information notices on non-residents

The Court of Appeal has held that international law does not prevent the exercise of HMRC’s powers under the provisions of Finance Act 2008 Schedule 36 to serve notice on a taxpayer in another jurisdiction requiring them to provide information relevant to their UK tax affairs: R (on the application of Jimenez) v HMRC [2019] EWCA 51.

The Court considered that a notice provided by HMRC to a resident of the UAE requiring the production of documents and information in the UK relevant to his UK tax affairs was within their powers granted by Schedule 36.

Background

The taxpayer, Mr Jimenez, was a UK national who was living in Dubai. He had been a UK taxpayer in previous years and there existed a dispute between him and HMRC as to the period of his UK residency. As part of HMRC’s investigations into his tax returns, HMRC issued a notice under paragraph 1 of Schedule 36 requiring the taxpayer in Dubai to provide them with certain financial information and a schedule of his visits to the UK. The taxpayer contended that the issue of such a notice to him outside the UK was either contrary to the legislation or otherwise contrary to international law. In particular, the taxpayer argued that the provisions of Schedule 36 “must be construed by reference to international law and in conformity with a presumption that Parliament would not have chosen to confer powers on HMRC which could be exercised in breach of international law”. That included not conferring a power on HMRC which might result “in the UK exercising an enforcement jurisdiction within the territory of another sovereign state”.

Decision of the Court of Appeal

The Court of Appeal accepted that there was a long line of authority that English legislation should be read as having territorial limits. But “recognition of a principle that Parliament can generally be presumed not to have legislated in respect of persons resident or events occurring abroad does not prevent particular legislation from being construed as having some extra-territorial effect if such an interpretation can be derived from the language of the statute and its purpose”.

The taxpayer argued that the Schedule should be read as a whole and it would not be appropriate to give different powers within the Schedule different territorial reach. Since it was agreed that certain powers, such as those giving officers of HMRC powers to enter business premises to check a person’s tax position, could not apply outside the UK, the whole schedule should be equally limited.

The Court of Appeal rejected this contention. The principle that the intention behind a provision in a statute needs to be ascertained by looking at the statute as a whole did not require the court to assume that the scope of each provision was intended to be the same. It was appropriate to consider the provision giving HMRC power to require certain information individually. On that issue, the Court considered that it was unlikely that investigatory powers designed to verify a taxpayer’s self-assessment in relation to UK taxes would have been limited to operating within the UK, except where to give them an extra-territorial effect would involve “an obvious incursion on the sovereignty of a foreign state”.

Viewed as a whole, the Court considered that a number of factors pointed towards HMRC being authorised to give a taxpayer’s notice under paragraph 1 to someone outside the UK. The subject matter and purpose of the legislation and also the lack of any express limitation or restriction on the geographical extent of the provision all pointed to the power being available to investigate persons resident abroad.

The argument that the provision was ineffective since any civil penalties for non-compliance could not be enforced directly against the taxpayer in a foreign state was regarded by the Court as having little weight. In addition, there were no criminal sanctions for non-compliance so the presumption that a statute should not be construed so as to make conduct abroad a criminal offence had no bearing on the matter.

The service of a taxpayer’s notice to the taxpayer in the UAE did not involve any breach of international law because it did not require performance of official act in that territory. It merely required the taxpayer to provide the information and documents to HMRC in the UK.

Comment

The decision of the High Court that HMRC’s powers under Schedule 36 were territorially limited and that if HMRC wants to seek information about liability to UK tax from persons who are abroad it should rely on mutual assistance arrangements with the relevant state was highly significant. Indeed, HMRC had accepted the restriction in its guidance (see here).

The unanimous decision of the Court of Appeal to overturn that decision will, no doubt, be welcomed by HMRC, even if, in practice, it may be difficult to enforce such notices. It should also be noted that the decision is limited to taxpayer notices. It is not clear whether HMRC will seek to apply the same analysis to third party notices.

HMRC are currently consulting on amending the scope of their powers under Schedule 36 (see here).