R PML Accounting Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Longmore,Lord Justice Henderson,Lord Justice Peter Jackson |
| Judgment Date | 17 October 2018 |
| Neutral Citation | [2018] EWCA Civ 2231 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: C1/2017/1202 |
| Date | 17 October 2018 |
[2018] EWCA Civ 2231
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
THE HONOURABLE SIR ROSS CRANSTON
Royal Courts of Justice
Strand, London, WC2A 2LL
THE RIGHT HONOURABLE Lord Justice Longmore
THE RIGHT HONOURABLE Lord Justice Henderson
and
THE RIGHT HONOURABLE Lord Justice Peter Jackson
Case No: C1/2017/1202
Mr Sam Grodzinski QC & Mr Ben Elliott (instructed by Bird & Bird LLP) for the Appellant
Mr Akash Nawbatt QC & Mr Sebastian Purnell (instructed by General Counsel and Solicitor to HMRC) for the Respondents
Hearing dates: 24 th & 25 th July 2018
Judgment Approved
Introduction
This is an appeal from a judgment of Sir Ross Cranston sitting as a judge of the High Court refusing the claimant's request for an order that the defendants destroy work product derived from what the claimant says was an unlawful notice requiring information and documents to be provided by it in its capacity as a managed service company provider.
Individuals who provide services to users through a company rather than as employees have, for some time, been of concern to the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) because, to instance one such concern, a company pays corporation tax at a rate lower than most individuals pay income tax. Chapter 9 of Part 2 of the Income Tax (Earning and Pensions) Act 2003 (“the 2003 Act”) addresses the position of individuals who provide their services through such companies and treats certain payments made for provision of services by the company as earnings liable to income tax and national insurance contributions as if the individual were an employee, provided that the company falls within the definition of a managed service company (an “MSC”). The legislation also identifies a person, carrying on the business of promoting or facilitating the use of companies providing the services of individuals, as a managed service company provider (“MSC provider”). There are circumstances in which, if an MSC is unable or fails to pay tax or national insurance contributions which are due, the debt can be transferred to the MSC provider. The claimant and appellant, PML Accounting Ltd (“PML”), is one such MSC provider offering services, in particular, to road haulage companies, including preparation of accounts and financial records, PAYE and VAT registration, tax computation, preparation and submission of tax returns and other general advice. The sole director is Mr Paul Hazell and he and his two brothers (“the Hazells”) hold the company shares in equal proportions. The brothers play no role in the day to day business of the company but their father Richard Hazell, the proprietor of the accounting firm Hazell Minshall, plays a part in the history in as much as it was Hazell Minshall who dealt with HMRC correspondence and inquiries.
The legislative provisions can only be sensibly utilised by HMRC if they can obtain information and documents from the MSC provider. There are two ways in which this can be done, first by serving a notice on the MSC provider for the purpose of obtaining information and documents relating to its own tax position (a taxpayer notice) and secondly by serving such a notice in respect of the provider's client (a third party notice). On 26 th November 2012 HMRC served what they considered to be a taxpayer notice (“the Notice”) on PML pursuant to paragraph 1 of schedule 36 of the Finance Act 2008 (“the 2008 Act). They did not consider the response to be a proper compliance and levied an initial penalty and then daily penalties.
PML then appealed; the nature of that appeal is one of the matters in controversy but the upshot of that appeal to the First-tier tribunal (“the tribunal” or “the FTT”) was a determination that the notice was invalid and the penalties were not, therefore, enforceable. It decided that the taxpayer notice was invalid since it considered that it related to the tax position of PML's clients (for which a third party notice would be necessary) and not that of PML itself. The tribunal concluded its determination by noting that it had no power to require HMRC to return the documents provided by PML pursuant to the Notice but expressed the opinion that they “must” be returned to PML. HMRC did not seek to appeal the tribunal's decision and returned the documents (and copies that they had made) to PML on 19 th January 2016.
PML requested HMRC to provide or delete any information, analysis and work product derived from the material provided pursuant to the Notice. HMRC declined that request and PML on 2 nd February 2016 instituted judicial review proceedings (“the current judicial review”) challenging HMRC's refusal to
1) deliver up or destroy all analysis, schedules and other work product derived from the Notice; and
2) to give any undertaking that they would not use that work product in any further MSC investigation or for any further purpose.
The background to that request is that HMRC are conducting a substantial criminal investigation into the activities of PML suspecting (inter alia) that PML have instigated or participated in a fraudulent conspiracy to declare amounts of corporation tax on behalf of the MSCs to whom they provide services which differ from the amount they have themselves declared as MSC providers; this would arguably not only be a fraud on HMRC but also a fraud on their own clients. On 23 rd April 2015 HHJ Rowland acceded to an ex parte application by the Criminal Investigation team of HMRC for search warrants in relation to PML and those warrants were executed on 29 th April. On 23 rd July the Hazells filed a judicial review claim for a declaration that the search warrants were unlawful and for the return of all items seized and copies (“the Hazell judicial review”). On 14 th October 2015 Collins J refused permission for that judicial review on the papers; the Hazells orally renewed their application which was refused by the Divisional Court on 4 th December 2015 in a judgment of Irwin J with whom Burnett LJ agreed.
The current judicial review came before Langstaff J on 6 th October 2016 who ordered a rolled-up hearing of the application. On 7 th April 2017 Sir Ross Cranston handed down a judgment which gave permission for what the parties have called the illegality ground only, thus excluding any claim based on the European Convention on Human Rights. But he dismissed the claim for a number of reasons, one of which was that it was not illegal for HMRC to retain their own work product.
The other reasons he gave were in broad summary:-
1) in December 2012 PML had agreed that its appeal was only in relation to the time given for compliance with the Notice and not an appeal in relation to its validity; it had asked for an extension of time for compliance and HMRC had agreed to extend that time. The effect of paragraph 32(5) of Schedule 26 of the 2003 Act and section 54 of the Taxes Management Act 1970 (“the 1970 Act” or “ TMA 1970”) was that the Notice was confirmed as varied and that agreement constituted a final decision as regards any issue concerning the validity of the Notice;
2) the tribunal had no jurisdiction to consider the validity of the Notice in what was solely an appeal in relation to penalties;
3) HMRC were not estopped from asserting that the tribunal had no jurisdiction to rule on the validity of the Notice;
4) The tribunal had not ordered or recommended the return of HMRC's work product and PML had not identified any basis on which HMRC were obliged to do so;
5) Even if all that were wrong he would not grant relief because
i) HMRC had, in serving the Notice, adopted the course which PML had itself wanted since any third party notice would have alerted its clients to the existence of a revenue investigation which would be detrimental to its business;
ii) PML had acquiesced in the production of the material obtained as a result of the Notice;
iii) any order of the kind sought would be likely to give rise to further dispute and satellite litigation; and
iv) he accepted HMRC's evidence that their work product was derived from a combination of sources, only one of which was the material provided pursuant to the Notice, and could only be disentangled from such combination with great difficulty particularly as the relief sought, if granted, would require HMRC to review thousands of its files to determine if there was, in fact, information derived from the material provided as a result of the Notice.
Each of the reasons given by the judge is now the subject of this appeal and, to set the appeal in context, it is necessary to set out the statutory scheme which, as far as powers to obtain information and documents are concerned, is contained in Schedule 36 of the 2008 Act.
The statutory scheme
Paragraph 1 of Schedule 36 provides:-
“ Power to obtain information and documents from taxpayer
(1) An officer of Revenue and Customs may by notice in writing require a person (“the taxpayer”) –
a) to provide information, or
b) to produce a document,
if the information or document is reasonably required by the officer for the purpose of checking the taxpayer's tax position.
(2) In this Schedule, “taxpayer notice” means a notice under this paragraph.”
Paragraphs 2 and 3 provide for third party notices for checking the tax position of a third party but such notices cannot be given without the agreement of the third party taxpayer or the approval of the tribunal. Paragraph 29(1) gives the taxpayer a statutory right of appeal against a taxpayer notice. It provides:-
“ Right to appeal against taxpayer notice
29 (1) Where a taxpayer is given a taxpayer notice, the taxpayer may appeal against...
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