Notice of enquiry – Agreed directions – appeal – Documents – Possessionor power

THE SPECIAL COMMISSIONERS

	MEDITOR CAPITAL MANAGEMETN LTD	Appellant

	- and -

            PATRICIA FEIGHAN             
	(HM INSPECTOR OF TAXES)    	Respondent

				Special Commissioner:    JULIAN GHOSH

Sitting in London on 16 January 2004

Hartley Foster, McGrigors, (formerly KLegal). for the Appellant

Ingrid Simmler instructed by the Solicitor of the Inland Revenue, for the Respondent

© CROWN COPYRIGHT 2004

DECISION

1.	This is an appeal against a Notice of Enquiry issued by the Inland Revenue under the Finance Act 1998, Schedule 18, Paragraph 27, against the background of previously agreed directions relating to documents and particulars to be disclosed to the Inland Revenue by the Appellant.  The context is an enquiry as to whether certain fees charged by the Appellant to its 100% parent represent arm’s length fees for the purposes of the transfer pricing provisions of the Income and Corporation Taxes Act 1988, Schedule 28AA.  No oral evidence was led by either party.  Both parties referred, in the course of argument, to certain documents contained in five agreed bundles of documents.  

The facts

2.	The Appellant, Meditor Capital Management Limited (‘MCM’) is a UK resident company providing investment advisory services and is regulated by the Financial Services Authority.  It was incorporated on 25 February1998, commenced trading on 1 July 1998 and employs three investment professionals.  MCM is a 100% subsidiary of Meditor Capital Management (Bermuda) Limited (‘MCM(B)’), a Bermuda based fund management company engaged mainly in the establishment, management and administration of Bermuda based mutual funds.  Mr Talal Shakerchi is a director of MCM and was a director of MCM(B) until October 2000.  He was also a majority shareholder in MCM(B) until 24 October 2002, when he transferred his shares into a trust of which he is a beneficiary.   MCM’s business as a fund management company are (i) researching, designing and launching new funds, (ii) sales, marketing and promotion of funds; (iii) client services; (iv) advising on and managing new investments; (v) fund administration; and (vi) client reporting. 

3.	On 10 July 1998 MCM and MCM(B) entered into an agreement (‘the Investment Manager Agreement’) according to which MCM would provide investment advisory services to MCM(B) in return for a fee.  

4.	In the year 1999 MCM had three clients for its investment advisory service, of which one was MCM(B).  The others were RIT Capital Partners(contract dated 30 March 1998) and the Finsbury Global Investment Fund, a fund managed by Rea Brothers (contract dated 17 August 1998).  MCM also performed some administrative tasks for MCM(B) but these were paid for separately and are not in issue.  

5.	The Inland Revenue opened an enquiry into MCM’s tax 1999 return on 21 December 2001.  The Revenue made a number of requests and MCM supplied various documents accordingly.  The specific nature of these documents is not relevant to this case.  

6.	On 2 June 2003 MCM applied to the Special Commissioners for a direction that the Inland Revenue issue a closure notice under Paragraph 32, Schedule 18, Finance Act 1998.

7.	The Applicant has twice formally asked MCM(B) if it would be willing to supply any of the information requested by the Inland Revenue.  Both responses were copied to the Inland Revenue.  The Appellant argues on this basis that it has no means of compelling MCM(B) to provide further information.  This assertion is not accepted by the Inland Revenue.    

The Directions

8.	At a hearing on 31 July 2003, the parties made a joint application for agreed directions (‘the Directions’), which were issued on the terms of that joint application.  The Directions are reproduced as an appendix to this decision.  The Directions required MCM to supply the documents and information listed in a Schedule (‘the Schedule’).  The Directions required MCM either to supply the documents and information listed in the Schedule or to state reasons why they were not to be provided.  Directions 2 to 4 read thus:  

a.	“The Applicant will reply to the information requests as set out in the Schedule by 15 September 2003; and will either:
i.	enclose the requested documents and particulars, or
ii.	state the reasons why any of the documents or particulars are not enclosed.

b.	The Revenue will by 15 October 2003 either:
i.	issue a closure notice under paragraph 32, Schedule 18, Finance Act 1998 informing the Applicant that they have completed their enquiry into the Corporation tax return for the year ended 31 December 1999 and stating their conclusions, or
ii.	issue a notice to the Applicant under paragraph 27, Schedule 18, Finance Act 1998 in respect of one or more of the documents which the Appellant has not sent to the Respondent, within Direction 2 above or in respect of such documents that reasonably are required solely as a direct result of new information that has come to light by reason of information in the documents sent by the Applicant to the Respondent in accordance with Direction 2 above.

c.	The Applicant will by 10 November 2003 either:
i.	produce the documents in response to the paragraph 27 notice issued by the Revenue (as described in Direction 3 above) or
ii.	appeal against the paragraph 27 notice under paragraph 28, Schedule 18.”

9.	Direction 5 directed that if MCM complied with Direction 4(i) the Revenue would issue a closure notice by 30 November 2003.  Direction 6 directed that if MCM complied with Direction 4(ii) then the Revenue would either, by 20 November 2003, (i) set aside the paragraph 27 notice and issue a closure notice, or (ii) state in writing that they would be contesting the appeal and set out the reasons why.  Any appeal in respect of the paragraph 27 notice would be heard by 8 December 2003 or on the first convenient date thereafter.  

10.	Direction 10 directed that the “list of documents in the Schedule appended hereto… is a final list with regard to this enquiry, that they are bound by the timetable set out in these directions and that neither will take any steps other than in accordance with these directions.” Importantly, Direction 10 does not refer to ‘particulars’, only to ‘documents.’

11.	On 12 September 2003, MCM sent a letter to Ms J Preshaw at the Inland Revenue Special Compliance Office in purported compliance with Direction 2(i), responding to the questions in the Schedule and enclosing the documents it considered needed to be provided in accordance with the Schedule.  

The Notice

12.	On 15 October 2003, Ms P Feighan replied to MCM’s letter, enclosing a Notice under paragraph 27, Schedule 18, Finance Act 1998 (“the Notice”).   MCM had until 10 November to respond.

13.	The Notice was directed at obtaining the following information.  Item 1: documents recording the full extent of the interaction between the Appellant and MCM(B) for a two week period (or such other representative period as the Appellant may choose).  Item 2:  documents relating to marketing and other activities undertaken on behalf of MCM(B) by Mr Shakerchi or the Appellant; and documents showing all contact between the Appellant and the Administrator or Custodian of the fund.  Items 3 and 5: information relating to employees of MCM(B).  Item 4:  information about the interests held by MCM(B) in the funds under management by the group.   

The s 20(3) precursor notice

14.	On 27 October 2003 Ms P Feighan wrote to Mr Talal Shakerchi, stating that she required the production of a number of documents (“the s 20(3) precursor notice”).  In the letter, it is stated that if documents were not produced by 6 December, Ms Feighan intended to seek a notice under s 20(3) Taxes Management Act 1970 requiring their production.  After some protest from Mr Shakerchi, and some correspondence between the parties, an application was made for a declaration that the s 20(3) precursor notice was a nullity.  This application was refused on 5 December 2003, and is not relevant to the present application.

MCM appeals the Notice

15.	On 10 November 2003, MCM replied to the letter from Ms P Feighan dated 15 October.  In the letter MCM appeals the Notice under the Finance Act 1998, Schedule 18, Paragraph 28 (consistent with Direction 4(ii)).  

16.	On 17 November 2003, in compliance with Direction 6(ii), Ms Feighan replied to MCM, confirming that she would be contesting the appeal.  

The Appellant’s Case

17.	MCM appeals the Notice issued by the Revenue, and applies for a direction that it be set aside.  It applies in the alternative for a direction that the Notice be set aside so far as it requires the production of documents, or the provision of information, either not reasonably required for the purposes of the enquiry or not within the terms of the Directions.  It also applies for a direction specifying those documents and information requested by the Notice that are not reasonably required for the purposes of the enquiry.  

18.	MCM gives four grounds for its application.  The first is that the Notice contains requests that are not in accordance with the Directions.  The second is that it contains requests which cannot be reasonably required for the purpose of the transfer pricing enquiry.  The third is that it contains requests for information which MCM has already supplied.  The fourth is that it contains requests for information and documents that are not within the power or possession of MCM.  

Requests in the Notice not in accord with the Directions

19.	Under the first ground, it is claimed that the Notice breaches Direction 3(ii), which directs that the only further requests for documents that the Revenue are entitled to make are for those that are reasonably required solely as a direct result of the new information that has come to light by reason of information sent in compliance with Direction 2.  

20.	The Appellant further submits that Items 3, 4 and 5 of the Notice are not requests for documents at all but presumably information in a more general sense.   

21.	Item 7 of the Schedule required a sample of documentation recording interaction between MCM and its clients in order to gain a proper understanding of the functions carried out by MCM.  This, the Appellant claims, was provided.  However, the Revenue has sought a further sample to be produced and modified the nature of its information request:  Item 1 of the Notice requires all the documents for a particular period (two weeks), whereas Item 7 of the Schedule only required a sample over an unrestricted time period.  Furthermore, Item 7 of the Schedule was expressed as being required for the purpose of “gaining a proper understanding of the functions carried out” by the Applicant with regard to all its clients.  Item 1 of the Notice, by contrast, is focused on a particular subject (MCM(B)) and is not based on the aim of understanding MCM’s activities.  

22.	Item 2(i) of the Notice is, the Appellant argues, not within the Schedule.  It asks for all documents either received or produced by MCM within a specified period to be provided.  Item 10 of the Schedule was not restricted to a particular period and required reasonable documents and particulars only.  Furthermore, Item 2(i) of the Notice attempts to extend information required in respect of overseas visits by Mr Shakerchi.  But the Revenue had been informed of these visits before the Schedule was produced and agreed in the Directions.  Therefore these documents cannot have been required “solely as a direct result of new information that has come to light by reason of the information in the documents sent by the Applicant to the Respondent in accordance with Direction 2.”  The request is thus, the Appellant argues, in breach of the Directions.

23.	Item 2(ii) of the Notice also contains a request that does not arise “solely as a direct result of new information.”  MCM  responded fully to Item 10 in the Schedule.  Item 2(ii) of the Notice seeks further information in a particular area for a specific time period.

24.	Direction 10 specified that the list in the Schedule was final.  By seeking documents that are not in the list and are not the result of new information, the Appellant argues that the Notice breached Direction 3(ii).  It therefore breached Direction 10 and ought to be set aside.  

Information and documents requested that cannot reasonably be required for the purpose of a transfer pricing enquiry

25.	MCM argues that the Revenue has enough information for the purposes of its enquiry.  It argues that the fee that it charges MCM(B) is at arm’s length and is directly comparable to the fees charged by MCM to third parties for substantially similar activities.  Such factors as MCM(B)’s employee details, which functions MCM(B) chooses to outsource or perform internally, and the job titles of the employees of MCM(B) are, in its view, irrelevant.  Furthermore, the only activities relevant to the fees charged by MCM are those of MCM, not those of MCM(B).  The OECD Guidelines state that comparable uncontrolled prices (“CUP”) methodology is a traditional transaction method and a preferred method of verifying that the pricing is at arm’s length.  MCM has provided the following data supportive of the CUP methodology:  (a) data showing MCM had a very high operating margin (46%) and return on assets (300%) in 1999, based largely on business with MCM(B); (b) confirmation that the actual revenues in 1999 represented cost plus 85%; (c) evidence that in the investment advisory industry large accounts such as MCM(B) typically pay lower fees than smaller accounts such as the third parties; (d) information showing that MCM carries relatively low commercial risk in its contract with MCM(B); (e) information that MCM(B)’s largest original client, which contracted with MCM for it to provide investment advisory services, paid fees of 0.5% per annum plus 10% of performance to MCM(B), not significantly higher than that paid by MCM(B) to MCM (0.4% plus 8% of performance); and (f) data provided by an independent survey of the investment advisory industry showing that the fee rate charged by MCM to MCM(B) exceeds the industry average.  MCM submits that the Revenue has enough information on which to close the enquiry, and that no further documents needed to be provided to the Revenue for that purpose.

Requests for information and documents MCM has already supplied

26.	MCM claims that Items 3, 4 and 5 of the Notice were dealt with in its letter to the Revenue on 12 September 2003.  It also claims that it has provided a sample of documents in relation to Item 7 of the Schedule, and “reasonable documents and particulars” in relation to item 10 of the Schedule.

Requests for information that are not in the power or possession of MCM

27.	MCM argues that the documents relating to MCM(B) that are not within its power or possession cannot be supplied to the Revenue.  Mr Shakerchi is no longer a director and shareholder of MCM(B).  MCM does not maintain the personnel and financial records of MCM(B), and although it has asked MCM(B) twice to supply the information requested by the Revenue, it has refused to do so.  

28.	MCM refers to Item 11 of the Schedule, which states that 

“If any of the aforementioned information and documentation relating to MCM(B) cannot be provided because Mr Shakerchi is now unable to obtain the underlying documentation and associated information as a result of his no longer controlling MCM(B), may we please have:
i.	a copy of the trust deeds establishing the Honeypot Trust
ii.	a list of names of any other beneficiaries of that trust apart from Mr Shakerchi
iii.	confirmation that
1.	the Honeypot Trust now controls MCM(B),
2.	it received all Mr Shakerchi’s shares in MCM(B) and 
3.	that those shares represent the entire ownership of MCM(B).”

The Respondent’s Case

29.	The Respondent contends that the Notice is valid and should be enforced in its entirety.  According to the Respondent, the Notice either relates to documents which the Appellant has not sent the Respondent in accordance with Direction 2 of the Directions, or to documents that are reasonably required solely as a result of new information that has come to light by reason of information in the documents supplied in accordance with Direction 2.  

30.	On 10 July 1998 MCM and MCM(B) had entered into the Investment Manager Agreement whereby MCM provided discretionary fund advisory services to MCM(B) in return for payment of fees.    The fee structure was agreed by Mr Shakerchi on behalf of MCM(B) at a time when he was a director and had ultimate control of MCM as follows:  MCM(B) receives from the hedge funds a 20% annual performance fee, amounting to 20% of any increase in the value of the funds and a management fee totalling 1.2% of the funds under management each year.  MCM receives from MCM(B) 8% of any increase in value and 0.4% of the value of the funds under management.

31.	The Respondent argues that the fee structure lacked transparency, that the level of fees charged by MCM may be artificially low and that there may be no or little justification for MCM(B) retaining the bulk of the group’s revenue if the bulk of the work is conducted by MCM.  

32.	Furthermore, MCM has provided no contemporaneous documentation to show a methodology by which the pricing arrangements were arrived at and how that resulted in arm’s length terms.  I was not referred to any correspondence or other documents by either party which suggested that such contemporaneous documentation has been provided.  MCM simply points to the fees it charges two independent customers, RIT Capital (contract dated 30 March 1998) and Finsbury Gloral/Rea Brothers (contract dated 17 August 1998).  MCM relies on these comparators to argue, after the event, that its transfer pricing with MCM(B) was at arm’s length.  

33.	The Respondent submits that a proper application of the arm’s length principle requires a functional analysis of the controlled transactions to determine the extent to which they are truly comparable with the uncontrolled comparators.  Differences between the functions of Rea Brothers and RIT Capital are as follows.  (a) Whereas MCM(B) subcontracts out back office functions and investment, advisory and management functions, and appears not to carry out any useful function in relation to the agreement, both Rea Brothers and CIT Capital are well established private banking entities with established back office and other capability.  (b) MCM(B) has no track record, no client list known to MCM, no brand or marketing know-how, whereas Rea Brothers has all these things.  (c) The nature and complexity of the advice given to MCM(B) and that given to Rea Brothers and RIT Capital is very different: the latter two agreements prohibit more complex transactions such as leveraging and the advice offered to MCM(B) appears more complex.  (d) The fee arrangement with RIT Capital is very different in that no performance fee is charged.  The Respondent further submits that such a functionality analysis is in accordance with the Transfer Pricing Guidelines of the Organisation for Economic Co-operation and Development, and with Schedule 28AA Income and Corporation Tax Act 1988.

34.	The Respondent submits that the information sought with regard to the following items is necessary for a functional analysis and in compliance with the Directions.  The request in Item 1 of the Notice for documents recording the full extent of the interaction between MCM and MCM(B) for a two-week period was, the Respondent submits, originally requested in Item 7 of the Schedule, but there was no significant compliance with the request.  Since clause 10.1 of the Investment Manager Agreement states that any instructions given by MCM(B) to MCM shall be in writing or shall be confirmed in writing, it is to be expected that many documents exist.  Yet MCM has produced only three such documents for the entire calendar year 1999.  The Respondent thus submits that MCM breached Item 7 of the Schedule by failing to give a sample that enabled the Respondent to “gain a proper understanding of the functions carried out,” and that the new request is simply a more particularised version of the first.  The Respondent further points out that Item 2 of the Notice, requesting documents relating to marketing and other activities undertaken on behalf of MCM(B) by Mr Shakerchi or MCM, and documents showing all contact between MCM and the Administrator and Custodian of the Fund, was originally in Items 7 and 10 of the Schedule.  

35.	The Respondent also submits in the alternative that Item 2 of the Notice is based on MCM’s assertion that it performed additional administrative work on behalf of MCM(B) during 1999.  In order to do this work, MCM must have had access to documents relevant to this work, which is the subject of this Item.

36.	 Items 3 and 5 of the Notice relate to Items 1 and 5 of the Schedule, requesting details of the employees of MCM(B).  The Respondent submits that there has been no compliance with this request.  

37.	Item 4 of the Notice, the Respondent argues, requests information about the interests held by MCM(B) in the funds under management by the group.  It repeats the request in Item 4 of the Schedule that a “schedule of the funds under management by the group, setting out its nature, the amounts held, fees charged and any interest held by MCM(B) therein.”

38.	Furthermore, the Respondent argues, none of Items 3, 4 and 5 are ‘documents’.  I note in passing that this asserted by the Appellant itself.  Thus the Respondent further argues that Items 3, 4 and 5 comprise ‘particulars’ rather than ‘documents’ and are outside the scope of the ‘limitation provisions’ (for want of a better term) in Direction 10.  

The law

39.	Paragraph 3 of Schedule 18, Finance Act 1998 provides that

“(1) The Inland Revenue may by notice require a company to deliver a return (a “company tax return”) of such information, accounts, statements and reports --
(a) relevant to the tax liability of the company, or
(b) otherwise relevant to the application of the Corporation Tax Acts to the company,
		as may reasonably be required by the notice.
(2) Different information, accounts, statements and reports may be required from different descriptions of company.
(3) A company tax return must include a declaration by the person making the return that the return is to the best of his knowledge correct and complete.
(4) The return must be delivered to the officer of the Board by whom the notice was issued not later than the filing date.”  

40.	Paragraph 27(1), Schedule 18, Finance Act 1998 provides that

“If the Inland Revenue give notice of enquiry to a company, they may by notice require the company –
(a) to produce to them such documents in the company’s possession or power, and 
(b) to provide them with such information, in such form,
as they may reasonably require for the purposes of the enquiry.”

41.	Thus the scope of the enquiry notice must only encompass documents and particulars which are: 1.  relevant to the Appellant’s liability to corporation tax; 2. reasonably required by the Inland Revenue to ascertain that liability (I should say that since Para 27 deals with a Revenue investigation power [that is, of the executive] and not an exercise of administrative discretion, I construe the term ‘reasonable’ as taking its normal English meaning rather than the sense of Wednesbury unreasonableness or perversity); 3. within the power or possession of the Appellant.  This is a question of fact.
  
42.	Paragraph 28 provides

“(1) An appeal may be brought against a requirement imposed by notice under paragraph 27 to produce documents or provide information…
(3) An appeal under this paragraph shall be heard and determined in the same way as an appeal against an assessment.
(4) On an appeal under this paragraph the Commissioners-
a.	shall set aside the notice so far as it requires the production of documents, or the provision of information, which appears to them not reasonably required for the purposes of the enquiry, and
b.	shall confirm the notice so far as it requires the production of information, which appears to them reasonably required for the purposes of the enquiry.”

43.	Paragraph 28(3) of Schedule 18 means, inter alia, that the burden of proof is on the Appellant: Taxes Management Act 1970, s 50(6).  

Decision

44.	The Notice is confirmed in respect of all Items 1, 2, 3, 4 and 5.  I dismiss the appeal in relation to all these Items.  

Item 1 of the Notice

45.	Item 1 is clearly relevant to MCM’s corporation tax liability.  The request is also reasonable (whatever the test for ‘reasonableness’), particularly in the light of Item 7 of the Schedule to the Directions.  So far as the Directions are concerned, whilst it may be argued that Item 1 of the Notice does not exactly replicate Item 7 of the Schedule, it is clear that the paucity of the evidence provided by MCM of its dealings with MCM(B) justifies the finding that the documentation provided does not enable the Revenue to “gain a proper understanding of the functions carried out” by MCM.  Nor does the request for information about MCM’s dealings with MCM(B) in particular amount to a breach of Direction 10, since it is merely a sub-set of the documents requested in Item 7 of the Schedule.

46.	Item 1 of the Notice is confirmed.

Item 2 of the Notice
  
47.	Item 2 is also self-evidently relevant to MCM’s corporation tax liability.  Given the inadequacy of the disclosure under Item 10 of the Schedule, the Revenue is justified (and reasonable) in making a more particularised request for information, for the same reasons that it did so in Item 1 of the Notice.  In relation to the Directions, Item 7 of the Schedule was effectively breached as a result of the failure of MCM to provide “reasonable” documents on which a functionality analysis can be applied.  Item 2(i) was simply an attempt to lay down a more particularised version of what counts as reasonable and it is correct.  To that extent it appears entirely reasonable.  

48.	As with Item 1, even if Item 2(i) is construed as a request for new documents as a result of “new information”, it would be valid: it would be a reasonable response to the documents provided on 12 September 2003.  

49.	The Appellant points out that information about Mr Shakerchi’s overseas visits had already been provided before the Directions were issued, and infers that the request about such visits in Item 2(i) cannot arise solely as a result of new information supplied on 12 September 2003.  But it is not the case that because certain information had been elicited concerning Mr Shakerchi’s overseas trips before the Directions that the Revenue was barred from seeking further information on those trips as a result, and directly and solely as a result of new information supplied on 12 September 2003.  It would be an excessively narrow interpretation of Direction 3(ii) that it barred all requests for documents about subjects that had already been discussed by the parties.  The Directions are analogous to a Consent Order.  Consent orders are based on a contract between the parties and are to be interpreted accordingly:  Wentworth v Bullen (1840) 9 B & C 840, Chanel Ltd v F. W. Woolworth & Co [1981] 1 WLR 485.  

50.	Item 2(ii) of the Notice requests more specific information for a specific time period than do Items 7 and 10.  It is a reasonable request.  

Items 3, 4 and 5 of the Notice

51.	MCM claims that the information sought by the Revenue in Items 3, 4 and 5 is irrelevant to MCM’s corporation tax analysis, since the information focuses on MCM(B) rather than MCM.  But in determining the arm’s length price of a transaction or series of transactions, “it is the economic significance of those functions in terms of their frequency, nature and value to the respective parties to the transaction that is important”(OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 1.21).  It is only by looking at the transactions from the point of view of both parties that an arm’s length price can be determined therefore.  Put another way, it may show that the provision of services by MCM to MCM(B) is not at arm’s length if MCM(B) has no use for the relevant services supplied by MCM.  This may or may not be the case, depending on what is revealed.  The request is also reasonable on the part of the Revenue, especially in the light of the Directions.  I therefore reject any argument to the contrary put to me by MCM.  

52.	 Items 3, 4 and 5 of the Notice are further objected to by the Appellant on the grounds that the documents containing details of the employees of MCM(B) and of the funds managed by MCM(B) are not within the power or possession of MCM.  These are the only Items in relation to which the Appellant invokes this argument.  This is a question of fact with the burden of proof being on the Appellant (Finance Act 1998, Schedule 18, Para 28(3), Taxes Management Act 1970, s 50(6)).  I am slightly disturbed by the absence of any oral evidence put by the Appellant at all to make good this submission, which means that I have had to decide this question by reference to inferences drawn from the agreed facts alone.

The “power or possession” argument

53.	  MCM claims that MCM(B) documents are not within its “power or possession” and thus that a request for such documents breaches Paragraph 27(1)(a).  For the period in question, the director and shareholder of both companies was the same individual, Mr Shakerchi.  It is accepted that he is no longer the shareholder of MCM(B), having gifted his shares to a trust of which he is the beneficiary in 2000.  It is also accepted that he resigned his directorship of MCM(B) in October 2002.  The claim that documents relating to or belonging to MCM(B) are not within the “power or possession” of MCM is one that is relevant to requests for all such documents, and is crucial to this appeal.

54.	There is no case law on the phrase “possession or power” in the particular context of paragraph 27, Schedule 18 Finance Act 1998.  Nor is there any case law on the same phrase in sections 20 and 20A of the Taxes Management Act 1970.  However, there is case law on the phrase in relation to the old disclosure rules, which confirms that the question is one of fact.  RSC Order 24, rule 7(1) provided that the court had the power to order disclosure in certain circumstances if documents were in the “possession, power or custody” of a party.  In B v B (matrimonial proceedings: discovery) [1979] 1 All ER 801, a husband was ordered to disclose certain documents in divorce proceedings, although the documents belonged to a company which he controlled and of which he was a director.  It was held by Dunn J that the documents were within his power.  The question of whether this was the case was a question of fact, depending on the individual’s shareholding, whether the minority shareholders were adverse to him, the constitution of the board of directors and whether they objected to disclosure of the documents.  Documents would not be within his power merely because he had a right under s12 of the Companies Act 1976 to inspect them; but where a company was a director’s alter ego, so that he had unfettered control of its affairs, company documents would be within his power.  In B v B the individual was the chairman and individual director of the company, which is not the case with Mr Shakerchi at present.  He is no longer a director of the company, nor is he a shareholder.  It is difficult to say that MCM(B) is the ‘alter ego’ of Mr Shakerchi in the manner that the company was the alter ego of the director in B v B (807h). The fact that Mr Shakerchi is not a director of the company means that this rule cannot be invoked.  The refusal of MCM(B) to disclose the documents in question to MCM, in spite of two requests that MCM has hitherto made, must be borne in mind in this context.

55.	In Lonrho Ltd v Shell Petroleum [1980] 1 W.L.R. 627, it was said that “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 the consent of anyone else” (per Lord Diplock, at 635H).  In that case, the question arose of whether holding companies had the power over documents in indirectly controlled subsidiaries.  The following observations were made:  “The articles of association of all the subsidiaries vest the management of the company in its board of directors.  It is the board that has control of the company’s documents on its behalf; the shareholders as such have no right to inspect or to take copies of them.  If requested to allow inspection of the company’s documents, whether by a shareholder or by a third party, it is the duty of the board to consider whether to accede to this request would be in the best interests of the company” (at 634E-F).  The rule was limited however thus: “I say nothing about one-man companies in which a natural person and/or his nominees are the sole shareholders and directors.  It may be that, depending upon their own particular facts, different considerations apply to these” (636H-637A).  

56.	The upshot of the above cases is that in cases in which a company is not simply a one-man company, the refusal of a company to allow inspection of its documents must be respected (Lonrho).  In the case of one-man companies, if the company is the alter ego of the individual the company’s refusal will have no effect on the individual’s “power” over a document (B v B).  Mr Shakerchi is no longer director of MCM(B), so it cannot be classified simply as a one-man company or the alter ego of Mr Shakerchi.  Lord Diplock mentions “a natural person and/or his nominees” as the shareholder and directors of a company.  The Trustees of the Honey Pot trust are the shareholders of the company, but they would only be nominees if Mr Shakerchi was solely entitled to the shares and could at any time bring the trust to an end (Saunders v Vautier (1841) Cr & Ph 240), which does not appear to be the case.  Certainly this was not suggested by the Respondent at all (no argument or evidence was presented which led me to infer this).   

57.	However, no evidence, as I have already observed, was presented by the Appellant either.  The argument that MCM does not have power over these documents is undermined by the fact that they agreed in the Directions to provide them, from which it follows that MCM must have believed at the time that it did have such power.  Also, the Appellant has provided detailed information as to Mr Shakechi’s movements and expenditure (including personal expenditure) after the time when Mr Shakesrchi ceased to be a director and shareholder of MCM(B).  This leads to the inference that MCM does have power or possession to obtain documents in relation to MCM(B).  No evidence was presented to me to demonstrate the absence of an arrangement (whether or not legally enforceable) between MCM and MCM(B), whether or not involving Mr Shakerchi, as to the availability of documents or particulars falling within Items 3, 4 and 5 to MCM for further disclosure to the Inland Revenue.  Thus even if the Lonrho test is the correct test to apply for Para 27 purposes (and it need not be: I see no reason why in the context of Para 27 ‘power or possession’ should mean anything other than a de facto ability to obtain the documents or particulars), the Appellant has certainly not discharged the burden imposed by Taxes Management Act 1970 section 50(6) that the documents sought by the Inland Revenue within Items 3, 4 and 5 are not within its ‘power or possession’, whether ‘power or possession’ means the legal ability to obtain documents or particulars or de facto ability to obtain them.  

58.	Indeed the inference raised by the information already supplied and the terms of the Directions which were agreed between the Appellant and the Inland Revenue leads me to the inference that the documents are in MCM’s de facto power or possession and may be in MCM’s legal power or possession (in the absence of any contrary evidence).  

59.	I may have reached the opposite conclusion in relation to Items 3, 4 and 5 if the Appellant had led any evidence whatsoever beyond simply referring to the correspondence.  The refusal of MCM(B) to give MCM certain documents does not merely of itself displace this opposite inference and does not justify what is only an assertion by the Appellant that it cannot compel the disclosure of Items 3 to 5.   

60.	I note that Para 29 imposes a penalty on MCM if it fails to comply with the enquiry notice.  However, the enquiry notice can only, by definition, encompass documents and particulars within the power or possession of MCM.  If MCM is unable to provide the Inland Revenue with the documents and/or particulars because they are outside MCM’s ‘power or possession’ those documents and particulars would be outside the scope of Para 27.  There will be no failure to have complied with the notice in respect of them.  There can be no penalty to fail to produce documents that are outside MCM’s power and possession.  In order to escape such a penalty MCM will, by then, be required to produce some evidence that the documents and/or particulars are indeed outside its power and possession.

61.	Items 1, 2, 3, 4 and 5 of the Notice are confirmed.  I dismiss the appeal in respect of all of these Items.  

JULIAN GHOSH
SPECIAL COMMISSIONER

SC 3064/03

DIRECTIONS

HAVING HEARD the Parties and having received a Joint Application for Agreed Directions, the Commissioners direct as follows:-

1.	The information requests of the letter from the Inland Revenue to the Applicant dated 25 July 2003 shall be amended so as to be in the terms of the Schedule appended to these Directions.

2.	The Applicant will reply to the information requests as set out in the Schedule by 15 September 2003; and will either:

(i)	enclose the requested documents and particulars, or
(ii)	state the reasons why any of the documents or particulars are not enclosed.

3.	The Revenue will by 15 October 2003 either:

(i)	issue a closure notice under paragraph 32, Schedule 18, Finance Act 1998 informing the Applicant that they have completed their enquiry into the Corporation Tax return for the year ended 31 December 1999 and stating their conclusions, or

(ii)	issue a notice to the Applicant under paragraph 27, Schedule 18, Finance Act 1998 in respect of one or more of the documents which the Appellant has not sent to the Respondent, within Direction 2 above or in respect of such documents that reasonably are required solely as a direct result of new information that has come to light by reason of information in the documents sent by the Applicant to the Respondent in accordance with Direction 2 above.

4.	The Applicant will by 10 November 2003 either:

(i)	produce the documents in response to the paragraph 27 notice issued by the Revenue (as described in Direction 3 above) or

(ii)	appeal against the paragraph 27 notice under paragraph 28, Schedule 18.

5.	If the Applicant produces the documents in response to the paragraph 27 notice, then the Inland Revenue will issue a closure notice under paragraph 32, schedule 18 by 30 November 2003.

6.	If the Applicant appeals the paragraph 27 notice under paragraph 28, the Inland Revenue will, by 20 November 2003, either:

(i)	set aside the paragraph 27 notice and issue a closure notice under paragraph 32 or

(ii)	state in writing that they will be contesting the appeal by the Applicant in respect of the paragraph 27 notice and the reasons for so contesting.

7.	Any appeal in respect of the paragraph 27 notice (as described in direction 3 above) will be heard on 8 December 2003 or on the first available date thereafter which is convenient to both Parties.

8.	If at the conclusion of that appeal, the Commissioners direct, under paragraph 28(4), Schedule 18 that any of the documents be supplied, then the Applicant will supply such documents to the Inland Revenue within 30 days of the decision of the Commissioners, and the Inland Revenue will issue a closure notice within 30 days of receipt of the documents.

9.	If the Commissioners set aside the paragraph 27 notice, then the Inland Revenue will issue a closure notice within 7 days of  this decision.

10.	The parties agree that the list of documents in the Schedule appended hereto, referred to in Direction 1, is a final list with regard to this enquiry, that they are bound by the timetable set out in these directions and that neither will take any steps other than in accordance with these directions.

11.	Liberty to apply.

12.	The Applicant withdraws the application for a closure notice due to be heard on 31 July 2003.

JULIAN GHOSH
 SPECIAL COMMISSIONER

SC 3064/03