A Financial Institution, Application to Serve a Notice on [2005] UKSPC SPC00517 (05 December 2005) 

SPC00517
NOTICE UNDER TMA 1970 s.20 without naming the taxpayer – whether subs (8A) satisfied – yes – whether consent should be given to the Notice – yes 

THE SPECIAL COMMISSIONERS

APPLICATION BY THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS TO SERVE A SECTION 20 NOTICE ON A FINANCIAL INSTITUTION IN RESPECT OF CUSTOMERS WITH UK ADDRESSES HOLDING CREDIT CARDS ASSOCIATED WITH OFFSHORE ACCOUNTS 

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in private in London on 28 November 2005

The Group Director, Special Civil Investigations Offshore Fraud Projects Group, and Mr Dennis Dixon, Solicitor’s Office, for the Applicant

© CROWN COPYRIGHT 2005

ANONYMISED DECISION

1.	This is an ex-parte application by the Commissioners for HM Revenue and Customs for consent to serve a Notice under section 20(8A) of the Taxes Management Act 1970 on a Financial Institution (“the Financial Institution”).  The Notice seeks information about credit card customers with UK addresses whose cards are associated with offshore bank accounts.  
2.	The Revenue were represented by the Group Director, Special Civil Investigations Offshore Fraud Projects Group (“the Inspector”), and Mr Dennis Dixon of their Solicitor’s Office.  I received on the Wednesday before the hearing on the following Monday a written brief from them consisting of 35 pages with numerous exhibits contained in three ring binders.  The Financial Institution’s solicitors (“the Solicitors”) have made written representations in the form of a 2 page memorandum which cross-refers to another 35 page memorandum (written for the purpose of another application which is not before me today, because I was told the Revenue were sending a revised precursor letter) plus a ring binder of exhibits, and I received a further representation from them on the day of the hearing.  The Solicitors ask me to give a written decision, a procedure that has been adopted before, see Applicant v Inspector [1999] STC (SCD) 128 (identified on appeal as the Morgan Grenfell case), which I agreed to do in this case.
3.	Relevant parts of section 20 of the Taxes Management Act 1970 are:
“…(3) Subject to this section, an inspector may, for the purpose of enquiring into the tax liability of any person (“the taxpayer”), by notice in writing require any other person to deliver to the inspector or, if the person to whom the notice is given so elects, to make available for inspection by a named officer of the Board, such documents as are in his possession or power and as (in the inspector’s reasonable opinion) contain, or may contain, information relevant to any tax liability to which the taxpayer is or may be, or may have been, subject, or to the amount of any such liability; and the persons who may be required to deliver or make available a document under this subsection include the Director of Savings. 
…
 (6) The persons who may be treated as “the taxpayer” for the purposes of this section include a company which has ceased to exist and an individual who has died; ... 
 (7) Notices under subsection (1) or (3) above are not to be given by an inspector unless he is authorised by the Board for its purposes; and— 
(a)   a notice is not to be given by him except with the consent of a General or Special Commissioner; and 
 (b)   the Commissioner is to give his consent only on being satisfied that in all the circumstances the inspector is justified in proceeding under this section. 
(8) Subject to subsection (8A) below, a notice under subsection (3) above shall name the taxpayer with whose liability the inspector (or, where section 20B(3) below applies, the Board) is concerned. 
(8A) If, on an application made by an inspector and authorised by order of the Board, a Special Commissioner gives his consent, the inspector may give such a notice as is mentioned in subsection (3) above but without naming the taxpayer to whom the notice relates; but such a consent shall not be given unless the Special Commissioner is satisfied— 
 (a)   that the notice relates to a taxpayer whose identity is not known to the inspector or to a class of taxpayers whose individual identities are not so known; 
 (b)   that there are reasonable grounds for believing that the taxpayer or any of the class of taxpayers to whom the notice relates may have failed or may fail to comply with any provision of the Taxes Acts; 
 (c)   that any such failure is likely to have led or to lead to serious prejudice to the proper assessment or collection of tax; and 
 (d)   that the information which is likely to be contained in the documents to which the notice relates is not readily available from another source. 
 (8B) A person to whom there is given a notice under subsection (8A) above may, by notice in writing given to the inspector within thirty days after the date of the notice under that subsection, object to that notice on the ground that it would be onerous for him to comply with it; and if the matter is not resolved by agreement, it shall be referred to the Special Commissioners, who may confirm, vary or cancel that notice.”
4.	I find the following facts:
(1)	Some of the credit cards issued by the Financial Institution in the UK have a sort code associating them with a bank account outside the UK stated on the application form.  The largest number of cards associated to offshore accounts relate to accounts in the Channel Islands and the Isle of Man.  Transactions relating to credit cards associated with accounts there are processed in the UK.  Debit cards relating to some of the Financial Institution’s offshore accounts are also produced in the UK but no information about them is retained in the UK.  It is estimated that currently there are about [number withheld] credit cards held by persons with a UK address associated with a non-UK bank account, although the number could be smaller.  There will also be a further number of people who no longer hold credit cards associated with offshore accounts but did so in the last six years, of which the number is not known at present.  Data about such credit cards held during the last six years is stored and is available electronically.
(2)	The Financial Institution also operates in [list of countries withheld].
(3)	 As the Inspector’s job title indicates, the Revenue are currently investigating the use of offshore accounts by UK residents, including credit cards linked to offshore accounts.  Credit cards associated with offshore accounts can be used either to draw money in the UK from ATMs or sums charged to the card in the UK can be paid from the offshore account.  The Revenue consider that this presents a significant risk to the proper collection of UK tax.
(4)	I was given the following statistics which the Revenue have so far obtained. 
Source	The Financial Institution’s customers	Matched to SA returns	Foreign income declared	
Tax Credit Office	668	191	23	
Source 1	3,300	790	27	
Source 2	5,321	866	277	
Total	9,289	1,847	327	
I am aware of the identity of Sources 1 and 2 which relate to banking cards (although I think they include debit and other cards as well as credit cards). The table shows that of the total of the Financial Institution’s customers with UK addresses and cards associated with offshore accounts only 19% made tax returns, and only 18% of those who make returns and are UK resident have declared any foreign income.  The information from the Tax Credit Office is of individuals claiming Child Tax Credits and Working Tax Credits and having the money paid into an offshore account with the Financial Institution, which is not directly related to credit cards, although some of them may have credit cards associated with the accounts.  Again there is a big discrepancy between each of the figures.
(5)	These sources have produced some thousands of names out of which a sample, which is intended to be representative, of 500 cases (not limited to the Financial Institution) were chosen all of which relate to taxpayers who have made self-assessment returns, are UK resident and domiciled, and have not declared any foreign income.  As part of a trial agreed with some of the accountancy bodies, letters based on one of four types of standard letter were sent to them in July 2005, specimens of which I saw.  The Solicitors mention that the letters refer to the possibility of prosecution but this is true of only half of them.  So far such cases have an expected yield of £1.4m and many payments on account have been made.  The Inspector expected that in half the cases there would be additional tax.  If granted, this Notice will also provide further information about transactions entered into by such people.
(6)	I was given full details of Special Civil Investigations and local tax office investigations of 21 cases contained in 2 ring binders, all relating to the Financial Institution’s customers, 7 of which have been completed.  Fifteen of these cases include (and in one case, relates exclusively to) interest on offshore bank accounts, and the remaining 5 cases relate solely to other types of undeclared income.  There is an estimated total settlement of £3.44m tax or £164,000 per case (£1.4m tax or £94,935 per case, if one takes only those where there is undeclared offshore interest).  One of these cases involving undeclared offshore interest, with an estimated yield of £100,000 started from information from Sources 1 or 2.
(7)	I asked the Inspector at the hearing for his estimate of the additional tax estimated to be collected if I consent to this Notice.  He said he would consider this further and has followed it up with an estimate that 20% of cases (15,000) might be expected to result in additional tax, with 2% of the total being investigated by Special Civil Investigations and 18% in tax districts, with a potential tax yield, based on averages for each, of about £347m.
5.	The Notice seeks the names and addresses and date of birth of customers (other than quoted companies) having a UK address with a UK credit card, who on the application form (or subsequently) gave details of a non-UK bank account with which it is associated; the sort code and account number of the bank account, and the interest earned per annum; and the transactions on the credit card for six different months.  If the Notice is granted the Inspector informs me that the Revenue will first try to match the information with tax returns electronically.  If this shows that foreign interest is declared no further action will be taken and the customer will not even know about the Revenue’s Notice; indeed the Inspector points out that the information cannot be used for purposes other than those for which the power is conferred, so that if the Revenue were to ascertain information that might be of interest for, say, VAT they cannot share it with their VAT colleagues (although before the merger they could have done under a statutory provision).  If foreign income is not declared, the Revenue will first ascertain whether there is a good explanation, for example that no interest is earned on the account, the person with a UK address is not resident, or is non-domiciled and does not remit any interest, or that interest from, say, the Channel Islands has incorrectly been returned as UK source interest.  Only if there is no such explanation will the Revenue pursue their investigation of the undeclared interest.  I mention this evidence because the Solicitors suggest that innocent customers of the Financial Institution will find themselves “wrongly caught up in an extensive fraud investigation,” and they state that “one can have little confidence that taxpayers’ affairs will be reviewed individually and discretely upon a case by case basis.”
6.	I emphasise that no allegation is made against the Financial Institution and, as one would expect, the Solicitors’ memorandum states that the Financial Institution does not condone or seek to facilitate tax evasion and has made representations so that their duty of confidentiality to their customers is property considered.  Prior to the issue of the precursor letter of 7 September 2005 the Financial Institution and the Revenue have had a number of meetings starting on 7 September 2004, have corresponded frequently by letter and email.  I have seen copies of notes of meetings and of the correspondence.  While very properly reserving their position to argue against the validity of any Notice, it is extremely helpful for me to know that there has been this dialogue during which a number of concessions have been made by the Revenue, and as a result the Financial Institution has been able to explain any difficulties they would have in complying.  I am slightly surprised by the Solicitors’ objection that it is for the Revenue to prepare a valid demand and not for the Financial Institution to do it for them, and that “If HMRC needs the co-operation of the noticee in order to frame a notice which is reasonable, not excessive, and addressed to the right person, that, it is submitted, is a plain sign that the proposed notice goes too far upon the basis of too little evidence.”  It seems to me that the dialogue that has taken place is exactly what one would expect from a responsible taxpayer like the Financial Institution.
7.	As a result of this dialogue the Solicitors accept that the Notice is not onerous, and that the information is in the Financial Institution’s possession or power. Since their representation was written, public limited companies, charities, churches, mutuals, trade associations and clubs have been excluded from the precursor letter.  The notice has also been limited to 6 years.  If the Notice is granted, the time limit of 60 days for complying is also agreed.
8.	As the Solicitors remind me, section 20(8A) was enacted in 1988 following a recommendation of the Keith Committee, of which I should declare that I was a member.  I agree with them that one should not regard the Report of the Committee as indicating the intention of Parliament in enacting the provision.  While I consider that the Report is admissible as a statement of the mischief that Parliament was aiming to correct I thought it better not to reminded myself of what the Report said on this topic as my task is to interpret the statutory provision.
9.	I turn to the Solicitors’ objections.  The first and main one is that holders with UK addresses of credit cards linked to non-UK bank accounts is too wide a class.  They say that any large class is certain to contain persons who have failed to meet their tax obligations.  It seems to me that there are two different questions, first whether this is a class, and secondly, if it is, whether it is a proper class for using section 20(8A), or whether it is an excuse for conducting a fishing expedition, which is not answered by analysing the meaning of class.  Thus a proposed notice addressed to all those with a surname beginning with A might be a class, but would certainly not be a rational class in relation to the question whether there are reasonable grounds for believing that any of the class may have failed (or may fail) to comply with the provisions of the Taxes Acts.  As to the first question, the only issue to my mind is whether it is certain that a member falls within the class.  I can see no uncertainty here.  I should add that although Parliament refers to them as a “class of taxpayers” it is clear from the context that the section is intended to be used for enquiring into whether such persons have complied with their tax obligations, if any.  Certainly it was so understood in R v IRC ex p. Ulster Bank Ltd [2000] STC 537.  
10.	On the second question of whether the Notice relates to a rational class of taxpayers, it seems to me that the Financial Institution’s real objection is that they suspect that the Revenue are saying “Can we have a section 20 Notice against the Financial Institution because those with UK addresses whose cards are linked to offshore accounts form so large a class that we are bound to find some tax defaulters.”  If that were the case I would have no hesitation in refusing consent to the Notice.  But the application before me is very different.  The Revenue have quite a lot of information about the Financial Institution’s customers, including their credit card customers, from their existing enquiries.  They have some information (although less than is required by the Notice) about 9,289 of them, of which 668 relate to payments of tax credits to an offshore account which is, or may be, unrelated to credit cards, and the remainder relates to cards (but not necessarily credit cards) issued to customers with UK addresses linked to offshore accounts with the Financial Institution obtained from Sources 1 and 2.  These show that only 19% of the total make self-assessment returns, and of those who do, only 18% have declared any foreign income.  On any basis these figures need investigating, which the Revenue are in the course of doing.  The 500 representative sample of cases (not limited to the Financial Institution) where there are self-assessment returns for resident and domiciled individuals has in the short time since letters were sent out in July 2005 raised £1.4m, and the Inspector expects there to be additional tax in half of them.  Lastly, of the 21 cases of the Financial Institution’s customers under investigation, but not specifically as part of the current investigation into offshore accounts, where the expected tax yield is £3.44m (£164,000 per case), 15 of them (total £1.4m of £94,935 per case), are cases where there is undeclared interest on offshore accounts.  This leads the Revenue to suspect that similar percentages that apply to the 9,289 of the Financial Institution’s customers with offshore accounts they know something about will be revealed for the rest of the possible [number withheld] cases for which they are requesting consent to issue the Notice.  Far from being a fishing expedition it seems probable that some 80% of cases will raise questions, in some of which there will be an innocent explanation, but in others there is likely to be default in complying with tax obligations.  The Inspector’s estimate is that 20% of cases will yield additional tax, with an estimated total of about £347m.  In the light of these statistics I am satisfied that the class of taxpayers specified is a rational one.
11.	Another objection is that the Notice includes information not contained in current documents of current customers and documents not relevant to customer identification.  I see no objection to either.  The investigation is properly made in respect of the last 6 years and section 20 is not limited to matters of customer identification.  Indeed, it is obvious from the figures quoted above that there will be cases where the customer is known to the Revenue but who has not returned foreign interest or, if non-domiciled, the existence of remittances of such interest.  I assume from the fact that the Financial Institution does not rely on the Notice being onerous and that the information is available electronically there is no difficulty in providing this information.  
12.	Further, they object to the Revenue asking for documents relating to persons whose identities are already known to the Revenue.  They argue that “Unless they are removed, [the Financial Institution] will know any notice to be invalid in relation to some thousands of customers ostensibly caught by it; but [the Financial Institution] will not know which, with the result that it cannot know in respect of any customer whether it has a duty to disclose or not.”  While there are 9,289 of the Financial Institution’s customers with offshore accounts whose identities are known to the Revenue they are not co-extensive with those with credit cards whose identity is required by the Notice.  It is important to note that the paragraph immediately following, paragraph (b), requires that there are reasonable grounds for believing that any of the class of taxpayers may have failed (or may fail) to comply with any provision of the Taxes Acts.  The logical flaw of the argument is demonstrated by the fact that to the extent that such persons have in fact complied with their tax obligations, their identity will obviously be known to the Revenue.  That cannot possibly have been intended by Parliament to invalidate the whole Notice.  
13.	The Solicitors suggest that the ex-parte procedure is incompatible with articles 6 and 8 of the Human Rights convention.  The Revenue respond that in Funke v France (1993) 16 EHRR 297 the Court’s objection with regard to article 8 was not the French customs officers’ powers of search and seizure as such, but the lack of safeguards against abuse of their power.  I agree with the Revenue’s analysis.  The Judgment states:
 “56. Undoubtedly, in the field under consideration—the prevention of capital outflows and tax evasion—States encounter serious difficulties owing to the scale and complexity of banking systems and financial channels and to the immense scope for international investment, made all the easier by the relative porousness of national borders.  The Court therefore recognises that they may consider it necessary to have recourse to measures such as house searches and seizures in order to obtain physical evidence of exchange-control offences and, where appropriate, to prosecute those responsible.  Nevertheless, the relevant legislation and practice must afford adequate and effective safeguards against abuse.
57. This was not so in the instant case.  At the material time…the customs authorities had very wide powers; in particular, they had exclusive competence to assess the expediency, number, length and scale of inspections.  Above all, in the absence of any requirement of a judicial warrant the restrictions and conditions provided for in law, which were emphasised by the government, appear too lax and full of loopholes for the interferences in the applicant’ right to have been strictly proportionate to the legitimate aim pursued.”
14.	It seems to me that the procedure under section 20 compares favourably to other ex-parte procedures for obtaining a search warrant, which is a far more intrusive power than the present Notice, even though it does relate to a large number of people.  I believe that the Court would approve of the ex-parte procedure as being proportionate, particularly where the Financial Institution has been able to raise legal arguments before me.  I do not think that any issues relating to article 6 arise at this stage.
15.	In relation to the Solicitors’ objections to ex-parte proceedings as a breach of internationally recognised “fundamental taxpayers’ rights,” it is worth stating that there are two sides to the argument.  The procedure is itself a recognition of such rights in that it is a safeguard against abuse of the Revenue’s powers.  And it is because the proceedings are ex parte that the Revenue have been able to give me detailed and highly confidential information about the investigation of 21 taxpayers, and of their sources of information which they could not have disclosed to the Financial Institution because of taxpayer confidentiality or prejudicing their investigations.  As a result I am in a far better position to assess the merits of the application than if the Financial Institution had been allowed to be present.  The benefits of the procedure were accepted by the Court of Appeal (the point not being in issue in the House of Lords) in R (on the application of Morgan Grenfell) v Special Commissioners [2001] STC 497 in which the Revenue argued (at [49]) that the self-evident risk of compromising the investigation shuts out any possibility of an oral procedure, which the Court accepted (at [50]) saying that an inter-partes procedure would lead to the accidental disclosure of material to which the taxpayer was not entitled, the disclosure of which would run counter to Parliament’s purpose.  That point is clearly demonstrated here.  Finally, the Solicitors suggest that an ex-parte procedure is irrational when there is no equivalent in indirect taxes.  It is publicly known that a review of powers is currently taking place following the merger and that is the correct forum for such matters to be considered.
16.	So far as EU law is concerned, the Solicitors have provided a seven-page appendix of arguments.  They appreciate that foreign suppliers of banking services will not be put in a worse position than UK banks.  Nor is there any discrimination against UK persons who use such services.  However, they contend that the Notice involves a restriction on the provision of such services, and of the free movement of capital (which is not restricted to the EU), and possibly the freedom of establishment, as in their example of a law firm with offices and client accounts in a number of countries.  They argue that a general presumption of tax evasion cannot be justified.  The Revenue contend that there is no objection to the Notice on EU grounds.  They argue that in Arblade, Case C-376/96, it was the creation of a double burden that was the restriction.  There foreign employers had to pay employers’ contributions to a fund in the host state in addition to any in the state of establishment, which was an additional expense for undertakings established in another member state and accordingly a restriction (at [50]).  So was the obligation to draw up and keep documents in accordance with Belgian legislation (at [58]).  Here there is no double compliance burden.  In Finalarte, Case C-49/98, the restriction which required to be justified, was that employers established outside Germany had to provide more information to the fund for providing holiday pay to construction workers than German employers.  The Court stated that it was not a justification if the State can check on the basis of documents required by the rules of the state of establishment (at [74]).  The Revenue cannot use such documents here.
17.	Assuming that the persons with UK addresses whose information is sought by the Notice are UK residents (if they are not, the information about them is of no interest to the Revenue), the Notice is sought for the purpose of taxing them.  If they have declared their foreign interest they will not even know about the Revenue’s enquiry.  If they have not paid tax the only disadvantage that they might suffer is that they are likely to be asked to demonstrate that the interest is for some reason not taxable, which is a burden that any UK resident (and I presume, any resident of any other Member State) may have to undertake.  Had they associated their credit card with a UK bank account, the UK bank would automatically give the Revenue information about interest earned on that account every year, which is arguably more onerous than under the proposed Notice.  If the customers are deterred from opening offshore bank accounts and associating credit cards with such accounts (or if the Financial Institution’s subsidiaries are deterred from providing such services to them) because the customers intend to evade tax I find it strange that it should be argued that the EU fundamental freedoms should assist them.  I am doubtful that there is any restriction here but even if there is I consider that the Revenue are pursuing a legitimate purpose, which the information so far obtained shows they are right to pursue and, since there is no other way of identifying the persons concerned, their approach is, in my view, proportional.
18.	The Solicitors also point out that from July 2005 the Savings Directive enables the Revenue to obtain at least some of the same information by another route.  The Revenue reply that they are seeking information for earlier periods; that some banks will in accordance with the Directive impose a withholding tax and will not have any information to supply; and those customers who are really intent on tax evasion may have moved their money out of complying jurisdictions before the Directive came into force.  I agree with the Revenue on all these points.
19.	Accordingly I do not consider that the Notice is bad on account of any of these objections.   In the light of the above I am satisfied first, that the Notice relates to a class of taxpayers whose individual identities are not known.  Secondly, in the light of the figures, that there are reasonable grounds for believing that any of the class of taxpayers to whom the Notice relates may have failed (or may fail) to comply with any provision of the Taxes Acts.  Thirdly, that in the light of these figures and the Inspector’s estimate, any such failure is likely to have led (or to lead) to serious prejudice to the proper assessment or collection of tax.  And fourthly, that the information which is likely to be contained in the documents to which the Notice relates is not readily available from another source (and in particular most of the information required by the Notice is not known even for those whose identities are known to the Revenue).  Accordingly, section 20(8A) is satisfied.
20.	Finally, I consider whether under section 20(7) I am satisfied that in all the circumstances the Inspector is justified in proceeding under section 20.  In my view the information that the Revenue has already obtained raises serious questions that merit investigation and cannot be investigated by any other means.  Accordingly I consent to the issue of the Notice.
21.	I have written these reasons for my decision in the expectation that the Revenue will send it to the Financial Institution and their advisers and if it is necessary I authorise them to do so.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 5 December 2005