Taxpayers can be required to provide HM Revenue and Customs (HMRC) with certain information and/or documents, if HMRC issues a written notice to that effect (FA 2008, Sch 36, para 1; previously TMA 1970 s 20(1)). The question arises: what information and documents are considered to be within the taxpayer’s remit to provide?
Under HMRC’s recently introduced information powers (in FA 2008, Sch 36), taxpayers must provide such information or documentation as is ‘reasonably required’ to check the taxpayer’s tax position. The previous legislation (in TMA 1970, s 20) required the taxpayer to provide such documents and particulars as are in the person’s ‘possession or power’.
In Parissis and Others v CRC  UKFTT 218 (TC), three individuals (the respondents) provided documents and particulars to HMRC in response to information notices. HMRC contended that the documents supplied only partly complied with the information notices, and applied for penalties for the failure. The respondents contended that the documents demanded by the TMA 1970, s 20 notices were not within their ‘possession or power’ and were not produced for that reason.
The individuals were connected with offshore trusts of which they were settlors and/or beneficiaries. The ‘missing documents’ (i.e. which HMRC requested but had not been supplied) included trust documents and accounts in respect of a British Virgin Islands (BVI) company, the shares in which were beneficially owned by the trusts. The tribunal considered HMRC must raise a case that the documents were in the respondent’s possession or power, and then it was for the respondents to show that they were not.
The respondents argued that they had no power over the missing documents. Once again, HMRC must establish a case that the documents exist, and the respondents must then prove that they do not. The tribunal's finding was that the BVI company and trust accounts existed. The tribunal also found that the other correspondence and documentation when the trust was set up existed, at least in the hands of the trustee.
HMRC accepted that the respondents did not possess the missing documents, but argued that the respondents had the power to influence the trustees to provide the documents. The respondents argued that they did not have a presently legal right to any of the material sought by HMRC, which was therefore not within their power. HMRC considered that the material was effectively within their power, because the settlors and beneficiaries could be assumed to have real power over the trustees.
The tribunal considered the meaning of 'power' and concluded that the term splits into two concepts - 'legal' power and 'practical' power. In terms of legal power, the tribunal concluded that the ordinary meaning of power could not extend to include legal action that is likely to fail. Some of the documents were not considered to be within the respondents' legal power on that basis. However, with regard to practical power, the tribunal held that:
"..documents are within a person's power if they can obtain them, by influence or otherwise, and without great expense, from another person even where that person has the legal right to refuse to produce them."
The tribunal also stated that even if not obliged by court order to provide the documents, it was likely that a trustee would choose, in the spirit of trusteeship, to provide copies of them to the settlors and beneficiaries. HMRC had raised a case that the documents were within the respondents' power, and the tribunal therefore considered that it was for the respondents to show that they had asked the trustees for the documents and been refused. They had not done so, and were in breach of the information notices and therefore liable to a penalty.
It is worth noting that, in the tribunal's view, the documents in the above case would not have been in the respondents' possession or power if the trust deed(s) contained a clause excluding the trustees' duty to give information and the respondents had asked the trustees to provide the missing documents but had been refused. Trust deeds for two of the trusts did contain such exclusions, but unfortunately for the respondents it would appear that they should have asked the trustees for the documents anyway.
What can HMRC do if a taxpayer refuses to provide requested documents which it could not lawfully be compelled to produce?
The tribunal in the Parissis case also considered this point, and noted that HMRC have wide powers to make a discovery assessment where they honestly consider that there has been a tax underpayment. It would then be for the taxpayer to show that the assessment is wrong. The tribunal cited the case of T Haythornwaite & Sons Ltd CA 1927 11 TC 657, in which the taxpayer company's refusal to provide documents had the effect of leaving itself without the evidence to challenge an assessment, which was therefore upheld in the Court of Appeal.
The decision in the Parissis case is worrying. In broad terms, it indicates that a document is in a taxpayer's power if it is in the possession of someone else, even if the taxpayer cannot compel that other person to provide the document.
Taxpayers who receive information notices from HMRC for documents which are in the possession of another person would therefore be faced with the prospect of having to ask that other person for the documents, or face a penalty.
In addition, if information is in the taxpayer's legal power but not his possession, it would seem that he or she must take legal action if necessary to obtain that information, unless such legal action is likely to fail. This will probably involve the taxpayer incurring significant legal costs in bringing proceedings against the third party.
It is not known at the time of writing whether the Parissis case has been appealed. If there is no appeal, HMRC may consider it possible to ask for virtually any information and documents, which will place a heavy burden on the taxpayer to attempt to obtain it from others. It is therefore to be hoped that the above case is not the last word on the subject.
This article is accredited to Mark McLaughlin for the ICPA
Mark McLaughlin CTA (Fellow) ATT TEP