Behind closed doors: HMRC denied access to Charman papers

In the recent case of HMRC v Charman [2012] EWHC 1448 (Fam), HMRC failed in their bid to obtain documents produced in a high profile divorce case.

In 2006 the High Court heard a post divorce contested hearing, which resulted in Mrs Charman being awarded more than £40m (a record sum) from her former husband Mr Charman.

Significant volumes of documents were produced by both sides during the disclosure process for the original High Court hearing. That hearing was held in private. The first instance judgment was then appealed to the Court of Appeal and the appeal was dismissed. The Court of Appeal hearing was held in public. Both the first instance judgment and the Court of Appeal judgment were reported in the law reports.

The extent of Mr Charman’s potential tax liabilities was a key factor which impacted on the judge’s determination of the wife’s award. In particular, the extent of Mr Charman’s tax liabilities in relation to his interests in Axis Speciality Limited, which in turn depended upon the date when he ceased to be resident in the UK and became resident in Bermuda. There was a large amount evidence on this point during the High Court hearing.

HMRC subsequently sought to recover about £11.5m of tax for the years 2001-2008. Mr Charman disputes this liability and has appealed against the assessments that HMRC have issued.

For the purposes of the tax appeal, HMRC wished to see, and to be able to use, transcripts of the divorce proceedings as well as other documents used in those proceedings.

Mrs Charman did not object but Mr Charman refused and so HMRC made the following application to the court:

It was common ground that, without the consent of both Mr and Mrs Charman the documents and other evidence sought by HMRC were not disclosable without a court order.

HMRC’s arguments

HMRC argued that it is always in the public interest for the right amount of tax to be paid by taxpayers and that the documents were directly relevant to the matters in issue before the tax tribunal. In particular they would help HMRC rebut any case put forward by Mr Charman to the extent that it is not consistent with Mr Charman’s case as previously advanced before the court in the divorce proceedings.

Mr Charman’s argument

Mr Charman said that he gave evidence during the divorce proceedings in private and was: ‘protected by the cloak of privilege and the parties’ duty of confidentiality. For that to be subsequently lifted, with no justification, with no wrongdoing having been proven on my part by HMRC and without even a final assessment upon me would be entirely unfair.’

The law

The judge dealt with HMRC’s application under the Family Procedure (Amendment) Rules 2012 rule 29.12, which states:

‘Access to and inspection of documents retained in court

29.12 (1) Except as provided by this rule or by any other rule or Practice Direction, no document filed or lodged in the court office shall be open to inspection by any person without the permission of the court, and no copy of any such document shall be taken by, or issued to, any person without such permission.’

The leading case in this area is the decision of Wilson J in S v S (Inland Revenue: Tax Evasion) [1997] 2 FLR 774. That case establishes first, that the court has a discretion as to whether to permit disclosure of the papers to HMRC and second, that it will be very rare for that discretion to be exercised in their favour. This point is illustrated by the fact that, in S v S, Wilson J refused HMRC’s application even though he had found the husband guilty of tax evasion.

The judge in the present case noted that the obligation on a party to an application for financial remedies in divorce proceedings to make full and frank disclosure ‘is absolute. It is a fundamental principle and is of paramount importance if the court is to fulfil the obligations imposed on it by the Matrimonial Causes Act 1973.’

Conclusion

The judge held that the general rule is that documents and other evidence produced in financial remedy proceedings are not disclosable to third parties save that:

‘exceptionally and rarely and for very good reason they can be disclosed with the leave of the court. The fact that the evidence may be relevant or useful is not by itself a good enough reason to undermine the rule.’

Whilst the judge agreed that it is in the public interest for the right amount of tax to be paid by taxpayers and that the documents sought in this case would be relevant to the tax tribunal proceedings, this was not the correct test to apply.

The judge held that there was nothing rare or exceptional about this case which took it outside the general rule and HMRC’s application was accordingly dismissed.

Comment

HMRC enjoy significant powers enabling them to obtain information and documents from taxpayers and third parties, and these powers have been substantially increased in recent years. There are very few limitations on these very wide and intrusive powers (the exception for legally privileged documents being one – see R v Special Commissioner and another ex parte Morgan Grenfell & Co Ltd [2002] UKHL 21). This decision protects the position of the parties during financial relief proceedings during divorce and encourages both parties to a divorce to make full, frank and proper disclosure of their financial affairs in the knowledge that such disclosure will not be obtained subsequently by any third party and used against them. The High Court was of the view that the public interest in divorcing couples making proper and full disclosure of their financial affairs out weighed the public interest in HMRC, or any other third party, obtaining details of such disclosure.

It remains to be seen whether HMRC will appeal this decision or accept that they do not have an unfettered right to obtain documents and information made available in matrimonial proceedings for use in tax litigation before the tax tribunals.