Tribunal varies Schedule 36 information notice as it sought material not reasonably required by HMRC

In Parker Hannifin (GB) Ltd v HMRC [2023] UKFTT 00971 (TC), the First-tier Tribunal (FTT) found that an information notice issued by HMRC, under Schedule 36, Finance Act 2008 (FA 2008), was not invalid simply because it required electronic searches using a list of specified search terms, but it did seek information that was legally privileged or not "reasonably required" and it varied the notice accordingly.

Background

Parker Hannifan (GB) Ltd (PHL) is a member of the Parker Group. In June 2014, PHL refinanced earlier debt by issuing a £238m Eurobond (the Eurobond) to Parker Hannifan LLP (the LLP). The LLP borrowed the same amount from Parker Hannifan Global Capital Management Sarl, based in Luxembourg. On 1 January 2017, the LLP transferred the Eurobond to Parker Hannifin Barbados Srl. PHL claimed tax relief on the interest paid on the Eurobond.

HMRC opened an enquiry. The enquiry focused on whether to refuse relief for some or all of the interest on the basis that (i) the refinancing in 2014 and/or the transfer in 2017 had an “unallowable purpose”, within the meaning of sections 441 and 442, Corporation Tax Act 2009; and (ii) interest relief should be refused under the transfer pricing provisions under Part 4, Taxation (International and Other Provisions) Act 2010. 

During the course of its enquiry HMRC issued an information notice to PHL under paragraph 1, Schedule 36, FA 2008 (the Notice). Unusually, the Notice did not set out particular documents or categories of documents which HMRC required PHL to provide, rather, it required PHL to carry out an email search using a list of specified terms under three headings and to provide all the emails identified as a result. The search produced over 11,000 results which were reviewed in order to identify the emails relevant to HMRC's enquiry and 1,695 such emails were identified. These were provided to HMRC. HMRC responded claiming that all of the emails should be provided on the basis that the information was "reasonably required for checking the taxpayer's tax position". 

PHL made a late appeal against the Notice. Whilst HMRC accepted the late appeal against the Notice, HMRC maintained their position stating that the information was "reasonably required". PHL requested a statutory review of the Notice which was upheld by HMRC. 

Following the review decision, on 20 October 2021, PHL appealed to the FTT against the Notice on the grounds that that: 

(i) the Notice was invalid because it did not "specify or describe" the information or documents to be produced, but instead only contained search terms (the First Ground); 

(ii) the documents identified by PHL as irrelevant were not "reasonably required", and the Notice should either be set aside in its entirety, or varied so that only those documents identified as relevant  were in scope (the Second Ground); and 

(iii) the Notice should be varied so as to (a) limit the dates for which documents must be provided to HMRC, (b) exclude items which HMRC was no longer seeking, and (c) make it clear that legally privileged materials are excluded (the Third Ground).   

FTT decision

The appeal was dismissed on the First Ground and allowed on the Second Ground. The FTT did not consider the Third Ground having found in favour of PHL on the Second Ground. The FTT varied the Notice accordingly. 

Prior to considering PHL's grounds of appeal, the FTT noted that the parties accepted that HMRC had the burden of showing that the Notice met the relevant statutory conditions (applying Cliftonville Consultancy Ltd v HMRC [2018] UKFTT 231 (TC)).

With regard to the First Ground, the FTT held that the Notice was not invalidated by HMRC's use of search terms and found the use of search terms to be consistent with paragraph 6(2), Schedule 36, FA 2008 (applying R (ex p Ulster Bank) v HMRC [1997] STC 832). The FTT agreed with HMRC, that Ulster Bank, which considered information notices issued under the predecessor legislation contained in the Taxes Management Act 1970, was highly persuasive as to the approach the FTT should take in relation to the use of the search terms in this case, and concluded that: 

(1) the purposes of both the predecessor legislation and Schedule 36, FA 2008, was essentially identical; 

(2) both sets of provisions provided that a notice may "specify or describe" the documents; 

(3) per Morritt LJ in Ulster Bank, the word "described" meant "characteristics of that which is referred to rather than its details or particulars", and the search terms used by HMRC met that requirement because they set out "characteristics" of the documents required by HMRC. The FTT, referring to Ulster Bank, confirmed that  search terms were permissible, because it agreed that a notice could be used for what is essentially a discovery exercise, whereby HMRC is seeking production of documents with a view to ascertaining whether they might be useful; and 

(4) the search terms had been sufficiently informative because PHL had been able to carry out the search, and identify the documents in question. 

The FTT agreed with the conclusion in Ulster Bank that the protection for a taxpayer or third party does not lie in giving a narrow meaning to the words "specify" or "describe", instead the documents identified by the notice must be "relevant", or as per Schedule 36, FA 2008, "reasonably required". 

On the Second Ground, the FTT considered the question of what was "reasonably required" and agreed with PHL, finding that the great majority of documents which resulted from the application of the search terms were not "reasonably required", such as correspondence with the taxpayer's auditor or relating to unconnected transactions.  

In considering the Second Ground, the FTT noted:

(1) that it was common ground that a document which might be relevant to the purpose of the Notice would be reasonably required and that a document which was not relevant to that purpose would not be reasonably required; 

(2) that PHL not only had a right to appeal against the wording of the search terms it could appeal on the basis that the documents resulting from the search were not reasonably required. In the instant case, the requirement in the Notice was for PHL to provide all the documents which meet the search terms and PHL could therefore appeal if one or more of those documents were not "reasonably required". The FTT considered that if HMRC was correct it would be entitled to every document within the scope of the specified search terms, whether or not a document was reasonably required, which would: (i) undermine the taxpayer's well-established right to appeal against a Schedule 36 notice on the basis that a document is not reasonably required; (ii) constitute an unjustified and unreasonable expansion of HMRC's right to access documents; and (iii) place an unfair and unreasonable burden on the taxpayer to correct the mechanism chosen by HMRC itself to describe the documents required under such a notice. The FTT agreed with PHL that it is not the taxpayer's role to identify search terms or to "pick up the Terms and start to cross out bits of them"; 

(3) that in the application of the search terms, some of the output from the search was plainly irrelevant to the purpose of the Notice;

(4) that reliance could be placed on the results of the search exercise. In this regard, the FTT found that: (i) PHL's professional adviser  correctly identified the scope of the exercise and that HMRC accepted that, in carrying out the exercise, it had acted professionally and in good faith; (ii) having reviewed the documents identified as relevant, HMRC did not identify any omissions indicating that relevant documents had not been handed over; (iii) PHL's willingness to pay an independent third party law firm chosen by HMRC, to carry out further review of the documents identified as irrelevant demonstrated that PHL was confident that the original exercise had been completed accurately, fairly and completely; and (iv) that HMRC itself accepted that PHL's adviser correctly determined the parameters of four of the categories of documents as being irrelevant and had accurately identified the documents which fell within them;  and

(5) that paragraph 23, Schedule 36, provides a statutory exemption for privileged information.

The FTT, therefore, having considered the remaining categories of the documents withheld by PHL and their nature, concluded that none of the withheld documents were "reasonably required". 

In deciding to vary the Notice, the FTT considered that, had PHL appealed the Notice before the search exercise had been carried out, it would have set the Notice aside for being far too broad.    

Comment 

This decision is helpful in clarifying that whilst search terms can be referred to in an information notice issued under Schedule 36, FA 2008, strict parameters must be adhered to by HMRC. The FTT has demonstrated its willingness to reel HMRC in when it seeks documents which are not "reasonably required".  

Whilst each case will depend on its own facts and circumstances, it will be interesting to see whether this decision encourages HMRC to use search terms more often in Schedule 36 information notices. 

The decision can be viewed here.