Wilsons Solicitors LLP v HMRC [2018] UKFTT 627 (TC): HMRC’s failed attempt to obtain disclosure of client due-diligence

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Wilsons Solicitors LLP v HMRC [2018] UKFTT 627 (TC): HMRC’s failed attempt to obtain disclosure of client due-diligence

Published 10 June 2019

In a landmark case before the First Tier Tax Tribunal, DAC Beachcroft’s client, Wilsons Solicitors LLP, successfully defended proceedings brought by HMRC for disclosure of its client due-diligence documents (“CDD”).


HMRC’s case
In around 2015, HMRC approached a number of law firms, including Wilsons, with a view to obtaining their CDD in matters where the firm had advised in relation to the creation of offshore trusts. Such trusts have historically been used in order to mitigate tax liabilities on behalf of high net worth individuals.

A total of 10 law firms, including Wilsons, were served with formal Notices pursuant to Schedule 23 of the Finance Act 2011 (“Schedule 23”) requesting disclosure, on the basis that these firms were “Trust Company Service Providers” (“TCSPs”), as defined under the Act.

Schedule 23 provides HMRC with the power to seek information from “data-holders” to provide them with “relevant data”. The definition of “relevant data” depends on the class of “data holder” in any particular case and is set out in the Data Gathering Powers (Relevant Data) Regulations 2012 (the “2012 Regulations”). In summary, HMRC argued:- 

  1. As a TSCP, Wilsons “maintained” a “register” which for the purposes of paragraph 17 of Schedule 23 meant that the firm would be classed as a “data holder”. It said that by “maintaining” records of CDD, as required by the Money Laundering Regulations 2007 (“MLR”), this definition was met. It argued that “register”, defined under the legislation as “any record or list that any other person is required or permitted to maintain or by or under any enactment” would include the retention of client ID on individual matter files. It argued that a “register” did not have to be a single, composite document.
  2. The firm kept “relevant data”, which is defined at paragraph 15 of the 2012 Regulations as “the name and address of anyone…to whom an entry in the register relates or related”, “the particulars of…the entry” and “information relating to any …entry on that register”.

Wilsons considered that it had no option but to appeal the Notice, given its duty to preserve client confidentiality.


Wilsons’ position
Wilsons did not consider that Schedule 23 applied. It argued:-
  1. The MLR require firms to preserve CDD, but they do not go so far as to require firms to “maintain a register” consistent with the definition contained in Schedule 23 or to keep CDD records updated once a particular client matter had concluded;
  2. The definition of “register” was not met, because the firm’s records were not kept in a single document. The use of the single article (“a” register) meant that the legislation was intended to cover a single set of records, which the firm did not keep, nor was it required to do so;
  3. Accordingly, the ordinary meaning of “register” was not met. The legislation had in mind a definitive register of records, such as the Companies Register;
  4. Because “relevant data” referred to data held in a “register” it followed that this definition was not met either.


Outcome 
Wilsons’ appeal was allowed in full when the case reached a final hearing in September 2018. In summary, the Judge held:-
  1. The MLR oblige firms to keep “records” but that concept does not include and is distinct from a “register”; 
  2. A “register” is more than a record and firms are not required to keep a “register”, applying the ordinary meaning of that term, in relation to its CDD;

  3. Accordingly, the definition of “relevant data” was irrelevant but in any event “relevant data” could only include an entry in a register, and not merely a record. Even if therefore Wilsons were found to have maintained a “register”, Wilsons would not in any event have been found to be a “relevant data holder”.

  4.  The Judge concluded, therefore, that the Notice was “wholly incorrect” and “simply invalid”. HMRC has not appealed the decision and Wilsons has been awarded a proportion of its costs.

 

Comment

Wilsons found itself in an invidious position. It was forced to fund its appeal in order to protect client confidentiality. It did so because it took a principled stance, cognisant of the potentially wide ranging consequences of a decision in HMRC’s favour, not just for Wilsons but the profession as a whole.
The decision brings welcome clarity for firms, particularly those advising clients in relation to their tax arrangements, in relation to HMRC’s rights to disclosure.
We predict that HMRC will continue to look for new and creative ways to try to circumvent client confidentiality, albeit it is hoped that the outcome will deter HMRC from further attempts to interfere with one of the most important aspects of the solicitor/client relationship.
 The decision can be viewed here

Authors

Tom Bedford

Tom Bedford

Newport

+44 (0) 1633 657 680

Clare Hughes-Williams

Clare Hughes-Williams

Newport

+ 44 (0)1633 657685

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