HMRC fails to obtain client data from law firm

Posted on 22 November 2018

HMRC fails to obtain client data from law firm

One of Her Majesty's Revenue and Customs' ('HMRC') most powerful investigation tools are the information powers that it is granted through various pieces of legislation. HMRC can exercise these powers broadly - to assist them with the efficient and effective discharge of their tax functions.

Schedule 23 of the Finance Act 2011 ('Schedule 23') enables HMRC to require a "relevant data holder" to provide "relevant data".

The recent First-tier Tribunal ('Tribunal') case of Wilsons Solicitors LLP v The Commissioners for Her Majesty's Revenue and Customs [2018] concerned an appeal by Wilsons Solicitors LLP ('Wilsons') against a Notice issued by HMRC under Schedule 23 for a list of clients holding beneficial interests in offshore entities. Since 2016, corporate entities have been required to maintain details of their beneficial owners in their own register.

At the heart of the appeal was the contention by HMRC that the duty under the paragraph 19 Money Laundering Regulations 2009 to maintain records was the same as the duty under paragraph 17 of Schedule 23 to maintain a register.

HMRC argued that:

i) a relevant data holder includes a person by whom a register is maintained; and

ii) all records are registers, therefore the requirement to keep records of transactions and individuals in compliance with their obligations under the Money Laundering Regulations (MLR) meant that the law firm satisfied this test.

The issue for the Tribunal was whether the records kept under MLR could constitute a register for the purposes of Schedule 23.

The Tribunal held that is was important to consider the choice of words by the draftsman, and concluded that a person who keeps records should only be considered as falling within the relevant section of Schedule 23 if it was appropriate to deem each record as an individual register.

Further, the Tribunal found that HMRC's definition of register was too broad and that the word had a narrower meaning than record.

The Tribunal went on to consider the use of the word 'maintenance' within paragraph 17 of Schedule 23. A distinction was drawn between something that was kept up to date for continued use and something that was merely accurate at the time it was recorded.

On the basis that a record of a transaction for MLR purposes should remain unaltered, the Judge in allowing the appeal formed the view that any record of a transaction by the firm was not maintained, and ultimately held that the firm's obligations under MLR did not make it a relevant data holder.

What at first might be seen as a minor matter becomes more significant when one bears in mind the reason for HMRC's request, which was to seek details of clients' beneficial interests in offshore entities. It appears from the Wilson case that the Government, through more unusual routes, are exploring other more direct means of supplementing information which they would not otherwise have access to.

It is important to note that this is a decision of the First-tier Tribunal and therefore is not authoritative. It remains to be seen whether HMRC will appeal this decision. However, as concerns grow as to the methods adopted by HMRC to collect data on individuals, this case serves as a welcome reminder that it is important to consider the language and intent of the legislature when assessing your obligations under data protection law.

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