HM Revenue & Customs (HMRC) received 5 billion pounds ($6.4 billion) in revenue from civil and criminal tax fraud investigations in 2018. Investigations into fraud are big business for HMRC and HMRC take them seriously.
If they believe that a person or business has information which is relevant to their investigation they have powers to compel them to hand over that material. These requests can be time-consuming for an individual or business to comply with and often create tension between the recipient of the notice and the subject of the investigation, who are generally connected either as employee or client.
This article examines how to respond to a request for documents by HMRC and the balance between the competing interest of HMRC and third parties.
HMRC has the power to issue a disclosure notice to a person or business who they believe has information relevant to an investigation into tax fraud. In advance of serving a disclosure notice HMRC may invite the person or business to provide the material voluntarily. Sometimes voluntary disclosure may be appropriate but where, as is often the case, the material is held under an express or implied duty of confidence, the material should not be volunteered. In those circumstances, HMRC should be advised the material cannot be volunteered and can then consider whether to serve a disclosure notice.
Notification of the Subject
Where the material sought relates to another person, for example a client of the recipient’s business, the recipient must consider whether they can or should tell the person who is the subject of the investigation.
Sometimes there may be contractual or ethical reasons which compel a person or business to notify the subject. However, in every case care must be taken; it is an offense to notify, or “tip them off” the subject of a money laundering investigation (see section 333 of the Proceeds of Crime Act 2002).
This offense only applies to money laundering investigations and there is no general offense of tipping off for other types of investigation such as an investigation into tax fraud. Nonetheless, if tipping off is not an issue and the recipient of a disclosure request is required to notify the subject, they must tread carefully to ensure that whatever is done is not later misconstrued as an attempt to pervert the course of justice.
A practical way of dealing with this is to put the investigator on notice that the subject will be notified documents are to be disclosed. This gives the investigator the opportunity to take any necessary steps to prevent the investigation being prejudiced.
Complying with the Notice
The recipient should consider what steps would be required to comply with the notice. Are materials held in hard copy? Should material be retrieved from email accounts? Some notices suffer from very broad drafting and it may be unclear how extensive the production should be.
In every case, it is worth contacting the investigating officer in order to establish further background about what they are looking for, which will assist in better identifying the search parameters to be applied. If there is a large volume of electronic data, search terms, date ranges or limited custodians could be used to limit the amount of material considered. It is good practice to provide this information to HMRC when providing the documents.
A notice should not require a recipient to disclose material subject to legal professional privilege, material held subject to an express undertaking to a court or held under a duty of confidence in a banking business (in the latter case absent the consent of the subject, see above). The most complex of these exceptions is material relating to privilege, and advice should be sought prior to disclosure because the issue of what is or is not privileged varies widely between different jurisdictions.
Some relevant principles relating to privilege as it applies in the U.K. is that only legal advice given by lawyers is protected from disclosure (legal advice given by qualified accountants is not) and, unlike many other territories within Europe, communications giving or seeking advice by in-house counsel are protected.
An added complexity arises when, on receipt of a notice and examination of the documents to be provided, it is recognized that the recipient or an employee of the recipient may be implicated in criminal conduct. The protection from self-incrimination, which is reinforced by Article 6 of the European Convention on Human Rights, prohibits HMRC from requiring answers to questions that may tend to incriminate. However, this protection does not apply with such force to pre-existing documents, and in most circumstances these must be produced. Advice should immediately be sought about how to mitigate the impact of such a disclosure.
Where the notice is served on a U.K. branch or premises of a multinational business, advice should be sought as to whether the business is required to provide material held overseas. Until very recently lawyers had assumed that a disclosure notice served in the U.K. could only require a business to produce documents held in the U.K. The appropriate mechanism for obtaining material overseas was to make a formal mutual legal assistance request via diplomatic legal channels.
However, a recent decision of the Administrative Court puts that theory in doubt. In a case (R(on the application of KBR Inc) v. Director of the Serious Fraud Office  EQHC 2368 (admin)) concerning the Serious Fraud Office, the Administrative Court held that the investigator’s efforts should not be frustrated solely because material was stored on a server in a different jurisdiction.
The impact of this decision is that if a business has a U.K. presence, it may be required to produce material held overseas. This decision is subject to appeal to the Supreme Court and so advice should be sought about its applicability.
The recipient should also consider their obligations and liabilities under money laundering legislation. If a person or business receives a notice in relation to an investigation into fraud, the investigator’s suspicions are not automatically imputed to the recipient, but the information in the notice—perhaps combined with other information already known to the recipient—may cause the recipient to be suspicious of the subject of the investigation.
If the recipient of the disclosure notice holds or manages assets for the subject of the investigation, they should consider whether the information in the notice makes them suspicious, and if it does, they should consider whether to apply to the National Crime Agency for a defense against money laundering. If the recipient is a business in the regulated sector, a Suspicious Activity Report might be required.
In each case, one or all of the above factors may be present, and for that reason it is always worth seeking legal advice to ensure the notice has been correctly complied with, so that neither the subject of the investigation nor HMRC will have cause to complain whilst protecting the recipient from handing over information that they may not have a duty to do.
Jessica Parker is a Partner at Corker Binning, U.K.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.