Law firm sees off HMRC demand for records of clients’ offshore activities

HMRC: 10 notices issued to law firms so far

A law firm has fought off a demand by HM Revenue & Customs (HMRC) to hand over the details of clients who have sought advice on offshore structures, the prelude to similar requests to many more firms.

The first-tier tax tribunal held that the obligations on Salisbury firm Wilsons to keep records under the Money Laundering Regulations 2007 (MLR) did not make it a “data-holder” from which HMRC could demand information under its broad data-gathering powers in schedule 23 of the Finance Act 2011.

The notice sought “details of beneficial owners of offshore companies and persons who have beneficial interests in offshore partnerships, trusts and other like entities… where you, or an agent acting on your behalf, have or has provided services related to the formation of offshore companies, trusts and other entities or the creation of beneficial interests or the settling of funds in them for the whole period from 06/04/2013 to 05/04/2016 inclusive”.

Wilsons appealed the notice. Judge Barbara Mosedale said that Wilsons was the 10th solicitors’ firm on which HMRC had served one.

“HMRC regarded the service of these ten notices as a sort of test run with a view to serving similar notices on much larger numbers of firms in the future,” she recorded.

It told the tribunal that seven firms had complied, one had made a nil return which HMRC had accepted, and another had successfully appealed to HMRC on the basis that it was too onerous to comply.

However, Wilsons appealed the notice it had received – which excluded information protected by legal professional privilege – on the other two permissible grounds: that it was not a “relevant data-holder”, or the data specified in the notice was not “relevant data”.

The tribunal stressed that it was not being asked to draw “adverse inferences against Wilsons” for taking the stance that it had.

“For the avoidance of any doubt, I do not see how there could be any proper criticism of Wilsons Solicitors LLP in appealing the notice they received, rather than immediately complying with it.

“They owe a duty of confidentiality to their clients: it is only if the notice was a proper notice in accordance with the legislation that that their duty of confidentiality would be overridden.

“It was Wilsons’ right, and probably their duty to their clients, in circumstances where the law lacked clarity, to test whether the firm was obliged to give HMRC the information which HMRC sought.”

Schedule 23 identifies 20 types of mainly business activity and the extent to which someone carrying out that activity is a relevant data holder.

HMRC went after Wilsons under the ‘Licences, approvals etc’ activity: “A person by whom licences or approvals are issued or a register is maintained is a relevant data-holder.”

This was on the basis that, under the MLR, Wilsons maintained a register. The schedule defines a register as “any record or list that any other person is required or permitted to maintain by or under an enactment”.

HMRC argued that the enactment was the MLR, of which paragraph 19 required a person affected by the regulations to keep records.

Judge Mosedale considered the meaning of a ‘register’ at length, concluding: “A ‘register’ does not mean ‘records’. As ‘register’ is defined as a ‘record or list’, it is implicit that every ‘record’ referred to must be a register by itself.

“The MLR obliges a relevant person such as Wilsons to keep records; that is not an obligation to maintain a register unless it can be said that every record is a register… It is clear to me that ‘register’ does not simply mean any record…

“The obligation to keep copies of documents which evidence due diligence on clients is an obligation to keep (in the sense of preserve) records.

“But an obligation to keep (in the sense of preserve) records, which evidence a particular state of affairs, is not the same as an obligation to maintain (in the sense of keep up) a register, which records the names of persons or things meeting its criteria.

“It follows that its obligations under the MLR do not make Wilsons a relevant data-holder.”

The judge added that, even if she had been satisfied that Wilsons was a relevant data-holder, the definition of ‘relevant data’ meant she would not have found that Wilsons held any of it.

Mike Parker, managing partner of Wilsons, declined to comment.

An HMRC spokesamn said: “We are considering our position following the decision made by the tribunal.”

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