Tribunal refuses HMRC's application for specific disclosure from taxpayer

In Coopervision Lens Care Ltd v HMRC [2024] UKFTT 00351 (TC), the First-tier Tribunal (FTT) refused HMRC's application for specific disclosure commenting that the order sought by HMRC was unclear, disproportionate and inappropriate.

Background

In February 2021, HMRC issued determinations to Coopervision Lens Care Ltd (CLC) for PAYE arising in respect of a disposal of shares. CLC appealed the determinations to the FTT.  

In the course of the appeal proceedings, after service of CLC's witness evidence, HMRC applied to the FTT for a direction requiring CLC to disclose additional documents (having been unable to agree and obtain such disclosure from CLC).

Appendix Three of the application contained the disclosures requested from CLC, which were split into four categories. Later, after the disclosure application hearing was listed, HMRC filed a skeleton argument and produced an amended draft order for disclosure.

FTT decision

The application was refused.

HMRC failed to persuade the FTT that it should exercise its discretion to require CLC to produce further documents. The FTT was guided by the approach to disclosure adopted by the FTT in Royal Bank of Scotland Group plc [2020] UKFTT 321 (TC).  

The FTT commented that, in general, HMRC's approach was unclear and both CLC and the FTT were, in effect, being asked to consider a somewhat different order to that originally sought by HMRC and to interpret HMRC's skeleton argument in the context of its oral submissions.

The FTT considered the scope of the disclosure requested before analysing each category of document sought by HMRC.

Scope of disclosure

HMRC requested that CLC "carry out a reasonable and proportionate search of its databases". CLC argued that this lacked clarity as it was not clear what "its databases" might be and that such an exercise would be disproportionately onerous and costly to undertake, particularly so close to the hearing date.

The FTT agreed with CLC that HMRC's request was not clear and disagreed with HMRC that CLC would have undertaken most of the required searches as part of preparing its witness evidence. The FTT noted that there is a significant difference between, firstly, searching for and locating documents to which an individual wishes to refer and, secondly, searching for and locating all documents, including correspondence between third parties which that individual might not have been copied into and might not be aware exists. The FTT therefore found that, on balance, the scope of disclosure sought by HMRC would involve a significant amount of time and cost to CLC and might well jeopardise the hearing date. The FTT considered this to be a relevant factor when considering the disclosure requests in light of the overriding objective.

Categories of documents

Category 1

In the first category HMRC sought "copies of communications which relate to or include any discussion in 2014 of the sale price, the structure of the sale price, the division of the sale price as between the shareholders, and/or a separate payment for restrictive covenants".

The FTT held that the documents sought under this category did not meet the threshold for ordering disclosure and considered that it had not been demonstrated that the communications described and requested by HMRC would reasonably be required by the FTT in order to enable a fair determination of the issues to take place to the extent that they relate to the negotiation of the share price as argued by HMRC.

The FTT also considered that it would not be proportionate to require disclosure of these communications only a few months before a hearing that had been listed for some time in circumstances where HMRC had the underlying prompt for its disclosure request for years and with no explanation for the delay. The FTT said that this was particularly relevant since postponement of the hearing would likely mean a delay of months, if not more than a year, in finding suitable alternative dates.

Further, the FTT considered this category by reference to the issue of carelessness, which had been advanced by HMRC. Again, the FTT held that it had not been established that the documents sought on this issue were reasonably required by it in order to fairly determine the issues in the appeal. The FTT stated that none of the documents sought would clearly relate to the adequacy of, or reliance on, PAYE advice sought by CLC, or the instructions given to advisers in relation to the carelessness issue.

Category 2

In the second category, HMRC sought "copies of communications and advice relating to the structure of the deal and/or the PAYE issue".

The FTT held that, given the lack of clear explanation as to the relevance, and why the documents that CLC had already disclosed were insufficient, it had not been established that the FTT reasonably required further documents relating to the deal structure in order to determine the issues which would be determined at the substantive appeal hearing.

The FTT was not convinced by HMRC's submissions and held that HMRC had not established, in the context required by the relevant case law, that disclosure would provide information which was reasonably required in order for the FTT to reach a fair determination of the issues before it. For example, the FTT noted that HMRC did not explain why it was seeking disclosure of communications involving the shareholders, the EY individuals specified, or indeed the core team members other than one of the witnesses.

Category 3

In the third category, HMRC sought "copies of communications relating to the PAYE issue" between CLC's director and Chief Financial Officer.

The FTT held that HMRC's submissions in relation to this category, amounted to an assumption that there must be further written communication and an assumption that such written communications would be materially relevant to issues which the FTT had to decide. As such, the FTT considered the request to amount to no more than a "fishing expedition".

HMRC had also, again, failed to establish in the context required by the relevant case law, that the disclosure sought would provide information reasonably required to enable the FTT to reach a fair determination of the issues.   

Category 4

In the fourth category, HMRC sought "copies of communications relating to the PAYE issue" between CLC's director and its solicitors.

As with the third category, the FTT held that HMRC had made a series of assumptions that material existed and that the material would be relevant and reasonably required by the FTT. In the FTT's view, the assumptions were not supported by the facts.

In any event, such documents would in all likelihood be excluded from disclosure on the grounds of legal professional privilege.

The FTT therefore, considering the overriding objective, concluded  that it would be inappropriate and disproportionate to order disclosure of documents referred to in this category.

Comment 

This decision contains a helpful discussion of the factors the FTT is likely to consider when determining an application for specific disclosure. Any such application should be framed in a way that is sufficiently clear, proportionate, and reasonable, in all the circumstances, otherwise it is likely to fail.

This case also highlights that, as a matter of good practice, any assumptions that underpin the specific disclosure being sought must be properly supported with sufficient explanation.  HMRC will not be permitted to simply embark upon a fishing expedition.

The decision can be viewed here.