Michael Thomas looks at the legal issues surrounding Taxes Management Act 1970, s. 20: Article published in the April 2002 issue of Tax Adviser. Michael Thomas, Barrister, Gray’s Inn Tax Chambers.
We live in an age where information is supposedly the new currency and the state increasingly purports to control all aspects of our lives. Against this background it is inevitable that the information gathering powers of the Inland Revenue are assuming ever greater importance. Readers will be familiar with the Court of Appeal’s decision in R v IR Commrs ex.parte Morgan Grenfell
 STC 497 that taxpayers may be obliged to hand over documents which attract legal professional privilege under of the Taxes Management Act 1970 (TMA 1970), s. 20(1). An appeal to the House of Lords is awaited with interest, but Morgan Grenfell is only the latest in a long line of cases where the Revenue’s information-gathering powers have been interpreted broadly.
The purpose of this article is to discuss the practical impact of the Revenue’s increasing use of the power contained in s. 20(1) to compel taxpayers and others to produce information.
To understand the significance of s. 20 we need to place it in context. At one level s. 20 is simply a procedural power to ensure that all the relevant facts are out in the open. The purpose of all procedural rules is to produce rectitude of decision: the proper application of the law to the correct facts. So, like any other procedural power s. 20 exists to help bring about the correct outcome in each case. But while the Revenue’s s. 20 powers can be used for a ‘discovery exercise’ to elicit the relevant facts they are not simply an ordinary rule of civil procedure. Rather, as Simon Brown LJ spelt out in R v IRC ex parte Ulster Bank Ltd  BTC 314, they are ‘essentially investigatory powers’ belonging to central government and of the same species as powers to investigate fraud. The courts have consistently viewed s. 20 in this light: for example, the Court of Appeal in Morgan Grenfell described s. 20 as an investigatory power to counter abuses of the tax system. Accordingly, it is no surprise that the courts have interpreted the Revenue’s powers very broadly and been reluctant to interfere with their discretion because to curtail s. 20 powers would impact upon the scope of other governmental powers used to investigate fraud, money-laundering and terrorism.
The increased importance of TMA 1970,s. 20 also follows two recent trends. Firstly, in the modern tax system based as it is upon self-assessment the onus is increasingly upon the taxpayer to provide the state with full disclosure of the relevant facts. Secondly, a central theme of the new Civil Procedure Rules adopted to implement the Woolf reforms is that the parties should get all the facts and the areas of dispute out in the open at the earliest opportunity. The rationale is that this promotes early settlement, but one effect of this is that it front-loads the litigants’ costs.
Probably the most significant effect of the increased use of s. 20 on ordinary practice is the increased pressure it will bring on the taxpayer to settle at an early stage. Accordingly it is necessary to take a view as to the strength of the taxpayer’s case close to the outset of the dispute and make an early decision as to the appropriate strategy. If the taxpayer has a strong case then often the best strategy will be to provide the Revenue with all the information and, if they do not agree with the legal analysis, to take the case to the Commissioners without wasting further costs. If counsel are required it may be appropriate to consult them earlier rather than later.
As the courts have made plain, the use of these powers will be largely governed by the Revenue themselves. In this respect the relevant chapter of the Revenue Manuals is written in very sensitive and well-balanced terms and provides comforting reading for any adviser concerned about s. 20. In particular, reference is made to the assurance given in Parliament that the powers will not be used for ‘fishing expeditions’. The Revenue also state that they will not normally ask to see legal advice given to the taxpayer.
One reason for the Revenue tending to succeed before the courts in this area is the relatively cautious approach which they have taken. If the Revenue do become more aggressive then the courts are likely to start imposing more limits. Moreover, even if the Revenue do ask to see legal advice, just because it may say something to the effect of ‘if we do the transaction this way we can avoid tax’ this does not actually affect the strength of the taxpayer’s case before the Commissioners, unless of course a motive test is in issue.
Just because something is done for tax reasons does not mean that the Revenue will win as is made clear by, to take but one example, the House of Lords’ decision in Ingram v IR Commrs  BTC 8,047. The courts are well aware that people do things to avoid tax and it is important that taxpayers should not be overly concerned about having to disclose that.
In this article I have been considering TMA 1970, s. 20 in the ordinary civil case. Needless to say if there are criminal law issues then it becomes a different game altogether. If prosecution is a risk then it is important for the adviser to remember that information obtained under compulsory powers cannot be used in subsequent criminal proceedings after Saunders v United Kingdom (1996) 23 EHRR 313. An interesting point is that the European Court of Human Rights has also decided that significant tax penalties are criminal so, arguably, information obtained under s. 20 cannot be used in subsequent penalty proceedings.
Thus in my view the increased use of s. 20 powers should not cause tax advisers too much concern. What it does do is to follow the trends of front-loading costs and putting the burden on the taxpayer to provide the Revenue with information. This will affect the way in which tax advisers approach disputes because it is increasingly necessary to take an early view as to the strength of the taxpayer’s case and, where appropriate, to back that view by appealing to the Commissioners rather than wasting time and costs in correspondence and arguing about facts. It is hoped that the net result will be beneficial to taxpayers.
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April 2002 by