When is a record not a register?

In a recent decision the First-tier Tribunal (Tax Chamber) ruled that a novel demand by HMRC for certain records retained for Anti-Money Laundering purposes was not lawful because of the way those records were structured.
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The Background

As part of HMRC’s fight against money laundering, we are seeing increasingly creative methods of gathering information that HMRC would otherwise struggle to obtain. Here, HMRC served a request notice served under paragraph 1 of schedule 23 to the Finance Act 2011 (the Notice) against Wilsons Solicitors LLP (Wilsons). Under the Finance Act 2011 (FA 11) the only data that can be sought by such a notice is Relevant Data, which in this case was data held in a register that is maintained.

HMRC contended that the records Wilsons are required to keep under section 19 of the Money Laundering Regulations 2007/2157 (ML Regs) would qualify as a register for the purposes of the FA 2011 and so should be produced to them under the Notice.

Accordingly, the Notice sought details and names of beneficial owners of “offshore partnerships, trusts and other like entities” where Wilsons, or an agent on its behalf, had 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”.

Wilsons appealed against the Notice principally on the basis that the data that HMRC had requested was not “Relevant Data” as defined under the Finance Act 2011 (FA 2011). Wilsons contended that as the data they collected under the ML Regs was held disparately as records, and not in a register, it did not constitute Relevant Data as defined under the FA 2011.

The Decision

It was decided in the First-tier Tribunal that copies of records required under the ML Regs in this instance did not qualify as Relevant Data. As the records are not entries on a register, nor were they maintained by Wilsons (but simply kept - as required under the ML Regs), HMRC cannot obtain these documents using a notice served under schedule 23 of the FA 2011.

It was persuasive for Ms Mosedale J that if HMRC were right, and any record constituted a register, then any taxpayer might expect to receive a Schedule 23 Notice because any record would qualify as a register, and therefore Relevant Data.

On this basis, Ms Mosedale J considered the Notice to be “simply invalid” rather than incorrect as to its description of what a record is and so HMRC’s request that the Notice be varied was refused.

Points of interest

This case is interesting for three reasons:

  1. It is clear that HMRC are becoming increasingly creative as to how they obtain documents and records. Indeed, it was evident from submissions made by HMRC that the Notice was one of 10 notices issued to varying law firms as a test to see whether or not such action could result in an additional way to obtain information from larger firms. Seven firms complied, one made a nil return, and one successfully claimed a separate statutory exemption (that their notice would be too onerous to comply with).
  2. Companies providing services that are likely to be of interest to HMRC should carefully consider the structuring of their data in light of their regulatory obligations. The way their data is structured may allow for regulators to inventively demand documentation using different statutory mechanisms.
  3. This case provides a timely warning that companies should not simply provide the data of their clients, employees, or firm upon demand, but should as a first step seek to interrogate the statutory basis upon which the regulatory or enforcement agency is seeking to obtain this data. Ensuring that data is only collected by way of a proper use of a body’s statutory powers is in the best interests of the individuals who own the data concerned.

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