This month’s Chartered Accountants Tax Case Digest looks at the scope of the duty of confidentiality owed by HMRC in respect of the affairs of taxpayers. The point at issue was comments made by the Permanent Secretary for Tax in HMRC to a national newspaper in relation to a particular taxpayer.

The High Court and the Court of Appeal both rejected the appeal but the UK Supreme Court allowed it stating that HMRC owed a duty of confidentiality to the taxpayers in this case. The Court held that while HMRC’s statutory duty of confidentiality allows disclosure to an extent that is reasonably necessary to fulfil its function as tax collector, in this instance it was found that speaking to the media was not sufficient reason to do so.

Background

Ingenious Media Holdings plc (“Ingenious Media”) is an investment and advisory group which specialises in the media and entertainment industries. Its founder and Chief Executive Officer was Mr Patrick McKenna, who was formerly a senior partner of a global firm of Chartered Accountants.

Ingenious Media promoted film investment schemes involving film production partnerships which were devised by Mr McKenna and utilised tax relief which was available at the time. The group stopped marketing these schemes when the relief ceased to be available.

In June 2012, the Permanent Secretary for Tax in HMRC, Mr. David Hartnett, gave an interview to two financial journalists from the Times. The journalists had requested the meeting to discuss the topic of tax avoidance. While the meeting was recorded, it was agreed to be “off the record”.

The reasons given by Mr. Hartnett for engaging in the interview were that it was generally in the interests of HMRC to try to establish good relations with the press because such press coverage was a way to show HMRC’s views on tax avoidance schemes to the general public. A further reason given was that Mr. Hartnett thought the journalists might reveal some information of other tax avoidance arrangements which might be unknown to HMRC.

A week later, the Times published two articles in respect of tax avoidance involving film schemes and stated that Mr McKenna was one of two main providers of film investment schemes in the UK. The article went on to state that Mr. McKenna, along with another man, represented a threat and that the film schemes allowed investors to avoid at least £5 billion in tax. A portion of the direct transcript of the interview read as follows:

“Mr. McKenna, 56, founder of Ingenious Media, is also involved in a long-running Revenue inquiry into three of his partnerships.

‘He’s never left my radar,’ a senior Revenue official said of Mr. McKenna. ‘He’s an urbane man,…he’s a clever guy, he’s made a fortune, he’s a banker, but actually he’s a big risk for us so we would like to recover lots of the tax relief he’s generated for himself and other people. Are we winning? I would say, beginning to. I think we’ll clean up on the film schemes over the next few years.’”

The “senior Revenue official” was Mr. Hartnett who said many other things that were not quoted which included a description of film schemes as “scams for scumbags”.

At the time of the interview, HMRC was conducting a review of film schemes but had not taken a formal decision whether to challenge their validity.

Ingenious Media and Mr. McKenna brought forward a claim, by way of an application for judicial review, that the right to confidentiality by a taxpayer was breached by HMRC.

It was claimed that section 18 (entitled ‘Confidentiality’) of the Commissioners for Revenue and Customs Act 2005 was breached. This section states that:

“Revenue and Customs officials may not disclose information which is held by Revenue and Customs in connection with a function of the Revenue and Customs”

There are however instances where this does not apply. For example, section 18(2)(a)(i) states that it

“does not apply to a disclosure which is made for the purposes of a function of the Revenue and Customs”

In interpreting section 18, it was stated that HMRC’s entitlement to receive and hold confidential information about a taxpayer’s tax affairs is for the purpose of allowing it to assess and collect taxes from the taxpayer. Total confidentiality is a ‘vital element’ of the system. While it was acknowledged that section 18 does contain specific provisions allowing the disclosure of taxpayer information for other purposes, the definition of “for the purposes of a function of the Revenue and Customs” required further examination by the Court. While the wording might appear ambiguous and have far reaching implications, the principle in the case of R v Secretary of State for the Home Office, Ex p Simms [2000] 2 AC 115,131 which states that “fundamental rights to confidentiality cannot be overridden by general or ambiguous words” was noted to be of importance.

The Court commented that the 2005 Act was not drafted to envisage a case where an HMRC official would discuss its views of individual taxpayers in “off the record” discussions.

The meaning of ‘off the record’ also required consideration. It was referred to as an idiom which by definition can have several meanings. It could be intended to mean ‘strictly confidential’ or alternatively could mean ‘not to be directly quoted’. It had been argued that Mr. Harnett viewed the discussion as one to influence the journalists’ views when writing about matters affecting HMRC rather than as a piece that would be published following the interview. The Court stated that while disclosure of information may sometimes be allowed on a restricted basis, just because information is passed on in confidence does not mean that it is not a disclosure of confidential information.

Decision

The Court found that the information supplied by Mr. Hartnett to the journalists about Ingenious Media and Mr. McKenna was of a confidential nature and HMRC should have owed a duty of confidentiality to them. Section 18 is limited in scope but at the time of the interview, the tax consequences of the film schemes were under the consideration of HMRC and as these schemes were no longer viable from a tax perspective, the Court had difficulty seeing that the disclosures made by Mr. Hartnett were reasonably necessary for the purposes of HMRC’s investigations into the schemes.

The Court dismissed the justifications put forward by HMRC for speaking to the media in order to improve relations or foster a relationship in order to publicise HMRC’s views on tax avoidance schemes stating that it was impossible to justify a senior or any other official of HMRC discussing the affairs of taxpayers with journalists. It was the view of the Court that the possibility of the journalists revealing to HMRC information about further tax avoidance schemes was purely speculative.

With regards the ‘off the record’ element, the fact that Mr. Hartnett did not expect the comments to published was no justification for making the comments in the first place. The Court said that the matter of supplying confidential information to the media by HMRC was of serious concern. The Judge stated that she could not lay down a rule that information should never be passed to the media by HMRC and cited an example where an undercover operation by HMRC may be in danger of being destroyed by the media. In this instance, albeit exceptional, the HMRC might deem it necessary to speak to the press in confidence.

The Court found in favour of Indigenous Media and Mr. McKenna.

Full judgement is available here:

http://www.bailii.org/uk/cases/UKSC/2016/54.html