Introduction

The decision in Cliftonville Consultancy Ltd v. Revenue and Customs [2018] UKFTT 231 (TC) addresses the critical issue of the burden of proof in the context of HMRC's information notices under paragraph 1 of Schedule 36 to the Finance Act 2008. Cliftonville Consultancy Ltd ("Cliftonville") contested an information notice that mandated the provision of extensive documents related to their use of a tax avoidance scheme known as the Dividend Replacement Strategy (DRS), also referred to as Aikido. This case is pivotal in understanding the delineation of responsibilities between HMRC and taxpayers when scrutinizing tax positions under suspected avoidance schemes.

Summary of the Judgment

The First-tier Tribunal (Tax Chamber) dismissed Cliftonville's appeal against HMRC's information notice, albeit with variations to certain document requests. Cliftonville argued that the information requested was not reasonably required for HMRC to check its corporation tax position. The Tribunal, however, upheld HMRC's stance that the requested information was necessary to ascertain the accurate implementation and tax implications of the DRS. Importantly, the Tribunal affirmed that the burden of proof lies with HMRC to demonstrate that the information and documents are reasonably required, a significant affirmation of HMRC's investigatory powers under Schedule 36.

Analysis

Precedents Cited

The Judgment extensively references prior case law to shape its reasoning. Notably:

• Joshy Mathew v HMRC [2015] UKFTT 139 (TC): This case initially examined the burden of proof in the context of HMRC's information notices, concluding that the burden rested on the appellant unless HMRC provided sufficient evidence.
• Derrin Brother Properties Ltd v HMRC [2014] EWHC 1152 (Admin): This Court of Appeal decision introduced the concept of a "combined view" when assessing HMRC's burden of proof, especially concerning third-party notices.
• R v Commissioners of Inland Revenue ex parte T C Coombs & Company [1991] 2 AC 283: Established the presumption of regularity, meaning that HMRC's actions are assumed lawful unless proven otherwise.
• New Way Cleaning Limited v HMRC [2017] UKFTT 293 (TC): Reinforced the position that HMRC bears the burden of proof in demonstrating the necessity of information requests.

These precedents collectively fortify the Tribunal's position that HMRC must substantiate the reasonableness of its information requests, particularly under Schedule 36.

Legal Reasoning

The Tribunal's reasoning centered on interpreting the statutory provisions of Schedule 36 to the Finance Act 2008. Key points include:

• Burden of Proof: The Tribunal affirmed that HMRC holds the burden of proving that the requested information is reasonably required to check the taxpayer's tax position. This aligns with the general principles of civil litigation, where the party making the assertion bears the burden of proof.
• Presumption of Regularity: Drawing from Coombs, the Tribunal recognized that HMRC's actions are presumed lawful, requiring protesters to provide compelling evidence to refute this presumption.
• Combined View from Precedents: Incorporating insights from Derrin, the Tribunal adopted a holistic approach, considering both the decision-making process of HMRC and the supervisory role of the Tribunal in approving notices.
• Specificity of Requests: The Tribunal evaluated each item in the notice to ensure that it directly pertains to assessing the corporation tax position, thereby filtering out requests that delve into individual tax matters irrelevant to the company's tax obligations.

Through meticulous analysis, the Tribunal delineated the boundary between company tax positions and individual tax implications, ensuring that HMRC's inquiries remained within the scope of legislative intent.

Impact

This Judgment has profound implications for future tax appeals and HMRC’s investigatory practices:

• Clarification of Burden of Proof: Solidifies the principle that HMRC must demonstrate the necessity of information requests, thereby safeguarding taxpayers from unwarranted intrusions.
• Enhanced Scrutiny: Encourages HMRC to ensure that their information requests are meticulously targeted and justified, reducing the likelihood of excessive data demands.
• Guidance for Taxpayers and Practitioners: Provides a precedent that can be referenced in similar cases, offering clarity on the limits and obligations in responding to HMRC notices.
• Influence on Legislative Interpretation: May inform future legislative amendments to Schedule 36, emphasizing the balance between HMRC's need for information and taxpayer's rights.

Overall, the Judgment fosters a more accountable and transparent relationship between HMRC and taxpayers, ensuring that investigations are conducted within the framework of fairness and legal propriety.

Complex Concepts Simplified

Dividend Replacement Strategy (DRS) / Aikido

The DRS, also known as Aikido, is a tax avoidance scheme where a company (Holdco) pays dividends through an intermediate entity (Subco) placed in a trust (IIP trust). This arrangement can potentially shift the tax liability from shareholders to the company if structured favorably, exploiting differences in tax rates.

Schedule 36 Information Notice

Under Schedule 36 of the Finance Act 2008, HMRC can issue notices requiring taxpayers to provide specific information or documents to verify their tax positions. Paragraph 1 empowers HMRC to demand such information if deemed "reasonably required" for tax checks.

Presumption of Regularity

This legal principle assumes that governmental authorities act lawfully and within their powers unless proven otherwise. In this context, HMRC's issuance of a notice is presumed legitimate unless the taxpayer successfully challenges its validity.

Burden of Proof

In legal disputes, the burden of proof refers to the obligation to present evidence to support one's claims. Here, the Tribunal determined that HMRC must prove that the information requested is necessary for verifying the company's tax position.

Judicial Review vs. Tribunal Appeal

Judicial review is a process where courts examine the lawfulness of decisions or actions made by public bodies. In contrast, a tribunal appeal involves an independent body reviewing specific decisions. This case highlights the interplay between these mechanisms in overseeing HMRC's powers.

Conclusion

The Cliftonville Consultancy Ltd v HMRC Judgment marks a significant affirmation of HMRC's burden of proof in issuing Schedule 36 information notices. By compelling HMRC to substantiate the necessity of its information requests, the Tribunal ensures a fairer investigative process that respects taxpayer rights. This decision not only clarifies the responsibilities of taxing authorities but also provides a robust framework for taxpayers to challenge undue or unfounded information demands. As tax avoidance schemes become increasingly sophisticated, such jurisprudential milestones are crucial in maintaining equity and accountability within the tax system.