FTT holds email search terms sufficient for Sch 36 information notices

FTT confirms in Parker Hannifin that Sch 36 information notice valid if request for information by reference to email search terms included

A look at the Parker Hannifin case

In Parker Hannifin (GB) Ltd v HMRC [2023] UKFTT 971 (TC), the First-tier Tribunal (FTT) held that a Schedule 36 notice requiring the taxpayer to disclose emails containing specified terms was sufficiently certain. However, most of the resulting emails were not reasonably required to check the taxpayer’s tax position. The FTT varied the notice accordingly.

HMRC may require a taxpayer to produce documents ‘reasonably required’ to check the taxpayer’s tax position (para 1(1) Sch 36 Finance Act (FA) 2008). HMRC must give the taxpayer written notice which ‘may specify or describe’ the documents to be produced (para 6(2)).

In Parker Hannifin, HMRC notified the taxpayer company that it was required to disclose emails of three directors from a specified period which contained specified terms. HMRC asserted that the emails were reasonably required to check whether deductions the company had claimed on the cost of borrowing under group refinancing arrangements were restricted by the ‘unallowable purpose rule’ in s441 Corporation Tax Act 2009.

The taxpayer instructed an external adviser. The adviser modified the search terms to exclude obviously irrelevant results without excluding relevant ones. Nonetheless, the modified search terms yielded 11,162 emails, of which 1,695 were identified as relevant by a two-tier review.

The company disclosed these emails and explained the methodology to HMRC. On the same day, HMRC replied that they required all 11,162 emails returned by the search. The taxpayer appealed.

On the appeal to the FTT, HMRC had to prove on the balance of probabilities that:

  1. The notice ‘specified or described’ the emails to be produced; and
  2. The emails were ‘reasonably required’ to check the taxpayer’s tax position.

The FTT found for HMRC on issue 1, explaining that emails containing specified search terms can validly be the subject of a Schedule 36 notice. The words ‘specify or describe’ require HMRC to identify the key characteristics of the documents, not their details or particulars. By specifying the email account holders, the dates and the search terms, HMRC had met this requirement.

As regards issue 2, it would have been impractical for the FTT to review all 11,162 emails to determine their relevance. The FTT had to take a pragmatic approach, drawing inferences where necessary.

The starting point was the ‘principle of self-certification’: a taxpayer can rely on its or a third-party assessment of relevance if circumstances allow. The rationale seems to be that if HMRC were the arbiters of relevance, it would be difficult for them to ‘unsee’ documents they deemed irrelevant and the FTT’s role would be too limited.

The FTT concluded that the circumstances entitled the taxpayer company to rely on its adviser’s assessment. The adviser carefully explained why most of the emails had not been disclosed, dividing them into categories and using examples to illustrate their irrelevance. The adviser acted professionally and in good faith (indeed, HMRC declined an offer to have the review certified by a third party). The FTT therefore inferred the irrelevance of the undisclosed emails without having to review them individually.

The FTT limited the notice to the emails already disclosed. It noted that it would have invalidated the notice entirely had the appeal been brought before the review exercise. This does not mean the exercise was unhelpful. On the contrary, had the FTT invalidated the notice then HMRC might have issued another notice that failed to take matters much further. By adopting the adviser’s ‘tried and tested process’ the taxpayer could manage disclosure more effectively.