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Comparing the reach of the SFO and HMRC

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The Supreme Court has handed down judgment in the case of R (on the application of KBR, Inc) v Director of the Serious Fraud Office [2021] UKSC 2 (KBR) concerning whether the Serious Fraud Office (SFO) can require a foreign company to produce documents held overseas, pursuant to its investigation powers under s 2(3) of the Criminal Justice Act 1987.

In a unanimous decision, the Supreme Court allowed the ‘leapfrog’ appeal from the High Court, holding that the SFO does not have power to compel the production of documents in those circumstances. The Supreme Court found that Parliament had intended for evidence to be gathered from other jurisdictions by way of bilateral agreements, instead of conferring on the SFO such broad, extra-territorial powers.

In reaching its conclusion, the Supreme Court rejected the SFO’s argument that its position was analogous to that of HMRC, as considered in R (on the application of Jimenez) v HMRC [2019] EWCA Civ 51.

In Jimenez, the Court of Appeal held that HMRC does have power under FA 2008 Sch 36 to issue a compulsory information request to a person based outside the UK, for the purpose of checking that person’s tax position. Permission to appeal the decision was granted in June 2019, but a hearing date has not been fixed by the Supreme Court.

In Jimenez, the Court of Appeal concluded that Parliament could not have intended taxpayer notices to operate within an entirely domestic sphere, given that a large number of UK taxpayers would be persons resident outside the UK, and that there were often cross-border aspects to tax non-compliance.

The Supreme Court in KBR did not address the pending appeal in Jimenez. Neither did it comment on whether it was correctly decided. However, the Supreme Court distinguished Jimenez based on the following two factors (neither of which were present in KBR).

First, the powers conferred on HMRC under the Finance Act were expressly limited to checking the taxpayer’s tax position. Thus, these powers were only exercisable in relation to someone who is or may be a UK taxpayer, and therefore had an identifiable relationship with the UK. This was not the case in KBR, which led to the import of a judicially developed ‘sufficient connection’ test by the High Court.

Secondly, non-compliance with an information notice issued by HMRC was not made a criminal offence under the Finance Act, therefore the presumption that a statute should not be construed as rendering conduct abroad a criminal offence was inapplicable. Conversely, under the Criminal Justice Act, a person who, without reasonable excuse, fails to comply with the s 2(3) notice commits a criminal offence. 

Nick Clayton & Erica Li, Herbert Smith Freehills

Issue: 1520
Categories: In brief