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Beneficial ownership of offshore companies and trusts – HMRC data-holder Notices to firms

17 January 2017

Firms which advise clients on the establishment of offshore companies or trusts may shortly receive a letter from HMRC seeking information about beneficial ownership or interests. The letter will precede a formal Notice which is likely to follow no less than two weeks later.

The Law Society would like to hear from any firm which receives such a letter or Notice - please contact Ronan Casey.

The Law Society understands that HMRC will be issuing Notices to a number of trust and company service providers under Schedule 23 of the Finance Act 2011.

A Notice will seek:

  • the name and address of any client seeking to create an offshore entity;
  • the entity details (name, jurisdiction, date of registration); and
  • details of persons with beneficial ownership or interest in the entity and the nature of the benefit or interest.

The Law Society's view is that it is likely to be rare for UK-based solicitors to establish offshore companies or trusts, and that where solicitors are consulted to advise in relation to the establishment of such trusts, they may not necessarily be aware of the identity of the relevant beneficial owners.

If a solicitor has a suspicion that tax is being evaded, they are under a duty to report that activity in the form of a Suspicious Activity Report to the National Crime Agency.

Legal Professional Privilege (LPP)

HMRC has confirmed to the Law Society that it is not seeking material that is covered by legal professional privilege. HMRC has accepted in correspondence with the Law Society that its powers under Paragraph 17 of Schedule 23 to the Finance Act 2011 do not override legal professional privilege.

Nevertheless, a firm must satisfy itself as to whether compliance with such a Notice would be compatible with a client's right to legal professional privilege (which right may of course be waived by the client but not by the firm or any solicitor).

HMRC's position is that, as it is asking for information about 'transactions' rather than 'advice', it does not consider that LPP will be engaged. Having taken counsel's advice, the Law Society does not share that view. The Law Society's guidance to firms is that, because HMRC's request is likely to be related to advice that clients have sought (for example, in relation to the establishment of an offshore company or trust), LPP is very likely to be engaged. This is consistent with the decision of the House of Lords in Three Rivers District Council v Governor and Company of the Bank of England(No 6) [2004] UKHL 48, [2005] 1 AC 610 in which Lord Carswell said at [111]:

"… all communications between a solicitor and his client relating to a transaction in which the solicitor has been instructed for the purpose of obtaining legal advice will be privileged, notwithstanding that they do not contain advice on matters of law or construction, provided that they are directly related to the performance by the solicitor of his professional duty as legal adviser of his client."

Right of appeal to the Tribunal

The Law Society believes that compliance with a Notice may well be disproportionately onerous because most firms maintain records by client rather than by area of advice. Paragraph 1 of Schedule 23 envisages registers of names being kept in a way which is unlikely to be applicable to how law firms maintain client data.

If it is the case for any individual firm faced with a Notice that it believes that compliance would be unduly onerous, it is open to the firm to exercise the right of appeal provided by Schedule 23, paragraph 28 of the Finance Act 2011.

The Law Society also notes that paragraph 34(1) of that Schedule provides that liability to a penalty under paragraph 30 or 31 does not arise if the data-holder satisfies HMRC or (on an appeal notified to the tribunal) the tribunal that there is a reasonable excuse for the failure. The Law Society believes that a well-founded claim to LPP provides such a reasonable excuse.

The Law Society understands why HMRC regards such demands for information as being in the public interest. It is, however, also a matter of settled law that when a balance is to be struck between competing public interests, predominance is to be given to legal professional privilege (see R v Derby Magistrates Court ex parte B [1996] AC 487).

Neither the Law Society nor individual law firms will wish to be in conflict with HMRC. Nevertheless, the Law Society has informed HMRC that it will vigorously defend and protect legal professional privilege by all possible means, including litigation as necessary (for example, see the Society’s intervention in Three Rivers District Council v Bank of England [2004] UKHL 48, R (Watson and others) and the Secretary of State for the Home Department [2015] EWCA Civ 1185).
 

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