HMRC, the Panama Papers and the use of leaked information

Last week at the Society of Legal Scholars conference in Oxford, Michael Dirkis of the University of Sydney presented a paper entitled Having your cake and eating it too: The role of the judiciary in facilitating the effectiveness of exchange of information agreements and imposing limitations on the use of the information obtained’. Professor Dirkis’ paper compared the approach in different jurisdictions towards the legality of revenue authorities’ using information given to them from, for instance, whistleblowers. The timing of the presentation coincided with the revelation that the Danish Tax Authority would pay £1mil for secret financial information on hundreds of Danish nationals. The data itself is said to relate to the now infamous Panama papers leak.

Could HMRC do the same?

The first thing to note is that this is not the first time that a revenue authority is thought to have paid for tax information: Germany, the UK and France are thought to have done so in the past. Moreover, information given to HMRC from ‘interested’ third parties is a significant well from which the body draws when deciding whether to initiate investigations.

Other than the practicalities however, two questions of legality arise. First, is HMRC prevented from using the information due to the privacy rights of the individuals concerned? That is a question of international rather than national law. Put this way, countries are sovereign. The laws of one country do not apply in another country unless there is a specific provision providing that the second country allows itself to be so bound in certain circumstances. Thus, this might arise if there were a provision in the double tax treaty between the UK and Panama that it would not use confidential information. Whilst the DTT between the two countries does contain provisions on the use of information exchanged between the two revenue authorities, it is silent on the issue of information provided by other sources in those countries (see: here). Thus, HMRC is not legally impeded from using the information concerned. (However, the ability to rely in court upon information transmitted to HMRC from a leak is a separate issue, and the difficulty in verifying the veracity of the information obtained may explain HMRC’s apparent reluctance in recent years to pursue criminal prosecutions in light of the Falciani disclosures. Nevertheless, the reason that HMRC only pursued one prosecution in that case remains unclear)

What about the legality of paying for information?

The legality is determined by the scope of HMRC’s collection and management powers (most important in this respect is Commissioners for Revenue and Customs Act 2005, s.5). In the Fleet Street Casuals case, it was pronounced by Lord Diplock that this endowed the Revenue with:

“a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection.”

More recently in Gaines-Cooper, it was cited that this discretion permits the use of cost-benefit analysis:

“In particular the [R]evenue is entitled to apply a cost-benefit analysis to its duty of management and in particular, against the return thereby likely to be foregone, to weigh the costs which it would be likely to save as a result of a concession which cuts away an area of complexity or likely dispute” (para 26 (Lord Wilson))

HMRC’s collection and management powers allow the body, inter alia, to settle tax disputes, gives them flexibility in respect of what test cases to take, and to make prudent arrangements for the smooth collection of tax which may result in less tax than is strictly owed under the law. Whilst most obviously, HMRC’s discretion allows the body to collect less tax than is due, there is no reason why, taking Lord Wilson’s words to their natural conclusion, the body could not apply this cost-benefit analysis to the purchase of information from a whistleblower. HMRC is entitled to invest in upgrading technological equipment which will facilitate the collection of tax. There is no difference in principle with investing in information that can be used to collect more taxes that are due. This is predicated on the assumption that the leaked information could actually be used and that HMRC would have verified that the information itself was not faked, but this seems to be precisely what the Danish Tax Authority verified prior to agreeing to purchase the information. Furthermore, s. 26 of the Commissioners for Revenue and Customs Act 2005 explicitly provides that the ‘Commissioners may pay a reward to a person in return for a service which relates to [an HMRC] function’.

The source of the information was careful to only give the information to the Danish authority which concerned Danish individuals. It is unlikely that HMRC investigations could simply piggy-back on the Danish ones. HMRC would have to actually cough up for the information which relates to the UK. Perhaps the most prudent move for now might be for HMRC however to wait to see what comes of the Danish investigations. If they are successful, then HMRC will know the utility of the leaked data.

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About taxatlincolnox

Tax PhD candidate, College Lecturer and Tutor at Oxford University; Researcher at King's College London and Social Sciences Tutor with the Brilliant Club. With this blog, I seek merely to contribute to the debate. All thoughts are mine, of course.
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One Response to HMRC, the Panama Papers and the use of leaked information

  1. Also, a very interesting paper was given at the IFS seminar last week, regarding ‘The implications of Recent Additions to HMRC Powers and the Shifting Balance in the Relationship with taxpayers’ (not an official publication).

    Like

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