Mercury Tax Group Ltd & Anor, R (on the application of) v HM Commissioners of Revenue & Customs & Ors

Search-warrant powers under section 20C of the Taxes Management Act 1970 are highly intrusive. “Reasonable ground to suspect” is an objective, context-sensitive test, with a lower threshold than reasonable grounds to believe, but solid grounds are required. A warrant application must give full and frank disclosure of matters which may affect the decision, particularly matters militating against granting the warrant. Where material non-disclosure has influenced the decision in a borderline case, the warrant may be quashed. The validity of formal contractual schemes depends on proper execution. Recycling a signature page from a materially different draft document does not necessarily execute the final document, especially where the instrument is intended to be a deed.

HMRC obtained warrants under section 20C of the Taxes Management Act 1970 to search premises connected with a tax avoidance scheme operated by the claimants. The claimants sought judicial review of the approval and warrant decisions, alleging that the information did not establish reasonable grounds to suspect serious tax fraud and that HMRC had failed to make full and frank disclosure.

The alleged fraud concerned the transfer of clients’ signature pages from draft documents to materially different final documents, an inaccurate chronology, and a minute apparently recording events after they occurred. The central issues were whether the scheme’s implementation was materially defective, whether dishonesty could reasonably be suspected, and what consequences followed from HMRC’s presentation of the application.

1. Validity of the scheme documents. The transfer of signature pages from earlier drafts to materially different final versions was not shown to be authorised and was materially different from altering the same document after signature, as discussed in Koenigsblatt v Sweet [1923] 2 Ch 314. The identity of the gilt stock was fundamental to the contractual rights and obligations. The fact that the changes were commercially immaterial to the clients did not make them legally immaterial. Raiffeisen Zentralbank Osterreich AG v Crossseas Shipping Ltd [2001] 1 WLR 1135 concerned a different rule and did not assist the claimants.
2. Because the documents were intended to be deeds, section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 required the signature and attestation to form part of the same physical instrument. The information therefore disclosed reasonable grounds to suspect serious defects in implementation.
3. Reasonable suspicion. The question whether there were reasonable grounds to suspect dishonesty was objective, although it required judgment and evaluation. Under O’Hara v Chief Constable of the Royal Ulster Constabulary [1997] AC 286, the test was objective. It imposed a somewhat lower threshold than reasonable grounds to believe, but the intrusive nature of the power required solid grounds, consistently with Inland Revenue Commissioners v Rossminster Ltd [1980] AC 952.
4. The reviewing court ordinarily asks whether the issuing judge could properly have reached the decision on the material before him. Disclosure is an exception: the warrant may be quashed if HMRC misled the court by positive misstatement or material non-disclosure. HMRC failed to disclose letters showing that the clients had been told that 2004 stock would be used. That omission materially affected the presentation that the clients had been deceived and influenced the judge’s assessment of dishonesty.
5. The consequences of non-disclosure require a broad assessment of supervision, substantial justice and the public interest, applying the approach discussed in J v Crown Prosecution Service [2005] EWCA Civ 746 and Director of the Serious Fraud Office v A [2007] EWCA Crim 1927. This was a borderline case, the grounds for dishonesty were not particularly strong, and no serious public-interest prejudice was identified. The decisions of Judges Spencer and Hillen were unlawful and the warrants fell to be quashed, subject to submissions on the precise relief.