We look at the decision of HMRC v Charman and Another  and the Court’s view on whether HMRC should have access to documentation disclosed in financial remedy cases which are relevant to a tax investigation.
- The judgment in HMRC v Charman and Another emphasises the importance of preserving confidentiality of evidence given within matrimonial proceedings in order to ensure that full and frank disclosure is given by both parties.
- Case law demonstrates the importance of weighing the public interest of ensuring the accurate payment of tax against the public interest of confidentiality within private family proceedings having regard for the individual circumstances.
HMRC v Charman and Another - The facts
This case involves an application for financial remedy (formerly ancillary relief) by Mrs Beverley Charman against her former husband, John Charman. The case involved marital assets exceeding a healthy £100m. The parties were unable to agree a financial settlement and the matter came before Coleridge J in 2006 for a contested final hearing which resulted in the wife being awarded assets in excess of £40m. Not surprisingly, due to the size of the assets involved, there was a substantial amount of financial disclosure and production of documents within the proceedings. The judgment generated an appeal to the Court of Appeal by the husband.
One of the key issues when determining the extent of the wife's claim for financial provision was the extent of the husband's tax liabilities, specifically his income and capital tax liabilities in relation to his interests in a company, Axis Speciality Limited. In determining the husband's tax liability the issue to be decided was the date upon which Mr Charman ceased residence in the UK and took up residence in Bermuda. A considerable amount of evidence in relation to Mr Charman's potential tax liability was given throughout the proceedings and at the final hearing.
Some time after the final hearing, HMRC issued an application against Mr Charman for the assessment of unpaid tax in the sum of £11.5m from the period 2001 to 2008. Mr Charman appealed the application. As part of the hearing relating to the assessment of unpaid tax, HMRC sought to have sight of and use for the purpose of the tax hearing the transcript from the judgment in the final hearing and the production of other documents that were disclosed within the proceedings. HMRC specifically sought an order from the court for the husband and wife to produce such documents for HMRC and although the wife did not object to this, the husband refused. This therefore brought the application by HMRC for the production of the transcript and associated documents including applications, written submissions and witness statements.
When hearing the issue of the production of documents, Coldridge J heard the positions of HMRC and the husband. Both parties made public interest arguments for and against the production of the documents. HMRC contended that it was always in the public interest for a tax payer to pay the right amount of tax and as these documents directly related to the assessment of Mr Charman's tax liability they should be disclosed to HMRC. Also making a public interest argument, the husband's position was, not surprisingly, one of confidentiality and privilege of evidence within private family proceedings.
When giving his judgment Coldridge J referred to the Family Procedure (Amendment) Rules 2012 rule 29.12:
"Except as provided by the rule or by any other rule of Practice Direction, no document filed or lodged in the court office shall be open to inspection by any person without the permission of the court, and no copy of any such document shall be taken by, or issued to, any person without such permission."
Although technically the Family Procedure (Amendment) Rules 2012 were not in force when the application was issued, previous rules provided for the same effect. Neither party disputed the fact that it was for the judge to decide whether or not the documents sought by HMRC should be produced.
In giving his judgment, Coldridge J turned to earlier case law in relation to the production of documents disclosed within matrimonial proceedings and specifically referred to the leading case of S v S (Inland Revenue: Tax Evasion) .
In S v S Wilson J established two key points:
- That the court has the discretion to permit the production of documents that where disclosed within matrimonial proceedings to HMRC for tax purposes, and
- It would be very rare for such discretion to be exercised in HMRC's favour.
In making his assertions Wilson J stressed the importance of full and frank disclosure within ancillary relief proceedings (now financial remedy) and that cases should be looked at on an individual basis. Wilson J did not neglect to mention the importance of reporting tax evasion as a failure to do so would in his words “cheapen the law”. Thus the case of S v S Wilson J found the husband guilty of tax evasion but nevertheless refused the Revenue's application for the production of documents within matrimonial proceedings.
When referring to the case of S v S, Coldridge J could not emphasise too greatly the sanctity of full and frank disclosure which he held was of paramount importance within ancillary relief proceedings in order for the court to fulfil its obligations under the Matrimonial Causes Act 1973.
In Clibbery v Allan  the judge had made it clear that the requirement of full and frank disclosure within ancillary relief cases imposes considerable compulsion on each party, which should not be trivialised. In the earlier case of Medway v Doublelock Limited and Another  the applicant had sworn affidavits in ancillary relief proceedings. The defendant company in civil proceedings within the Chancery Division sought to use this as evidence against the claimant. The court held however that, as it is the case that parties are compelled to disclose information within ancillary relief proceedings which could be damaging in another suit, one cannot risk the use of such information for other purposes. Goulding J asserted that one must balance against each other not a private and public interest but two public interest arguments within different proceedings and in this particular case held that the public interest argument in relation to the ancillary relief proceedings weighed more heavily than the public interest within the civil proceedings.
Turning back to the case of HMRC v Charman and Another, Coldridge J took the view that it would make a nonsense out of the Family Procedure Rules if information about the means of a party could be provided to the public. Accordingly, Coldridge J concluded that as a general rule documents and other information which is produced within ancillary relief proceedings should not be disclosed to third parties outside the proceedings other than in exceptionally rare cases and for very good reason with leave of the court. The mere fact that the evidence may be relevant or useful is not in itself good enough to undermine rules relating to the access of documents within family proceedings.
Although the case of HMRC v Charman and Another  does not provide for any real change in the law, it does further strengthen the weight of the public interest argument that documents disclosed within financial remedy proceedings should remain privileged and confidential.
There is a significant amount of case law in this area which focuses on the importance of full and frank disclosure within matrimonial proceedings emphasising the public interest argument of confidentiality which should be preserved. The case law is not seeking to undermine the importance of the payment of tax which is also undisputedly in the public interest nor that such documents would not be relevant or of assistance to that cause however one must balance these public interests. Therefore, unless there is anything rare or exceptional about the case which should warrant the court granting leave to produce these documents, the rules of disclosure and the confidentiality/privileged attached should not be breached.
It is not clear in what circumstances the court would use its discretion to allow HMRC to access documentation in financial remedy cases; however, the court is unequivocal that it will not be compelled to relax the rules without good reason.
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