HMRC Puts Faith in Production Orders

Production orders are becoming increasingly commonplace. Here Adam Craggs and Michelle Sloane explain what they are and how they work.

HMRC ARE under pressure from the government to increase criminal prosecutions for tax evasion. Since 2010, there has been a five-fold increase in criminal prosecutions for tax fraud. Between 2010 and 2017, HMRC secured more than 4,794 criminal prosecutions and over 3,524 years of prison sentences.

HMRC has been given additional funding to tackle tax evasion and set a target under which it has to triple the number of criminal prosecutions it brings. The rise in HMRC criminal investigations has subsequently led to a significant increase in the number of production orders (“POs”) sought by HMRC, with this number set to continue to rise as HMRC increases the number of criminal investigations necessary to deal with this increased case load.

What are production orders?

Under various provisions contained in the Police and Criminal Evidence Act 1984 (“PACE”) and Taxes Management Act 1970 (“TMA”), HMRC are able to apply to the Crown Court for a PO against third parties in a criminal investigation, such as accountants, tax advisers and banks. Once obtained, a PO is served on the third party and it requires the third party to produce to HMRC the material requested within a specified time frames. Failure to comply with a PO can lead to a custodial sentence or substantial fine (see below). HMRC often insist that the documents are provided within a relatively short time frame, which can be extremely disruptive, especially for smaller organisations. POs can also raise difficult and complex compliance issues. Deciding what is, and what is not covered by a PO is not always easy and the potential cost of making a mistake and getting in wrong can be high.

Depending on the type of material sought by HMRC, there are different procedures it must follow and requirements that have to be satisfied when applying for a PO.

Special procedure material

Where HMRC seeks ‘special procedure’ material, which is defined in section 14(2) of PACE, as material held under a duty of confidence which has been acquired during the course of a business, profession or other occupation, HMRC must apply for a PO under Schedule 1 of PACE.

HMRC makes an application to a circuit judge. Notice of this application is served on the person who possesses or controls the material in respect of which HMRC is seeking a PO.

In order for a PO to be issued, certain conditions must be satisfied. Paragraph 2 of Schedule 1 of PACE sets out these conditions:

• a) There must be reasonable grounds for believing that:
• an indictable offence has been committed;
• special procedure material exists on the specified premises;

iii. the material is likely to be of substantial value to the investigation; and

• the material is likely to be relevant evidence.
• b) Other methods of obtaining the material have been tried without success or were not tried as they were bound to fail.
• c) It is in the public interest having regard to the benefit likely to add to the investigation and the circumstances under which the material is possessed to gain access to the material.

Once the judge is satisfied that all of the above conditions have been satisfied, he or she may make an order requiring the person in possession of the material to produce it or give access to it within a specified period which does not exceed seven days from the date of the PO.

Legally privileged material is exempted from production and need not be provided to HMRC under section 14(2) PACE. If there is a dispute about whether any document or part of a document is protected by legal privilege, the person concerned can apply to a circuit judge to determine the issue.

Under paragraph 15(1), Schedule 1 of PACE, failure to comply with a special procedure material PO is a contempt of Court. Pursuant to section 14(1) of the Contempt of Court Act 1981 (CCA), the court may impose an immediate custodial sentence for a term not exceeding two years. Alternatively, the court may impose an unlimited fine, if that is considered more appropriate.

Other material

Where HMRC seeks material that does not fall under section 14(2) of PACE, it can apply for a PO under the powers granted to it under section 20BA(1) of the TMA.

A circuit judge may make issue a PO provided the following conditions have been satisfied:

• a) there are reasonable grounds to suspect that serious tax fraud has taken place; and
• b) documents that may be required as evidence in any proceedings are or may be in the possession of a person.

Once the circuit judge is satisfied that both of the above conditions have been satisfied, under section 20BA(2) of the TMA, he or she may issue a PO requiring a person who appears to be in possession of the material referred to in the PO, to deliver the documents to a specified HMRC officer within ten working days after the date on which the PO is served on him or her, or a shorter period if specified within the PO.

Section 20BB(1) of the TMA, creates an offence of intentionally falsifying, concealing, destroying or otherwise disposing of material that is required to be produced. Under section 20BB(5) of the TMA, a person guilty of this offence may be liable, on summary conviction, to an unlimited fine. On indictment, a person may be liable to imprisonment for a term not exceeding two years or to an unlimited fine, or both.

Tips should you receive a PO

It is important that the recipient of a PO:

• confirms that the PO is valid and has been lawfully obtained;
• conducts a thorough, document-by-document review of the requested material and only produce documents which are covered by the PO;
• does not produce documents that are subject to legal professional privilege unless the client has waived privilege;
• ensures that all material in his or her power and possession and within the scope of the PO, is provided in order to ensure compliance with the PO and avoid the risk of criminal sanctions.

Given the serious criminal sanctions that may be imposed for failure to comply with a PO, it is recommended that anyone who is served with a PO obtains immediate legal advice from a lawyer with appropriate expertise in this area.

Adam Craggs is a partner and head of the tax disputes resolution team at RPC. He can be contacted on 020 3060 6421 or by email: adam. craggs@ rpc.co.uk.

Michelle Sloane is a senior associate in the team. She can be contacted on 020 3060 6555 or by email: michelle. sloane@rpc.co.uk