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Section 20 of the Taxes Management Act 1970 empowers the Inland Revenue to elicit documents or information needed to pursue investigations. Its use of S.20 to obtain documents and information from non-parties to an investigation has provoked controversy.
Some practitioners believe the Revenue regards S.20 as authority to embark upon unfettered fishing expeditions.
The decision of Judge Ferris in R v O'Kane & Clarke - ex parte Northern Bank (21 August 1996) is welcome. For the first time a bank has successfully challenged the Revenue's use of S.20.
Northern Bank (in common with many other financial institutions) had become increasingly concerned at the frequency with which it was receiving S.20 notices and at the way such notices were being drafted.
Compliance was putting increasing administrative and financial burdens on the bank and by February 1995, Northern Bank had had enough.
It issued an application for certiorari to quash eight notices. Before the application could be heard, an additional five notices were received from the Revenue. They were added to the application.
Northern Bank made a three-pronged attack:
(a) the notices fell outside the scope of S.20, as they were not limited to requests for the production of documents "specified or described" in the notices;
(b) the notices were vitiated by procedural error; and
(c) the notices were unfair and "irrational".
Judge Ferris' main conclusion was that the notices were grossly oppressive, unfair and thus "irrational" within the meaning of that term in judicial review.
Ultimately, all 13 notices were quashed.
The judge's approach was that a bank faced with a Revenue investigation into a customer was in the position of "a mere witness".
Consequently, the Inland Revenue should not be entitled to use its powers to place onerous discovery obligations upon the bank.
In future, all S.20 notices that are directed at banks must be drafted in clear and precise terms.
But the decision may have a sting in its tail.
Banks will now need to assess if compliance with a S.20 notice could expose them to the risk of a claim by a dissatisfied customer that the notice should have been challenged and that compliance has resulted in a breach of confidentiality.