The Divorce Court and the Taxman: a window of opportunity or safe haven?

Updated August 2012

Is the family court obliged to co-operate with any request for information from HMRC about a separating couple’s assets and income? Or is that information confidential and privileged from disclosure? This issue was considered in the recent case of HMRC v Charman [2012] EWHC 1448 (Fam).

Mr and Mrs Charman’s case had been decided by Mr Justice Coleridge in 2006. It was a “big money” case with assets in excess of £100 million. The award to Mrs Charman was more than £40 million.

One of the issues at the hearing had been the extent of Mr Charman’s potential tax liabilities arising from his interests in a company, Axis Speciality Limited. This in turn generated a good deal of evidence about the date when Mr Charman gave up his UK residence to live in Bermuda.

The HMRC inquiry

Following the divorce, HMRC issued assessments for about £11.5 million for the years 2001 – 2008. Mr Charman appealed the assessments. HMRC’s response was to apply to the Family Division for disclosure of the evidence given by Mr Charman’s about his tax liabilities. This included a request for transcripts of the evidence and submissions made on Mr Charman’s behalf. The application was to be considered by Mr Justice Coleridge.

The competing arguments

It was argued by HMRC that the evidence before the Family Division would assist the First Tier Tribunal in deciding the appeal.

Underlying that argument was the principle that it is in the public interest for the right amount of tax to be paid.

Mr Charman resisted the application. He said that he had given evidence “in private and was protected by the cloak of privilege and the parties’ duty of confidentiality”.

The decision

The starting point was that documents and evidence produced in financial remedy proceedings following divorce are not disclosable to anyone except the parties to the proceedings and their legal representatives. In exceptional cases that position can be changed, but only if the court gives permission for the evidence to be released to third parties.

Mr Justice Coleridge found that although the evidence filed by Mr Charman may be relevant to the tax enquiry, that argument was not sufficient to override the rule against disclosure. He highlighted the fact that Mr Charman had complied with his obligation to the court by giving full disclosure. Additionally and significantly there was no suggestion that Mr Charman had been guilty of tax evasion or criminal conduct. This was a routine tax assessment and it was for Mr Charman to prove his case to the tribunal. It was also relevant that the first instance judgments and the decision in the Court of Appeal were available to HMRC.

Conclusion

Has the door been closed on this potential source of evidence for tax investigations? Possibly, but as ever where judicial discretion is engaged different facts can produce different outcomes.

When deciding how the assets and income are to be divided on divorce the court must consider the family’s resources and needs. Without reliable and accurate disclosure, that exercise is impossible. The court will encourage the parties to provide full details of their assets, income and liabilities. Giving that information some protection from disclosure to third parties reinforces that message. But it is also clear from the judgment in HMRC v Charman that if it appears that there has been tax evasion the court is likely to be more sympathetic to a request for disclosure from HMRC. So, perhaps not a window of opportunity more a path to be trodden cautiously.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2012. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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