R (KBR) v SFO: the impact on HMRC’s extra-territorial reach

By Jack Prytherch


On 5 February 2021, the UK Supreme Court handed down its much anticipated judgment in R (KBR, Inc) v Director of the Serious Fraud Office [2021] UKSC 2, overturning an earlier decision of the High Court.  Although the case concerned powers specific to the Serious Fraud Office (SFO), the Supreme Court’s ruling also has potential consequences for the extra-territorial reach of HMRC’s investigatory powers.


Under section 2(3) of the Criminal Justice Act 1987, the Director of the SFO has the power to issue a notice requiring persons to produce documents and other information for the purposes of an investigation into serious or complex fraud (a Section 2 notice).  Failure to comply with a Section 2 notice is a criminal offence.  The issue before the Supreme Court in KBR was whether the SFO could use a Section 2 notice to compel a non-UK person to produce documents held outside the UK. 

KBR, Inc (KBR) is a company organised under the laws of the US.  It has no fixed place of business, and has never carried on business, in the UK.  It did, however, have UK subsidiaries, including Kellogg Brown and Root Ltd (KBR UK), which at the relevant time was under investigation by the SFO.

In Aril 2017, the SFO issued a Section 2 notice to KBR UK.  KBR UK duly provided various materials in response but made clear that certain information was not in its possession or control, and (to the extent it even existed) would instead be held by KBR in the United States.  In July 2017, officers of KBR agreed to attend a meeting with the SFO in London, during which the SFO presented a further Section 2 notice requiring the production of material held by KBR outside the UK.

KBR subsequently applied for judicial review to quash the second Section 2 notice.  Amongst other things, it argued that a Section 2 notice does not permit the SFO to require a company incorporated in the United States to produce documents it holds outside the UK.

The High Court (somewhat controversially) refused the application.  Based on a purposive reading, the High Court determined that the relevant legislation was intended to have some extra-territorial application - the question was simply the extent of that application.  It decided that Section 2 notices could require a non-UK company to produce documents held outside the UK provided there was a ‘sufficient connection’ between the company and the UK.  Interestingly, this argument had not been part of the SFO’s case and was suggested by the High Court itself.  KBR was given permission to appeal (which ‘leapfrogged’ the Court of Appeal straight to the Supreme Court).

Supreme Court decision

The Supreme Court unanimously agreed to allow KBR’s appeal and overturned the High Court’s earlier decision.  The Supreme Court’s starting position was the well-established presumption that UK legislation is generally not intended to have extra-territorial effect.  The question was therefore whether Parliament had intended the relevant provisions of the Criminal Justice Act 1987 to displace that presumption to give the SFO the power to compel a non-UK company such as KBR (which had no UK registered office or business) to produce documents held outside the UK.  Contrary to the High Court’s decision, the Supreme Court ruled that the SFO had not been intended to have such broad extra-territorial powers, noting that Parliament had instead developed mutual legal assistance to facilitate international investigations and prosecutions.

Critically, the Supreme Court held that there was no basis for the High Court’s finding that the SFO could use a Section 2 notice to require non-UK companies to produce documents held outside the UK provided there was a ‘sufficient connection’ between the company and the UK.  Implying a ‘sufficient connection’ test into the legislation would be inconsistent with the intention of Parliament and ‘involve illegitimately re-writing the statute’.

Taxpayer notices

The SFO’s case in KBR had relied in part on an earlier Court of Appeal decision in R (Jimenez) v First-tier Tribunal (Tax Chamber) and HMRC [2019] EWCA Civ 51.  In that case, HMRC had issued an individual (Mr Jimenez) with an information notice under Schedule 36 to the Finance Act 2008 (Schedule 36). 

As part of their formal information powers contained within Schedule 36, HMRC may issue different types of notice to assist with their investigations.  The two most frequently issued types of notice are:

  • ‘taxpayer notices’, which (subject to conditions) allow HMRC to require a taxpayer to provide information or documents that are reasonably required to check the tax position of that taxpayer (Schedule 36, para. 1); and
  • ‘third party notices’, which (subject to conditions) allow HMRC to require any person to provide information or documents that are reasonably required to check the tax position of another identified taxpayer (Schedule 36, para. 2).

The issue of third party notices, unlike taxpayer notices, must be approved in advance by the First Tier Tribunal (Tax Chamber) (FTT), unless the recipient consents to the notice being issued.  HMRC can, however, elect to seek FTT approval before issuing taxpayer notices – the advantage being that, once such approval has been given, there is no right of appeal and the taxpayer (or the third party recipient, as the case may be) would then need to seek redress through judicial review.  Penalties apply for failure to comply with Schedule 36 notices, although importantly such failure is not made a criminal offence.  Moreover, Schedule 36 is silent on the territorial scope of these information notices.

Mr Jimenez, a UK national who became resident in Dubai and had a Spanish passport, had been issued with a taxpayer notice by HMRC.  The Court of Appeal concluded that taxpayer notices could have extra-territorial effect, relying heavily on the High Court’s decision in KBR.  The Court cited the fact that many UK taxpayers would be resident outside the UK, meaning Parliament could not have intended taxpayer notices to have only domestic application.  Permission to appeal to the Supreme Court has been granted but a hearing date has not been set.

The Supreme Court’s decision in KBR did not refer to the pending appeal in Jimenez but did specifically distinguish the two cases based on the following factors:

  • firstly, Schedule 36 provides that HMRC may only issue taxpayer notices to someone who is or might be a UK taxpayer, and it is that status rather than their place of residence which is the key to the availability of that power; and
  • secondly, non-compliance with an information notice under Schedule 36 is not a criminal offence, meaning the presumption that a statute should not be construed as making conduct abroad a criminal offence is inapplicable.

Whilst the Supreme Court did not expressly comment on the correctness of the Court of Appeal’s earlier decision in Jimenez, the fact that it did not do so whilst distinguishing its own decision might reasonably suggest that it agrees taxpayer notices can have extra-territorial application in principle.

Third party notices

The Court of Appeal’s judgment in Jimenez was expressly limited to considering the extra-territoriality of HMRC’s power to issue taxpayer notices and a key part of that decision was the fact that the recipients will be UK taxpayers (irrespective of their residency).  The position in relation to third party notices is quite different and has not yet been considered by the higher courts.  In HMRC v Mr & Mrs PQ [2019] UKFTT 371 (TC), the FTT was asked to approve the issue of a third party notice to two non-UK resident individuals regarding information on the tax affairs of a UK resident company (of which they were directors and the sole owners).  Despite the fact that the hearing of the application was ex parte, Judge Barbara Mosedale of the FTT took the unusual step to publish her decision on the basis that it involved a ‘novel point of law’ and therefore was ‘of some public interest’.

The decision in Mr & Mrs PQ was made following the Court of Appeal’s ruling in Jimenez.  However, given the limited scope of that case, Judge Mosedale decided to also rely on the High Court’s decision in KBR, ruling that HMRC must show a ‘sufficient connection’ between the intended recipient and the information sought to be obtained before a non-UK resident may be served with a third party notice.  That decision is now clearly based on outdated legal precedent and, following the Supreme Court’s ruling in KBR, the better view is arguably that third party notices cannot be issued by HMRC on an extra-territorial basis.  However, we will need to wait for a binding decision of the higher courts to confirm the position.

Future enforcement

If the courts establish a principle that UK authorities like the SFO and HMRC cannot compel the production of information held outside the UK by non-residents, where does that leave the enforcement of legislation that is expressly intended to have extra-territorial effect?

For example, the Criminal Finances Act 2017 (CFA) introduced two new corporate criminal offences:

  • the failure to prevent the facilitation of tax evasion relating to UK tax; and
  • the failure to prevent the facilitation of tax evasion relating to foreign (non-UK) tax.

Broadly, there are three steps that must be taken for the CFA offences to be triggered:

  • firstly, a taxpayer commits a (UK or foreign) tax evasion offence;
  • secondly, a person (either an individual or a legal entity) acting in the capacity of a person associated with a relevant body commits a ‘tax evasion facilitation offence’ by facilitating the offence referred to above; and
  • thirdly, the relevant body fails to prevent its associated person from committing the tax evasion facilitation offence referred to above.

Where these steps are present, a strict liability offence has been committed by the relevant body subject only to the statutory defence of it having had in place ‘reasonable preventative procedures’.

Despite the CFA offences being introduced in September 2017, no prosecutions have yet been brought (although we are aware that a number of investigations are actively being pursued by HMRC). The legislation makes it expressly clear that these offences are intended to have extra-territorial application (section 48 CFA).  However, if the power of UK authorities to obtain information held outside of the jurisdiction is curbed by the courts, securing a future prosecution on that basis is likely to be much more difficult in practice.