Tribunal limits HMRC's Schedule 36 powers in transfer pricing case

In Lifeplus Europe Ltd v HMRC [2026] UKFTT 797 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeal against an information notice issued by HMRC, as the information requested by HMRC was not reasonably required to check the taxpayer's tax position and the taxpayer did not have the information in its power or possession.

Background

Lifeplus Europe Ltd (LEL) is a wholly owned UK subsidiary of Eurark LLC (EL), a company incorporated in the US. EL specialises in the manufacture and distribution of vitamins, nutritional supplements and healthy body products, which it manufactures in the US. LEL is EL's appointed distributor for products sold into the UK, EU and Switzerland.

Following a transfer pricing analysis performed by its external advisor, LEL implemented a transfer pricing policy in 2014 applying the Transactional Net Margin (TNM) method, reflecting its characterisation as a routine distributor.

HMRC identified a transfer pricing risk when it noticed a sharp fall in LEL's net profit margin in its accounts, even though there had been significant growth in LEL's turnover. HMRC opened a transfer pricing enquiry in relation to LEL's corporation tax position for the accounting periods ended 31 December 2014 to 31 December 2022, inclusive.

Central to HMRC's enquiry was the transfer pricing policy which LEL had implemented in 2014, which characterised it as a routine distributor with its US parent, EL, performing entrepreneurial functions and owning key IP.

HMRC challenged the TNM methodology adopted by LEL, questioning why the Comparable Uncontrolled Price (CUP) method had not been used and sought extensive information from LEL, including functional and supply chain evidence, internal correspondence and transfer pricing reports. 

In October 2023, HMRC issued an information notice to LEL under paragraph 1, Schedule 36, Finance Act 2008 (the Information Notice). The Information Notice requested all of EL's consolidated group financial statements for periods coinciding with LEL's accounting periods from 31 December 2014 to 31 December 2022, and its entity-level financial statements for the same periods. 

LEL asked EL to release the requested documents to HMRC. EL declined to do so on the basis that it was entitled to its privacy and confidentiality (under US law), HMRC had access to the necessary analysis and information in relation to the transfer pricing position, and significant information had already been provided to HMRC. 

LEL appealed the Information Notice on the grounds that the documents requested were not reasonably required to check its tax position and, in any event, were not in its possession or power. 

FTT decision 

The appeal was allowed.

Reasonably required

The FTT held that the documents requested by the Information Notice were not reasonably required. HMRC had not demonstrated a sufficient rational connection between the requested US accounts and the stated purpose of checking LEL's transfer pricing position (including HMRC’s preference for CUP over TNM). In reaching its decision, the FTT attached weight to the OECD's transfer pricing guidance which indicates that where a one-sided method is properly selected and the tested party is the domestic taxpayer, there is generally no reason to request the foreign associated entity's financial data.

Possession or power

The FTT concluded that the accounts were not in LEL's possession or power. The evidence was that EL's accounts were held confidentially on US servers with restricted access (limited to senior US executives). The FTT rejected HMRC’s suggestion that overlapping officers/directors of both companies meant LEL could exert its influence to obtain the documents. Not surprisingly, the FTT noted that group companies remain separate legal persons, and there was no general consent/arrangement giving LEL practical control. The FTT also accepted that compelling directors to attempt to obtain the documents could cut across directors’ duties (including independent judgment and potential conflicts).

Comment

This decision reinforcing the requirement that information requested by a notice issued by HMRC to a taxpayer under paragraph 1, Schedule 36, Finance Act 2008, must be 'reasonably required' to check the taxpayer's tax position and that, even in a complex, long-running transfer pricing enquiry, HMRC must establish (the onus being on it) a real evidential need for the information it is seeking.

The FTT also confirmed that being in the same corporate group, even with overlapping officers/directors, does not automatically put parent documents within a subsidiary’s 'power'. Corporate groups may wish to review their confidentiality protocols and should carefully evidence access restrictions and decision-making regarding document release. 

Read the FTT decision in Lifeplus Europe Limited.