Search warrants executed by Revenue & Customs at the offices of a tax consultancy were held to be unlawful by the High Court today.

Mercury Tax Group, based in Leeds, and its managing director, Neil Masters, a solicitor, won a ruling that HMRC failed fully to disclose material relevant to its suspicion that a tax avoidance scheme operated by the company was dishonest.

Mr Justice Underhill said Leeds Crown Court was “misled” into granting the warrants.

He said that, in any event, it was a borderline case for the deployment of the “nuclear weapon” of search warrants on not just business premises but the private homes of individuals.

HMRC was under a duty to put its case “with scrupulous accuracy and in such a way that the judge was able to made a fair assessment of the grounds for suspicion being put forward”.

“That did not occur,” Mr Justice Underhill, giving judgment in London, said.

Mercury, in the tax year 2002-03, operated a tax avoidance scheme on behalf of around 23 clients. HMRC began investigating in 2004, but it was not until November last year that search warrants were executed at three Mercury offices, Mr Masters’ home and the homes and several office addresses of 22 of the clients.

In its judicial review challenge, Mercury pointed out that it had already supplied all the documents required by HMRC, who said its requests for information had been satisfied in full. It sought the return of all documents seized in the searches of its premises.

HMRC contested Mercury’s claim that, in applying for the warrants, it failed to comply with its duty of “full and frank disclosure” of its grounds for suspecting tax fraud.

After ruling that there had been non-disclosure in one particular respect, the judge said that, in any case, he did not think there were sufficient grounds for granting the warrants.

He could see no serious damage to the public interest in quashing the warrants. The only possible damage would be if the return of seized documents led to the blocking of any prosecution which ought to take place.

“As at present advised, this does not seem to me a likely outcome,” he said.

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