HM Revenue and Customs v Mr Imtiaz Ali
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE WARREN |
| Judgment Date | 23 March 2011 |
| Neutral Citation | [2011] EWHC 880 (Ch) |
| Date | 23 March 2011 |
| Docket Number | Case No: HC11C00339 |
| Court | Chancery Division |
[2011] EWHC 880 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL
Mr Justice Warren
Case No: HC11C00339
MR DAVID CHIVERS QC & MR MARK FELL (instructed by Messrs Howes Percival) appeared on behalf of the CLAIMANT
MR ANDREW GEORGE (instructed by Messrs Sydney Mitchell LLP) appeared on behalf of the DEFENDANT
APPROVED JUDGMENT
This is an application by HMRC to continue a freezing order made by me on 17 February without notice. The defendant now appears and is represented by Mr George. HMRC is represented by David Chivers QC and Mr Mark Fell. Mr Mark Fell appeared on the without notice application. HMRC's underlying claim relates to Mr Ali's income tax and capital gains tax liabilities.
The background giving rise to the claim is this and comes from the evidence of Mr Brannigan on behalf of HMRC. The respondent, Mr Ali, was a director and employee of a now dissolved company known as Direct Resolutions Limited (which I will call "DR") for part of the tax year ended 5 April 2002. In that year DR purportedly participated as a learning provider in a vocational scheme operated by the Department for Education and Skills ("the DFES"), known as the Individual Learning Account Scheme. Pursuant to the ILAS, as I shall refer to it, between June 2001 and October 2001 DFES paid a total of nearly £3 million to DR.
HMRC believe that in the course of the tax year ended 5 April 2002 DR and subsequently paid a sum of about £2.5 million to the respondent. I shall refer to those as "the Payments". (It has a capital P in my mind, but I cannot do that when I am speaking.) HMRC considers that the sums were subject to an income tax charge under case 1 of schedule E and they consider that by reason of the Payments the amount which DR was liable to deduct from payments made to Mr Ali in the tax year ended 5 April 2002 exceeded the amount actually deducted by DR in that tax period. Secondly, HMRC is of the opinion that Mr Ali received the Payments knowing that DR wilfully failed to deduct the amount which should have been deducted from the Payments under the PAYE regulations. These matters are denied by Mr Ali, who has a different explanation for the Payments, as I will explain later. Ordinarily the liability to account for PAYE is the responsibility of a person's employer and it is for the employer to make the appropriate deduction from salary. Where there has been a failure to do so HMRC may make a direction pursuant to regulation 72 of the Income Tax Pay As You Earn Regulations 2003 (which I will call "the PAYE regulations"), and interest as well.
By 16 February 2011 HMRC had decided to make a direction in respect of the Payments. The result would be that Mr Ali would become liable for income tax of well over £1 million. HMRC did not wish to serve a direction and associated assessment, plus some other assessments for capital gains tax, on Mr Ali because they feared it would result in his hiding his assets or removing them from the jurisdiction. They therefore wanted to obtain a freezing order. However, HMRC were concerned that they might not have a cause of action sufficient to support a freezing order unless they had first issued the assessment. If push comes to shove they would argue that there is a sufficient cause of action even before the assessment is issued, but to avoid that argument they decided to adopt the procedure established in Re Q's Estate [1991] 1 Lloyd's Rep 931. Under this procedure HMRC came before me on 16 February to explain the case in just the way they would have done if they were in fact applying for a freezing order on that occasion. I indicated, after full submissions from Mr Fell, that I would be prepared to make the order the next day once the direction and assessment had been served on Mr Ali. This took place so that the period between service of a direction and the assessment and service of the freezing order was very short. They were in fact all served on the morning of 17 February.
Mr Ali is or is intending to appeal the assessments to the tax chamber of the first tier tribunal. The statutory provisions relating to tax, and I do not need to go into the relevant charging provisions relating to income tax and capital gains tax other than to explain how it is that Mr Ali can be made liable for the PAYE, if any, which should have been deducted by DR. Regulation 72 of the PAYE regulations provides that:
"This regulation applies if –
(a) it appears to the Inland Revenue that the deductible amount exceeds the amount actually deducted, and
(b) condition A or B is met."
It refers to an excess which is in effect the amount by which the amount which should have been deducted exceeds the amount actually deducted by the employer in relation to PAYE. Condition B, which is relevant to our purposes, is that:
"The Inland Revenue are of the opinion that the employee has received relevant payments knowing that the employer wilfully failed to deduct the amount of tax which should have been deducted from those payments."
Regulation 72(5)(a) provides that any direction under that paragraph must be made by notice, the direction notice, stating that the notice was issued to the employee if condition B was met. Sub-regulation (6) provides that if a direction is made the excess must not be added under regulations 185( 5) or 188(3)(a), adjustments to total net tax deducted for self-assessment and other assessments in relation to the employee. I interpose here that normally an employer will deduct PAYE. The employee will show on his tax run the income but he will show the PAYE deductions as a permittable deduction when arriving at the tax that he actually has to self-assess.
Returns are dealt with in section 8 of the Tax Management Act 1970. For the purposes of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment, and the amount payable by him by way of income tax for that year, he may be required by notice given to him by a officer of the board to make a return and provide information. The information required includes that which can be found in the tax return, which we are no doubt all personally familiar with. Then under section 1(1AA)(b):
"the amount payable by a person by way of income tax is the difference between the amount in which he is chargeable to income tax and the aggregate amount of any income tax deducted at source and any tax credits to which section 397( 1) or 397A(i) of IT TOIA 2005 applies."
I should mention section 9 of the Act, which I have in the court bundle in various versions as time goes by. I do not think anything turns on the differences. It provides in effect that in your tax return you must include a self-assessment setting out the amount of tax you have to pay. Clearly in relation to the income which has been made subject of the direction, in contrast with capital gains tax, Mr Ali did not need to self-assess the Payments, although if they were income they should have been shown on his return. His case before the tax tribunal, as I understand it, will be that they are not income at all.
Section 29 of the TMA deals with assessment where loss of tax is discovered by the inspector. Paraphrasing, subsection 29 applies where an officer of the board discovers as regards the taxpayer that any income has not been assessed or that an assessment to tax is or has become insufficient. If he forms that view then, subject to some conditions, he can make an assessment himself. The assessment can only be made if one of two conditions is fulfilled. The relevant one for our purposes is that the situation mentioned in "subsection (1) above", that is to say a non-assessment or an inadequate assessment, was brought about carelessly or deliberately by the taxpayer or by a person acting on his behalf.
Appeals are dealt with by section 31 and may be brought against any assessment of tax which is not a self-assessment. Payment of any tax assessed under section 29 is due for payment under section 59B of the TMA, on the day following the end of the period of 30 days beginning with the day on which the notice of assessment is given. Section 68 provides that any tax may be sued for and recovered from the person charged in the High Court as a debt due to the Crown. In the present case the debt under the assessment did not become due until 30 days after 17 February. That date has now passed, but it had not passed when this matter came before me on the return date. Section 86, which I will not go to, provides for interest on tax.
I will come in due course to the facts which HMRC rely on to justify a freezing order, but before I do so, I propose to deal with the principal legal argument which Mr Ali raises to resist an order and which would apply even if there were a clear risk of dissipation. The case is simple. First, he says, the authorities establish that before a freezing order can be made (Mareva relief in the language of the old cases) the claimant must have an existing cause of action. In the present case tax was not due from Mr Ali until 30 days after the assessment was given. There was accordingly no cause of action on which HMRC could sue, with the result that the court had no jurisdiction to make the order. In other words, I should not have made the order which I did in February and I should not make an order to continue that freezing injunction on the basis of an application and proceedings issued at that...
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Giuliani
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