Morris v R & C Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 23 May 2007 |
| Date | 23 May 2007 |
| Court | Chancery Division |
Chancery Division.
Patten J.
Philip Baker QC and David Southern (instructed by Howell & Co) for the appellants.
Sam Grodzinski (instructed by the Solicitor for HM Revenue & Customs) for the respondent.
The following cases were referred to in the judgment:
Jussila v FinlandUNK (Application No. 73053/01) (unreported, 14 December 2006, ECtHR)
Morris v Roberts (HMIT)UNKTAX [2005] EWHC 1040 (Ch); [2007] BTC 432
Pepper v HartTAXELR [1992] BTC 591; [1993] AC 593
Capital gains tax - Self-assessment - Penalties - Closure notices - Burden of proof - Disposal of shares giving rise to capital gain - Taxpayers claiming residence outside UK - Enquiry - Revenue power to raise assessments - Whether statutory time limit for assessments applied to closure notices served by the Revenue to amend taxpayers' returns containing self-assessment of CGT liability - Whether European Convention altered burden of proof for appeals against other assessments and notices listed for hearing at same time as penalty appeals but not involving any element of penalty - Taxes Management Act 1970, Taxes Management Act 1970 section 28A subsec-or-para 2 section 34s. 28A(2), s. 34.
This was an appeal by the taxpayers against a decision of the special commissioners that the ordinary six-year time limit for raising an assessment to income tax or capital gains tax in TMA 1970, s. 34 did not apply to a taxpayer's own self-assessment or amendments thereto.
The taxpayers were UK nationals. In October 1997 they sold their controlling shareholding in a company for £20.3m. They filed tax returns for the year 1997-98 in which they claimed that they were not resident or ordinarily resident in the UK in that tax year. Although the returns also required them to provide information if they were resident in another country for the purposes of claiming relief under a double taxation agreement that information was not provided. The returns did, however, claim that they had spent only 71 days in the UK in the relevant tax year. In March 1999 the Revenue served notices on the taxpayers under TMA 1970, s. 9A requesting a detailed schedule of arrival and departure dates for each visit to the UK in the tax year and other details such as the purpose of the visits, the address at which the taxpayers stayed during their visits and whether they had used credit cards whilst in the country. When no response was received, notices under s. 9A requesting the same information were sent directly to the taxpayers at an address in Spain. There was no appeal against those notices but no direct response from the taxpayers. Instead they instructed UK solicitors who wrote to the Revenue setting out the days allegedly spent in the UK but not providing the other information. Faced with that, the Revenue used their powers under TMA 1970, s. 20(3) to obtain copies of the taxpayers' credit card and mobile phone records. Those indicated that their credit cards and phones had been used in the UK on many more days than the taxpayers claimed they had been in the country.
In April 2002 the Revenue obtained consent from the general commissioners to issue notices under TMA 1970, s. 20(1) requiring the taxpayers to provide the relevant information and documents relating to the period from 6 April 1996 to 5 April 1998. That included credit and debit card accounts, telephone bills and copies of their passport entries for that period. The taxpayers failed to comply with the notices and in July 2002 the Revenue caused an information to be laid before the general commissioners for the purpose of determining the validity of the notices and imposing penalties on the taxpayers for non-compliance with them. The general commissioners upheld the validity of the notices and imposed the maximum penalty of £300 each on the taxpayers for their failure to comply with the notices. In November 2002 a High Court appeal was instituted against the decision of the general commissioners, but in May 2003 it was dismissed by consent. The taxpayers were ordered to pay the costs of the Revenue. Subsequently, further penalties were imposed for non-compliance with the notices.
In March 2005 the Revenue served notices under s. 28A on each of the taxpayers to amend their returns so as to include a liability to CGT on the part of each taxpayer in the sum of £3,846,011.60 due on the disposal of their shares. In August 2006 penalty determinations were made in the sums of £3,151,809.30 and £3,195,271.61 respectively. Assessments were also issued for the tax year 1995-1996 in respect of UK dividends and for Sch. E income tax in relation to another company.
Appeals by the taxpayers against all the assessments and notices were to be heard together by the special commissioners. The special commissioners decided preliminary issues against the taxpayers and the taxpayers appealed. The issues were whether the time limit imposed by s. 34 of the Taxes Management Act 1970 applied to the closure notices served by the Revenue under TMA 1970, s. 28A(2) so as to amend the taxpayers' returns containing the self-assessment of their liability to CGT; and whether art. 6 of the European Convention on Human Rights as applied by the Human Rights Act 1998 to the taxpayers' appeals against the penalty determinations under s. 95 altered the burden of proof in relation to the appeals against the other assessments and notices which were listed for hearing at the same time but did not themselves involve any element of penalty.
Held, dismissing the appeal:
1. Section 34 was concerned only with assessments by the Revenue. That was made clear by reading s. 34 in conjunction with s. 36 which was obviously intended to extend the time limits in cases of fraudulent or negligent conduct by the taxpayer. Section 36 could have no application in the case of a self-assessment by the taxpayer because that was not "an assessment on any person … for the purpose of making good to the Crown" a loss of tax. It would involve the taxpayer in effect alleging negligence or fraud against himself. The suggestion that s. 34 could apply to the taxpayer was also inconsistent with the structure and provisions of TMA 1970 in relation to the audit of self-assessments made by the taxpayer. The taxpayer's right to amend a self-assessment by the Revenue carried out under s. 9(3) or s. 28C depended upon his complying with the time limits which were imposed under TMA 1970, s. 9ZA. Specific time limits were imposed under s. 28C(5) both in respect of the determination by the Revenue and in respect of any self-assessment by the taxpayer which superseded it. If s. 34 did apply to self-assessment including amendments to self-assessments, then there would be two inconsistent time limits. That was clearly not what was intended and it was avoided if the word "assessment" in s. 34 was given a more limited meaning which excluded self-assessment by the taxpayer.
2. If s. 34 had no application to any assessment by the taxpayer then it must as a matter of the language used in that section exclude all forms of self-assessment and remain restricted to assessments carried out by the Revenue which were not self-assessments. That would be consistent with s. 31(1)(d) which gave a right of appeal against such assessments. If that was right then it followed that a closure notice under s. 28A was not within s. 34 because although served by the Revenue it had the effect of amending the taxpayer's self-assessment which was not an assessment within the meaning of s. 34 and an amendment to it could not change its character.
3. The Revenue were minded to concede that s. 34 might apply to a self-assessment on behalf of the taxpayer made by the Revenue under s. 9(3), which contained no time limit, by contrast with s. 28C(5) which contained a specific time limit for a determination of tax in cases where the taxpayer failed to file a return. The real distinction between s. 9(3) and s. 28C(1A) was that the provisions of s. 9(3) were in part mandatory whereas those of s. 28C(1A) were permissive; and that a failure to make a return including a self-assessment as required by s. 9(1) gave rise to the power to make a determination of tax under s. 28C which was subject to the time limit in s. 28C(5). In that way the non-application of s. 34 to s. 9(3) did not give rise to any anomaly.
4. If that was wrong and s. 34 was not excluded simply because s. 28A(1) provided for the amendment of the taxpayer's self-assessment, then the Revenue's argument was to be accepted that the draftsman had been careful in his use of terminology and had deliberately chosen to avoid describing the effect of a closure notice as an assessment.
5. As regards the penalty appeals, the special commissioners would need to be satisfied on the evidence that the returns were incorrect and that they were made either negligently or fraudulently. The determination of those matters was unlikely to be affected by the incidence of the burden of proof and the determination of the issue of residence would determine all the appeals including the penalty appeals in a way that was art. 6 compliant.
6. It was not appropriate for the special commissioners to have entertained any application to rule on whether s. 34 applied to the closure notices under s. 28A. The effect of their determination was to decide that issue for the purposes of the appeal and, given that that would be an issue in any event in relation to the penalty appeals, the determination of that issue served no useful purpose. The better course would have been to have determined both the closure notice appeals and the penalty appeals and to have then ruled on the s. 34 point (so far as was necessary) as part of a single exercise.
Patten J: Introduction
[1] This is an appeal against a preliminary decision of the Special Commissioners about two issues of principle which affect some forthcoming appeals by the appellant...
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