Personal Representative of Wood (Deceased) v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 July 2016 |
| Neutral Citation | [2016] UKUT 346 (TCC) |
| Date | 25 July 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Morgan, Judge Timothy Herrington
Tarlochan Lall, Counsel, instructed by Male and Wagland Solicitors, appeared for the appellant
David Yates, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Discovery assessments made against taxpayer relying on extended time limits on grounds of deliberate conduct – Death of taxpayer – Whether assessments should be discharged on grounds personal representative cannot receive a fair trial – Taxes Management Act 1970 (TMA 1970), s. 29 and 36 – European Convention on Human Rights (ECHR), art. 6 – Appeal dismissed.
In Personal Representative of Wood (deceased) v R & C Commrs [2016] UKUT 0346 (TCC), the Upper Tribunal (UT) upheld a decision by the First-tier Tribunal (FTT) that discovery assessments issued under extended time limits (up to 20 years) did not breach the European Convention on Human Rights (ECHR), art. 6 as they were not a criminal charge.
In June 2010 the taxpayer, the late Michael Wood, attempted to take advantage of a disclosure opportunity opened to medical professionals known as the Tax Health Plan by voluntarily disclosing under-declared income for the tax years 2002–03 to 2007–08 totalling £743,424 and making a payment of £352,983 of underpaid tax. HMRC decided that the disclosure made by the taxpayer did not fall squarely within the terms of the Tax Health Plan and commenced a Code of Practice 9 investigation into the taxpayer's affairs instead. The taxpayer had agreed to provide a full disclosure report into his tax affairs for the previous 20 years in March 2011 but the report had not been provided by the time the hearing of a preliminary appeal issue had been listed in the FTT.
On 14 August 2012 HMRC decided to raise discovery assessments (under TMA 1970, s. 29) going as far back as 1992–93 stating that the taxpayer had deliberately under-declared his income. The discovery assessments relied on the extended time limit provisions contained in TMA 1970, s. 36 which permit an assessment to be raised in cases of deliberate conduct no more than 20 years after the end of the year of assessment to which it relates.
All of the assessments were subject to an appeal to the FTT.
On 17 May 2013 HMRC issued penalties totalling £950,000 on the basis of either neglectful or fraudulent conduct in submitting incomplete or incorrect tax returns. Those penalties were also subject to an appeal.
On 22 May 2013 the taxpayer died and his widow and personal representative (the Appellant) continued to pursue the appeals to the FTT. The FTT directed the Appellant to produce the disclosure report promised to HMRC in 2011.
On 19 September 2012 HMRC withdrew the issued penalty notices stating that they had been advised to discharge the penalty because your client would not have the right to a fair trial because of his untimely death.
The Appellant's advisers relied on the above concession to argue that, in a similar vein, all of the discovery assessments should be withdrawn as there could be no fair trial on the main issue of whether the taxpayer has acted deliberately in the circumstances.
Following a hearing on the art. 6 preliminary issue, the FTT held that in order to succeed in this argument, the Appellant had to show that the extended time limits in TMA 1970, s. 36 constituted a taxpayer being charged with a criminal offence. In interpreting this phrase, the leading authority (Engel v Netherlands HRC[1976] 1 EHRR 647) cited three criteria to be considered:
1) the classification of the offence under national law;
2) the nature of the offence; and
3) the nature and degree of severity of the penalty that the person concerned risked incurring.
Taking into account the Engel criteria and heavily relying on the decisions in Director of the Assets Recovery Agency v C & E Commrs UNK[2005] EWCA Civ 334 and R & C Commrs v O'Rorke TAX[2013] BTC 2,096 the FTT decided that on the first criterion there was no explicit criminal offence defined by TMA 1970, s. 29 or 36. On the second criterion, the effect of s. 36(1A)(a) was simply to enable HMRC, upon proof of deliberate conduct, to recover the tax that should have been paid by the taxpayer and the recourse to extended time limits to issue assessments was not penal in nature. The circumstances under which an extended time limit assessment could be issued included for instance a lack of awareness of chargeability to Capital Gains Tax and there was no arrest, formal charge, penalty or criminal record attached to a discovery assessment.
With regard to the third criterion, the FTT cited the same reasons given under the second criterion. Following the ruling that no penalty liability arose under a discovery assessment, the FTT did not consider its nature and degree of severity.
The Appellant contended that the FTT made three errors of law in coming to its decision:
First, the cases of Charrington and O'Rorke were misapplied to the case because TMA 1970, s. 36(1A)(a) did not simply enable HMRC to recover under-declared tax. The possibility of going back 20 years created a material risk of more tax than should be lawfully paid being recovered not the least because the Appellant will not have kept records and other evidence supporting the amounts that were actually due.
Secondly, the changes to the law introduced by FA 2008 embodied in s. 36(1A) were an instance of the use of State power to condemn or punish individuals for wrongdoing as evident from HMRC's Consultation Document on the proposed provisions.
Lastly, the features of penalty or a sanction of a penal nature and serious personal consequences of alleged deliberate conduct were clearly present in this case.
Taking into account that the Appellant relied on the entitlement to a fair hearing in ECHR, art. 6(1) only and not on the presumption of innocence in art. 6(2) or the entitlement of a person to defend himself in person in art. 6(3)(c), the Upper Tribunal were not clear as to how the Appellant's case would be improved by a decision that the appeal to the FTT came within art. 6.
The Upper Tribunal also agreed with the FTT's ruling that it would be premature to decide whether the discovery assessments should be discharged before a full disclosure report had been served and before HMRC's Statement of Case.
The Upper Tribunal was not persuaded by the Appellant's arguments and held that the Engel criteria were not satisfied in the case for the following reasons:
1) it was not suggested that the first of the Engel criteria is satisfied;
2) the second of the Engel criteria refers to the nature of the provision;
3) the third of the Engel criteria only arises where there is a penalty;
4) in this case, it is convenient to consider the second and third criteria together;
5) TMA 1970, s. 36(1A) is one of a group of provisions dealing with discovery assessments;
6) the purpose of a discovery assessment is to enable HMRC to recover the correct amount of tax due;
7) it is no part of the purpose of these provisions to enable HMRC to recover more than the tax due;
8) if there were no time limit on the power to raise a discovery assessment, that would not mean that a discovery assessment involved a criminal charge (although it might raise an issue as to legal certainty);
9) there are, in fact, three time limits on the power to raise a discovery assessment;
10) it could not be suggested that the ordinary time limit of 4 years or the time limit (for carelessness) of 6 years produces the result that a discovery assessment within those time limits involves a criminal charge;
11) the fact that the pre-condition to the operation of the 20-year time limit is deliberate non-compliance does not change the nature of the discovery assessment;
12) the fact that the consequences of deliberate non-compliance are more adverse than the consequences of careless non-compliance does not mean that those consequences have a criminal character or are penal;
13) the reverse burden of proof on the taxpayer applies to every discovery assessment and does not produce the result that the discovery assessment involves a criminal charge or a penalty; and
14) the combination of a 20-year time limit and a reverse burden of proof equally does not produce the result that there is a criminal charge or a penalty.
In answer to the Appellant's other substantive arguments, the Tribunal held that there was no analogy between TMA 1970, s. 36 and the penalty provisions in TMA 1970, s. 95 and therefore the fact that HMRC had cancelled the penalties issued after the taxpayer's death did not mean that the discovery assessments could not be issued pursuant to the extended 20-year period.
Further, TMA 1970, s. 36 could not be said to have the character or nature of a provision imposing a punishment to deter offending by those to whom it is directed. A better analogy was provided by the Limitation Act 1980, s. 32 which provides that in the case of an action based on fraud by a defendant or deliberate concealment of a right of action by the defendant, the period of limitation begins to run after the claimant has discovered the fraud, concealment or mistake. Clearly, the nature of the section is the provision of an extended time to bring an action if the action pivots on the defendant's alleged fraud or deliberate concealment. Similarly, TMA 1970, s. 36 is a gateway through which the path to a discovery assessment can be opened; it extends the time limit for the making of an assessment that would otherwise be out of time.
TMA 1970, s. 36(1A)(a) operates as an incentive for taxpayers to submit their tax returns on time and the extended time limits may operate as a deterrence against non-compliance with that obligation...
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The Personal Representative of Michael Wood (Deceased) v The Commissioners for Her Majesty's Revenue and Customs
...[2016] UKUT 0346 (TCC) Appeal number:UT/2015/0108 INCOME TAX– discovery assessments made against taxpayer relying on extended time limits on grounds of deliberate conduct - death of taxpayer whether assessments should be discharged on grounds personal representative cannot receive a fair ......
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The Personal Representative of Michael Wood (Deceased) v The Commissioners for HM Revenue and Customs
...[2016] UKUT 0346 (TCC) Appeal number:UT/2015/0108 INCOME TAX– discovery assessments made against taxpayer relying on extended time limits on grounds of deliberate conduct - death of taxpayer whether assessments should be discharged on grounds personal representative cannot receive a fair ......
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British-American Tobacco v The Commissioners For Her Majesty's Revenue & Customs, TC 05678
...Wines”)). 35 473. I also note the observations of the Upper Tribunal (Morgan J and Judge Herrington) in Wood v Revenue And Customs [2016] UKUT 346 (TCC) at [58], which were based on [38] of Jussila, in relation to the second Engel criterion: “In our view the authorities demonstrate that it ......
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British-American Tobacco (Holdings) Ltd v The Commissioners for Her Majesty's Revenue & Customs, TC 05659
...Wines”)). 35 473. I also note the observations of the Upper Tribunal (Morgan J and Judge Herrington) in Wood v Revenue And Customs [2016] UKUT 346 (TCC) at [58], which were based on [38] of Jussila, in relation to the second Engel criterion: “In our view the authorities demonstrate that it ......