Stockler
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 June 2012 |
| Neutral Citation | [2012] UKFTT 404 (TC) |
| Date | 25 June 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 404 (TC)
Judge John Clark
The Appellant, of Stockler Brunton, Solicitors, appeared in person
Akash Nawbatt of Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax - penalty - previous finding of negligence by special commissioners in relation to partnership accounts - personal returns reflecting profits shown in those accounts - held, findings of negligence applied to personal returns - consideration of level of penalty - relevant criteria - total penalty left unchanged - appeal dismissed Procedure - whether open to tribunal to consider human rights point in light of limited terms on which the High Court permitted appeal to be remitted - no, but point considered in case of possible further appeal
The First-tier Tribunal decided that a finding of negligence against a taxpayer in a previous case was applicable in the determination of the penalty to be imposed in the current case. The finding of negligence also applied to the personal returns the taxpayer submitted covering the disputed years. In respect of the quantum of the penalty to be imposed, the Tribunal considered the relevant criteria and pegged the appropriate abatement at 30 per cent, which was equal to the percentage arrived at by HMRC's Special Civil Investigations office. In respect of the human rights issue belatedly raised by the taxpayer, the Tribunal considered in obiter that the taxpayer was properly notified of the possibility of the penalty when HMRC sent out a letter inclusive of the Code of Practice 8 ("COP 8") warning, and that the taxpayer's right to a fair trial would not have been prejudiced by the remaining period of delay.
The taxpayer appealed against the penalty determination made by HMRC in respect of the tax years 1996-97, 1997-98 and 1998-99.
The taxpayer was a solicitor and a partner in a firm ("SC"). He appealed the previous ruling of the special commissioners in Stockler v R & C CommrsSCD(2009) Sp C 739 ("Stockler") concerning a penalty determination made by HMRC in respect of incorrect returns of his tax liability for the three tax years from 1996 to 1999, inclusive.
The penalty was calculated at 70 per cent of the culpable tax which amounted to £53,555. His argument then was that HMRC failed to honour the terms of the settlement reached between SC and HMRC, and that, in consequence of HMRC's agreement to withdraw and subsequent withdrawal of amendments to the partnership returns, they were now precluded from relying on the amendments for any purpose, including the levying of penalties in respect of the relevant tax years. That argument was dismissed.
The penalty proceedings stemmed from the decision of the special commissioners in AB (a firm) v R & C CommrsSCD(2006) Sp C 572 ("AB"), where SC was the unidentified firm cited and the taxpayer was the solicitor concerned. AB formed a significant part of the evidence in respect of the disputed penalty. The taxpayer failed to obtain a positive response from two more appeals to his case in Stockler v R & C CommrsTAX[2009] BTC 566 ("Stockler 2009") and Stockler v R & C CommrsTAX[2010] BTC 692, which were both dismissed. The latter decision ruled that HMRC had the power to raise a penalty determination under the Taxes Management Act 1970 ("TMA 1970"), Taxes Management Act 1970 section 95s. 95.
During the hearing the taxpayer raised a human rights point which had not been referred to at any earlier stage, either that day or in the hearing before in previous proceedings before the Tribunal, with the special commissioners or to the Court of Appeal. Citing King v UK [2004] ECHR 631 ("King"), which ruled that tax-geared penalties were the equivalent of criminal charges, the taxpayer stated that it was for that reason that proper warnings had to be given. The taxpayer referred to HMRC's own enquiry manual at EM1362 and submitted that none of the required procedures had been followed in his case. Had HMRC complied with their own policy once the appeal process against the decision in AB had been exhausted, a settlement in a smaller amount than that presently being sought, in respect of the penalty, could have been achieved. He indicated that this in itself was a ground for abating the amount of the penalty. Based on King, a specific warning had to be given.
HMRC responded that the taxpayer introduced a new ground of appeal because of his reference to an alleged breach of human rights when the decision in Stockler 2009 had specified that the only matter to be considered on a further reference to the Tribunal was the due percentage rate for the penalty. Hence, it was not open to the taxpayer to raise a new ground of appeal.
The taxpayer described as a remarkable assertion the submission for HMRC that because the human rights point had been made too late, it could not be considered. He submitted that it infected the penalty determination as a whole. He added that even if the Tribunal concluded that HMRC had complied with their human rights obligations, the failure to give proper notification was nevertheless relevant in considering the issue of abatement. The taxpayer argued that if his human rights were affected, there would be no penalty period. The penalty had not already been determined by the High Court, which had merely decided whether the penalty determination had been settled.
HMRC submitted that the penalty should be 70 per cent of the tax insufficiency. Pursuant to TMA 1970, Taxes Management Act 1970 section 100B subsec-or-para 2s. 100B(2)(b)(ii)-(iv), it was for the Tribunal to determine whether the penalty was appropriate, excessive or insufficient and consequently confirm, reduce or increase the determination. This involved the Tribunal determining for itself what in all the circumstances the appropriate penalty was. The Tribunal was not limited to or confined by the reasoning of HMRC. The focus was on the appropriate level of penalty for the conduct of the taxpayer.
HMRC's approach of considering the quantum of penalty under the criteria or headings of disclosure, cooperation, and size and gravity, whilst not binding on the Tribunal, was a good starting point based on the findings in AB. They submitted that the taxpayer could not go behind the findings in AB as the AB decision contained the essential findings of fact on which the Tribunal should base its decision. AB was a wholesale rejection of the evidence of the taxpayer, which he had also given HMRC in the enquiry. The special commissioners in AB had provided an exhaustive decision containing the facts.
The taxpayer accepted that the effect of TMA 1970, Taxes Management Act 1970 section 100Bs. 100B was to place the discretion on the Tribunal. He submitted that the calculation of the penalty must be based on the time-honoured approach taken by HMRC in arriving at penalty determinations. If this approach were not to be followed, there was a risk of inconsistent calculations. The three individual criteria (disclosure, size and gravity, and cooperation) had to be looked at separately. He submitted that it was incorrect to look at the overall position, as HMRC's officer had appeared to do in giving her evidence. In her witness statement she had explained how she had dealt with each of these criteria. The taxpayer submitted that to take an overall approach was "disingenuous".
He also referred to two entirely separate findings of fact having been made by the special commissioners in AB. He submitted that there were no findings of fact adverse to him in relation to the disbursements issue, and that what had been involved had been exclusively a question of law. He should not be penalised for having adopted a perfectly valid position.
In summary, if a penalty was appropriate, it should be split. In relation to the disbursements, he suggested that the maximum abatement was appropriate. In relation to the legal costs, he submitted that the appropriate abatement for disclosure was at least ten per cent, the appropriate abatement for cooperation was at least 25 per cent, and suggested that the correct abatement for size and gravity was 30 per cent. He accepted that some form of penalty was appropriate (subject to the human rights point) in respect of the legal costs, but not in relation to the disbursements. The total abatement should be pegged at 65 per cent.
(2) Whether the correct quantum of penalty was imposed by HMRC in regard to the following three criteria: disclosure, cooperation, and size and gravity.
(3) Whether he was notified of the possibility of a penalty determination.
(4) Whether, if he had not been appropriately notified, HMRC's penalty determination was in some way invalidated.
Held, dismissing the taxpayer's appeal:
The Tribunal explained that the AB decision found the taxpayer's conduct, in submitting partnership returns claiming deductions in respect of costs and disbursements, to have been negligent. Hence, penalty was imposed for negligently delivering an incorrect return under TMA 1970, Taxes Management Act 1970 section 8s. 8 for the three inclusive years mentioned earlier. The Tribunal was satisfied that submission of personal returns including shares of partnership income, in respect of which the representative partner making partnership returns had been held to have been negligent, amounted to negligently delivering incorrect returns within the terms of TMA 1970, Taxes Management Act 1970 section 95 subsec-or-para 1s. 95(1) as applicable for the relevant years as well.
The Tribunal added that the findings of the special commissioners in AB as to the taxpayer's negligent conduct could be taken to extend to his submission of his personal returns. Further, it was clear from the special commissioners' findings in AB that they regarded the additional tax liability in respect of SC's profits as wholly attributable to the taxpayer. It was for that reason that HMRC decided to impose the penalty...
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Chowdhury
...at the rate of 65 per cent. However, such a level is not unprecedented; see the recent decision by the First-tier Tribunal in StocklerTAX[2012] TC 02099, in which the penalty of 70 per cent was upheld. 91.We accept that a penalty of 65 per cent is high. In the light of our findings above as......