Stockler v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 20 February 2009 |
| Date | 20 February 2009 |
| Court | Special Commissioners (UK) |
special commissioners decision
John CLark
Conrad McDonnell of counsel, instructed by Stockler Brunton, for the Appellant
Akash Nawbatt of Counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents
Income tax - penalties - whether penalty could be imposed on individual partner following tax litigation settlement agreement preventing amendment of partnership's tax returns - yes - further issues arising to be determined later
In the circumstances, the Revenue had power to raise a penalty determination in respect of an individual partner, following the settlement by agreement of litigation relating to the partnership return.
The taxpayer was a partner in a firm of solicitors. He was responsible for preparing the partnership tax return and was the representative partner for the purposes of the Taxes Management Act 1970. In September 2005, HMRC notified the partnership that it had amended the partnership's statements in respect of various periods of account from 1 May 1994 to 30 April 1998. In 2006, special commissioners heard an appeal by the partnership against those amendments and decided that: (a) the sums which had been deducted in computing the profits of the partnership were not moneys wholly and exclusively expended for the purpose of the partnership's profession within the meaning of ICTA 1988, Income and Corporation Taxes Act 1988 section 74 subsec-or-para 1s. 74(1)(a); and (b) the insufficiency of the amount of the profits was attributable to the negligent conduct on the part of the taxpayer within the meaning of TMA 1970, Taxes Management Act 1970 section 30B subsec-or-para 5s. 30B(5) ((2006) Sp C 572)).
The partnership appealed against that decision to the High Court. In May 2007, the partnership made an offer to HMRC pursuant to the Civil Procedure Rules (CPR), Pt. 36. The offer provided that, in return for HMRC withdrawing the amendments to the partnership's tax return, the partnership would make certain payments to HMRC. The offer was stated to relate to the whole of the appeal and, for the avoidance of doubt, to the matters raised in the respondent's notice. HMRC accepted that offer without prejudice to any penalty determination which might follow.
The partnership thereafter informed the court that the appeal had been settled and on the same day wrote to HMRC stating that the legal effect of an unconditional acceptance could not be altered by the incorrect assertion that it was 'without prejudice' to any penalty determination. The partnership also required the withdrawal of the amendments and asked for agreement to the figures payable pursuant to the settlement. Following correspondence between the parties, the sum payable was agreed as £122,731.77 and that sum was paid in June 2007. HMRC subsequently confirmed that the amendments had been withdrawn.
HMRC later made a penalty determination in respect of the taxpayer's incorrect returns. The taxpayer appealed and applied unsuccessfully to the High Court for a declaration that HMRC had failed to honour the terms of the settlement.
The preliminary issue was whether it was possible for HMRC to raise the penalty determination on an individual partner where the amendments to the partnership statements had been withdrawn.
The special commissioner (John Clark) (ruling accordingly) said that the earlier appeal to the special commissioners was by the partnership. The commissioners' decision was a decision in principle, and did not quantify the tax assessable on the partnership. The partnership appealed to the High Court against that decision. Negotiations continued, and as the date for the hearing approached, the taxpayer, on behalf of the partnership, sought to arrive at a settlement rather than proceeding with the appeal hearing. The negotiations were successful in achieving a settlement before the hearing was due to take place.
The Pt. 36 offer letter written by the partnership referred to HMRC "withdrawing" the amendments. However, that could only be done where an appeal was upheld in favour of the taxpayer and the original return was determined to be correct. Further, if the original return was reinstated as valid, but the taxpayer had paid the agreed or determined liability, that would show as a credit in HMRC's records with no corresponding liability. The administrative procedure adopted was to leave the amended figures on the record, but not to make the consequential amendments which would bring tax into charge, and to make a note against the record referring to the settlement agreement. The taxpayer's individual tax return had not been amended, as otherwise HMRC's records would have shown that both the sum due under the Pt. 36 agreement and the additional tax due in respect of his return were due for collection. The taxpayer had been assured that no tax would be demanded other than that due under the Pt. 36 agreement.
Liability to a penalty under TMA 1970, Taxes Management Act 1970 section 95s. 95 depended on the return being incorrect, the precondition in this case being that the person in question fraudulently or negligently delivered an incorrect return of the type falling within TMA 1970, Taxes Management Act 1970 section 8s. 8. The grounds for HMRC treating the taxpayer's individual returns as incorrect were that they were made on the basis of the partnership income figures derived from the partnership's returns and statements, and that, as a result of the special commissioners' decision, those statements had been shown to be incorrect by reason of the negligent conduct of the representative partner. The allegation against the taxpayer was that, on that basis, the submission of his individual returns was negligent rather than fraudulent. As his returns reflected the income and gains from the partnership, it was clear that the precondition in Taxes Management Act 1970 section 95 subsec-or-para 1s. 95(1)(a) was satisfied.
Although it was understandable that a firm might seek assurances in respect of penalties, clear and express reference would have been necessary to ensure that any such statement extended both to penalties on the partner or partners in that capacity under Taxes Management Act 1970 section 95As. 95A and to penalties under Taxes Management Act 1970 section 95s. 95 on the partner or partners in their capacity as individual taxpayers. Thus, despite the taxpayer's intention, the Pt. 36 agreement did not prevent HMRC from seeking to impose the penalty under Taxes Management Act 1970 section 95s. 95.
In the majority of cases involving professional partnerships dealt with through self-assessment, it was likely that the individual partners would already have made payments on account in accordance with TMA 1970, Taxes Management Act 1970 section 59As. 59A. The tax payable would differ from that chargeable, as at least a proportion of the latter would have been covered by the payments on account and any tax deducted at source. Under TMA 1970, Taxes Management Act 1970 section 59Bs. 59B, the difference between the tax contained in the person's self-assessment and the payments on account made in respect of the year in question was payable at the time specified, usually by the 31 January following the year of assessment. Clearly, therefore, the word "payable" in TMA 1970, s. 59B had a different meaning from that in Taxes Management Act 1970 section 95s. 95. Taxes Management Act 1970 section 59BSection 59B was addressing the timing of the liability, and only related to the balance which remained to be paid. Section 95 was looking at the whole of the tax liability, whether or not already paid or accounted for, and thus timing was not in issue. In addition, what was intended to be under scrutiny for the purposes of Taxes Management Act 1970 section 95 subsec-or-para 2s. 95(2) was the overall liability to income tax and capital gains tax ultimately determined for the particular years in question, irrespective of the method used for the purpose of arriving at that liability. Neither the method of collection of the tax, or the method of arriving at the liability for the year in question, were relevant to the question whether the tax was "payable" within Taxes Management Act 1970 section 95 subsec-or-para 2s. 95(2).
If a contract settlement was arrived at between a taxpayer and HMRC, the tax liability was established without amendment being made to that taxpayer's self-assessment. Such settlements usually covered interest and penalties in addition to the tax, so it might be assumed that establishing liability for the purposes of Taxes Management Act 1970 section 95s. 95 was irrelevant. However, if an amendment to the taxpayer's self-assessment was essential, that could lead to some form of challenge possibly being made in a wide range of contract settlement cases, perhaps even preventing some settlements from being reached.
1. This appeal made by Mr Stockler relates to a penalty determination. The hearing on 2 December 2008 was, by agreement between the parties, listed to consider the following preliminary issue of law:
Whether, as a matter of the construction and application of Taxes Management Act 1970 section 95s. 95 of the Taxes Management Act 1970 and in the circumstances of this case as set out in the Agreed Statement of Facts and as appears from the documents in the agreed bundle, HMRC have power to raise a penalty determination in any amount.
2. In this decision, I follow the parties' convention of referring to the Respondents as "HMRC".
3. With minor editorial changes I set out in full the Statement of Agreed Facts, together with other relevant facts, including those which were established at the hearing. Mr Stockler did not give evidence on oath.
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(2) At all material times, the Appellant ("Mr Stockler") was a solicitor and partner in the firm...
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