England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		13/12/2007

Mr Justice Warren :

Introduction

1. This is an application by Stockler Charity ("the Firm") for declaratory relief to the effect that the Respondents ("HMRC") have:

"failed to honour the terms of the Appellants' CPR Part 36 offer dated 17^th May 2007 (which they accepted by notice of acceptance dated 25^th May 2007) by having issued and served on William Stockler (a partner in the Appellant firm of solicitors) a penalty determination dated 16^th October 2007 when the right to do so was precluded in consequence of the Respondents' acceptance of the Appellants' Part 36 offer."

The history

2. The Firm, as the application mentions, is a firm of solicitors. Mr William Stockler has at all material times been a partner in that firm. Mr Stockler was the partner responsible for preparing the partnership tax return and was the representative partner for the purposes of the Taxes Management Act 1970 ("TMA").
3. Returns were prepared and submitted for the tax years 1996/97, 1997/98 and 1998/99. HMRC were of the view that, in computing the amount of the profits of the Firm, certain sums had been deducted which were not wholly and exclusively laid out for the purpose of the profession of the Firm. These were sums which HMRC considered were simply personal liabilities of Mr Stockler. HMRC accordingly amended the partnership return under the powers conferred by section 30B(1) TMA on the basis that Mr Stockler was guilty of negligence within section 30B(5).
4. It should be noted that, where a partnership return is amended under section 30B(1), it is provided by section 30B(2) that notice should be given to each relevant partner amending the individual return which he makes under section 8.
5. The Firm appealed against that amendment. The Special Commissioners dismissed the Firm's appeal. They made a finding that Mr Stockler had been guilty of negligent conduct within the meaning of section 30B(5).
6. The Firm appealed to the High Court on 25 January 2007. The Grounds run to 36 paragraphs, each one of which alleges an error on the part of the Special Commissioners.
7. On 3 May 2007, there was a meeting between Mr Stockler and representatives of HMRC. Mr Stockler says that he offered to settle the whole dispute upon payment of the full amount of tax claimed (less certain disbursements) plus interest but without any penalties. No agreement was reached.
8. The Firm then made an offer under Part 36 CPR to settle the Firm's appeal. The offer is contained in a letter dated 17 May 2007 to HMRC. The terms offered were as follows:

a. HMRC to withdraw the amendments.

b. The Firm to pay within 21 days pay "the aggregate amount of income tax assessable on the partners of the Appellant in consequence of the decision of the Special Commissioners dated 7^th December 2006, the subject of the appeal, less the following amounts" which amounts were certain sums of capital gains tax paid by Mr Stockler and certain other income tax.

c. The Firm to pay at the same time statutory interest on the amount under b.

d. The Firm to pay HMRC's costs of the appeal up to the date of acceptance of the offer.

This Part 36 offer made no express reference whatsoever to penalties.

9. On 25 May 2005, the Solicitor's Office of HMRC sent a letter enclosing a notice of acceptance of the Part 36 offer which was an unqualified acceptance with no reservations expressed in it. However, the covering letter itself contains this paragraph:

"We are aware that you have previously been in discussion with our colleagues regarding financial penalties, and we are instructed to make it clear, for the avoidance of any possible doubt, that acceptance of the Part 36 offer is of course entirely without prejudice to any penalty determination which may follow hereafter. Penalties are not, of course, in issue in the present proceedings."

10. On 31 May 2007, a letter to HMRC on behalf of the Firm suggested that

"Paragraph 1 of the offer dated 17^th May 2007 provides for the withdrawal by yourselves of the amendments of the Appellant's partnership returns. The purpose and effect of such withdrawal is to ensure that there can be no question of any reliance on such amendments for any purpose, whether of penalties or otherwise and that the payments to be made pursuant to the offer are in full and final settlement of all the taxpayer's liabilities. Absent any amendment, pursuant to TMA, Section 30B, there is no basis for making any charge to additional tax on the partners and thus any penalty pursuant to TMA, Section 95A."

11. The relevance of what Mr Stockler considered the purpose and effect of withdrawal to be may be debatable. But he is clearly incorrect if he is intending to say that it was the purpose of HMRC that they would be precluded from raising penalties. Such a proposition is flatly inconsistent with what HMRC said expressly in the covering letter. Now, HMRC may be right or they may be wrong in saying that, in the events which have happened, they remain entitled to raise penalties but that is a very different proposition from one to the effect that their purpose in accepting the Part 36 offer included the abandonment of any power to raise penalties.
12. The sum due under the Part 36 offer which was accepted by HMRC was paid by a personal cheque from Mr Stockler. One should not lose sight, however, of the fact that the appellant was the Firm and that the Part 36 offer was an offer (accepted by HMRC) to settle the Firm's appeal. The amount was some £122,731.77. It reflected a tax rate of 40% on the amounts which should not have been shown as deductions in the partnership tax return.
13. The Investigator, Ms Jennifer Louise Becker, of HMRC wrote to Mr Stockler on 11 June 2007 enclosing a copy of her internal instruction (to Mr Jason Gill of HMRC) to "discharge those amendments". Mr Stockler responded on the same day that this is not what had been agreed: rather the amendments would be "withdrawn". That resulted in a further instruction to Mr Gill, again on the same day, to "withdraw the amendments to the partnership self assessment…". Ms Becker told Mr Gill that this would have to be done by "amending the assessments back to the original figures". A copy of this new instruction was sent to Mr Stockler. After further correspondence, Mr Gill wrote to Mr Stockler on 27 June 2007 stating that he had "withdrawn the amendments".
14. I know of no provision which in fact allows an adjustment of this nature, following a decision on an appeal to the Special Commissioners, to be made to a return by agreement between the taxpayer and HMRC. Figures can be changed following the determination of an appeal to reflect the decision, but in the present case, the actual decision of the Special Commissioners determined that the amendments which had been made to the partnership return by HMRC should stand. That is not to say that the Part 36 agreement cannot be given effect to; the amendments have been withdrawn in the sense that it is not sought to amend the individual returns of the partners (in particular that of Mr Stockler). Whether the absence of a withdrawal in the sense of an absence of a formal change in the partnership return to reinstate the original figures has any impact on the amount "payable" within each of the subsections I rather doubt. If the amount paid pursuant to the Part 36 agreement would not be, or be reflected in, an "amount of income tax….payable…." within paragraph (a) had a formal amendment to the partnership return been possible, then I would have thought (although I do not decide) that the position would be the same even in the absence of formal amendment. In each case, the argument that the amount is not so "payable" turns not so much on the figures in the partnership return but on the absence of any amendment to the individual partners' returns and the absence of any assessment (including any discovery assessment).
15. On 16 October 2007, Ms Becker wrote to Mr Stockler to inform him that she had that day made a penalty determination "in respect of your incorrect returns of your liability to tax for the years, 1996/97, 1997/98 and 1998/99". She said that the penalty "is a tax geared penalty as provided for in s95 Taxes Management Act 1970". In her letter, she refers to her earlier letter of 8 June 2007, repeating the figures there set out in respect of what she describes as the "culpable tax". The 8 June 2007 letter contains calculations carried out on the basis that the additional tax due was "based on all the additional chargeable profits being attributed yourself".
16. I infer from Mr Deacon's written submissions that it is not accepted that Mr Stockler is liable for 100% of any additional tax. I imagine that the reason for the attribution adopted by Ms Becker is that HMRC now consider that this is the effect of the partnership agreement. In this context, it should be noted that the Special Commissioners stated in their decision that the arrangement between the partners was that, if there was an expense of the Firm which was the responsibility of only one of the partners, that expense was debited to that partner's account. In the present case, the items which were, as a result of the Special Commissioners' decision, disallowed as deductions were, on the basis of that decision, the responsibility of Mr Stockler. It follows that, if they had been properly allowable, it would have been only Mr Stockler's share of profits which would have been affected both in reality and for tax purposes. Accordingly, the disallowance of those deductions would result in an increased amount of profit being attributable to Mr Stocker so that his tax position alone would be affected. This approach is consistent with the payment under the Part 36 agreement having come from Mr Stockler alone and would explain why the penalty claimed is based on 100% of the additional tax and not on 50% of it (Mr Stockler's partnership share being, at the material time, 50%). On the basis of that attribution, and adopting Mr Stockler's tax rate of 40%, the total additional tax and interest amounted to £122,731.77, the figure which Mr Stockler paid in accordance with the Part 36 agreement. Of that figure, £76,508.75 represented tax and the balance represented interest.
17. The penalty claimed is based on the figure of £76,508.75 and, claimed at 70%, gives a penalty of £53,555. The formal penalty determination is raised in that sum against Mr Stockler alone. It is raised under section 95, not section 95A, TMA.
18. Sections 95 and 95A deal respectively with incorrect returns and incorrect partnership returns and both relate to returns which are made fraudulently or negligently.
19. Dealing first with individuals, a person may be required under section 8 TMA to deliver a return (which will, when made, include a self-assessment). Under section 95, if a person delivers an incorrect return fraudulently or negligently, he is liable to pay a penalty not exceeding the difference between the amounts specified in paragraphs (a) and (b) of sub-section (2) which read as follows:

"(a) the amount of income tax and capital gains tax payable for the relevant years of assessment by the said person (including any income tax deducted at source and not repayable), and

(b) the amount which would have been the amount so payable if the return…..as made or submitted by him had been correct."

20. Dealing next with partnerships, the partners or any individual partner may be required under section 12AA TMA to make a partnership return. Under section 95A, if the representative partner (in the present case, Mr Stockler) delivers an incorrect partnership return and does so fraudulently or negligently, he is liable to pay a penalty not exceeding the difference between the amounts specified in paragraphs (a) and (b) of sub-section (2) which read as follows:

"(a) the amount of income tax and capital gains tax payable by him for the relevant years of assessment by the said person (including any income tax deducted at source and not repayable), and

(b) the amount which would have been the amount so payable if the return…..as made or submitted by the representative partner had been correct."

21. There has, however, been no actual assessment of tax on Mr Stockler to reflect the additional amount which has in fact been paid pursuant to the Part 36 agreement.

.

22. On 31 October 2007, Mr Stockler appealed against the penalty determination which would, absent this application, in due course be heard by the Special Commissioners.
23. On 7 November 2007, Mr Stockler issued the present application in the Firm's appeal against the decision of the Special Commissioners. Its wording – "failed to honour the terms of the…offer" - reflects the wording of CPR 36.11(8).

The hearing before me

24. Notwithstanding my initial view that a challenge to the penalty determination ought to be dealt with in the appeal against it to be heard by the Special Commissioners, I allowed Mr Deacon to develop his submissions to the effect that the effect of the acceptance of the Part 36 offer was so clearly to prevent HMRC from raising penalties that I ought to make a declaration to that effect. Mr Nawbatt, on instructions, accepted that, if I considered the position to be absolutely clear to that effect, HMRC would want me to decide the point rather than re-argue everything before the Special Commissioners. He also seemed inclined, at the hearing, to accept that the penalty determination ought more properly to have been raised under section 95A rather than section 95 but that is not now the position of HMRC.
25. The central issue at the hearing, and indeed today, is the meaning of the word "payable" in paragraph (a) of each of sections 95(2) and 95A(2)). This is of critical importance to Mr Deacon's argument since, if HMRC are correct in their interpretation on this point, the foundation of the argument falls away.
26. Towards the end of the hearing, it became apparent that there was an important difference between the parties about the meaning of paragraph (b) of each of sections 95(2) and 95A(2). Mr Nawbatt submitted that it is concerned with what would have been the amount payable if the (personal or partnership as the case may be) return had contained the correct figures in the first place. Mr Deacon submitted that it is concerned with the tax which would have been payable had the income actually been as declared in the incorrect return. HMRC had not appreciated that the Firm would be taking the position for which Mr Deacon was arguing. And Mr Nawbatt was attracted by an opportunity to expand on his argument. I accordingly gave permission to each side to file further written submissions on the true construction of those two provisions. Both sides have taken advantage of that opportunity, making lengthy submissions which go rather beyond what I had envisaged. Further, HMRC have introduced new evidence from Ms Becker. Although Mr Deacon has not objected to that evidence going in, it does not, in the end, have any impact on my decision on the case, although I do take account of what Ms Becker has to say about how HMRC dealt with their obligation under the Part 36 agreement to "withdraw" the amendments to the partnership return.
27. In the event, Mr Nawbatt now accepts, after reflection, that the Appellants are correct on this point so that paragraph (b) of each subsection refers, to quote Mr Deacon's written submission:

"to the tax that would have been payable if the taxpayer's original returns had been correct as made, that is to say the tax that would have been payable as a result of applying the TMA machinery to the declarations made in the original returns."

28. Accordingly, the issue between the parties is really the meaning of "payable" in paragraph (a) in each of sections 95(2) and 95A(2) TMA.

The arguments

29. Mr Deacon submits that it is inherent in the acceptance of the Part 36 offer that HMRC are no longer able to seek payment of any penalty. His argument is quite lengthy. However, I do not think that I do it any injustice if I summarise the points in this way:

a. The Part 36 offer obliged HMRC to withdraw the amendments to the partnership return.

b. Mr Stockler's purpose in including that requirement to withdraw the amendment was to put the Firm in precisely the same position for all purposes as if the amendments had never been made. (He says that he had made the same offer at the 3 May 2007 meeting. That may be correct; HMRC say that it is not, but it is clear that he made an offer which was similar if not identical.)

c. Accordingly, when he made the Part 36 offer, HMRC must have appreciated that his purpose was as set out in b. above. Mr Stockler would like then to say that HMRC must have had the same purpose as he had; but even if that is not so, the background demonstrates on Mr Deacon's argument that, objectively viewed, the acceptance of the Part 36 offer must be regarded as having that purpose.

d. By raising a penalty determination, HMRC have failed to honour the terms of the offer which they have accepted. Mr Stockler and the Firm are accordingly entitled to enforce the terms of the offer by obtaining the declaratory relief sought.

e. I add that, if Mr Deacon is correct on all of this and I make the declaration sought, it might be expected that, subject to any appeal, HMRC would give effect to my decision by withdrawing the penalty determination.

30. Let me deal with the steps in that argument.
31. Paragraph a: This is clearly correct. It has been done in the sense that HMRC do not now seek to amend the partners' individual returns. But it follows from Ms Becker's evidence that there has not in fact been a formal amendment to the partnership return because there is no power to do so.
32. Paragraph b: I will accept this as being the case for the purposes of the argument. It is important, however, to understand why Mr Stockler says that this was his purpose. It is because – and can only be because – as a matter of construction of sections 95(2) TMA and 95A(2) the maximum amount of the penalty which HMRC can raise is nil. Mr Deacon submits that, the amendments to the return having been withdrawn, the difference between the amounts specified in paragraphs (a) and (b) is in fact nil. But this conclusion follows only if Mr Deacon is right in his submission concerning the meaning of "payable" in paragraph (a).
33. Paragraph c: If that is correct, then it follows that the purpose of the Part 36 offer was to preclude any penalty assessment. That is so whether one looks to Mr Stockler's own purpose or views the matter objectively, so that HMRC must be taken to have the same purpose. Mr Deacon says that the meaning of the word "payable" in each of the subsections is so clear that I ought to decide the point and make the appropriate declaration.
34. Paragraph d: On that basis, Mr Deacon submits that it was a term of the Part 36 offer which should be enforced under CPR 36.11(8) that penalty determinations should not be made.
35. Mr Nawbatt says that this is all nonsense. The Part 36 offer said nothing about penalties and nothing is to be implied. HMRC has done everything which it agreed to do. In any case, HMRC take a very different view about the true construction of the provisions and maintain that, notwithstanding withdrawal of the amendments, they are entitled to make a penalty determination in the way they have.

Discussion

36. I have received long written submissions about the meaning of "payable" in sections 95(2) and 95A(2) TMA. Mr Deacon's submissions include an exegesis on the operation of the self-assessment system in the UK and detailed submissions about chargeability and assessment. He concludes, reading section 9(1) and paragraph (a) of sections 95(2) and 95A(2) together, that the paragraph (a) amount relevant to a taxpayer is:

"the amount in which he is assessed to income tax under s.9(1)(a) together with any amount of income tax deducted at source and not repayable, less any tax credits to which section 231 of the principal Act [ie Taxes Act 1988 but which should now be a reference to section 397(1) Income Tax (Trading and Other Income) Act 2005] applies".

37. HMRC submit that paragraph (a) is concerned with the tax which is properly payable by a taxpayer. That amount, Mr Nawbatt submits, is not limited to the amount in respect of which an assessment has actually been made or even one which could now be made. It includes, for instance, amounts of tax which have been paid by way of settlement of a claim for tax or of an appeal from the Special Commissioners. It includes, in particular, the additional amount which Mr Stockler paid to HMRC pursuant to the Part 36 agreement: tax which has been paid pursuant to such an agreement is as much "payable" as tax paid pursuant to an assessment or deducted at source.
38. Mr Nawbatt relies on the decision of Pitchers J in The Director of the Assets Agency v M [2007] EWHC 908 to show that tax becomes payable under sections 7, 8 and 59A TMA the amount of which is to be finally ascertained, if necessary, pursuant to section 29. As to that, Mr Deacon says that it is not authority for the proposition that tax is payable prior to assessment at all but, on the contrary, makes clear that, in the absence of an assessment, the taxpayer's obligation to pay is not quantified: the liability to pay an ascertained amount of tax arises only 30 days after the assessment. However, even if Mr Deacon is right in saying that the case is not an authority for the proposition which Mr Nawbatt puts forward, it does not answer the question whether a liability has to be both quantified and immediately due before it can be said to be "payable" for the purposes of paragraph (a).
39. Mr Nawbatt rejects Mr Deacon's proposition that, in normal cases, an enquiry by HMRC revealing a failure to return any income will result in a formal amendment to the self-assessment under section 28A TMA. On the contrary, he says that frequently there are settlement agreements with assessments being made only where an agreement with the taxpayer cannot be reached. According to his analysis, even when the matter is dealt with by agreement, the tax nonetheless remains payable albeit that it is collected under the agreement rather than by virtue of an assessment. An assessment is simply the collection mechanism which does not affect the quantum of the tax payable. For his part, Mr Deacon says that there is no statutory mechanism for settlements (although I would comment that settlements can be made pursuant to HMRC's "care and management" duties). The amount of any "penalties" included in the contract of settlement are, he says, recoverable as contractual sums and are not penalties under section 95 or section 95A at all. He has further detailed submissions in relation to closure notices and the compromise of appeals under section 54 TMA.
40. Mr Nawbatt also submits that the Part 36 agreement results in an agreement which is the equivalent of a contract of settlement of the type commonly entered into with taxpayers rather than making formal amendments to returns. Indeed the offer itself refers to the tax: the Firm was to pay to HMRC "the aggregate amount of income tax assessable on the partners of the Appellant in consequence of the decision of the Special Commissioners…". The offer was to pay the tax which could have been assessed so that it not even open to the Firm to take a technical (and unmeritorious) point that the obligation is not to pay the tax but only an amount of money equal to the amount of the tax.
41. He also makes a number of further submissions. These include submissions about the source of liability to tax which he says is to be found in Income (Trading and Other Income) Act 2005 Part II sections 5 to 7 and not in section 59B(1) (as asserted by Mr Deacon) which he says is simply an administrative provision about collection. Further, he rejects the suggestion that "payable" in sections 95 and 95A has the same meaning as in section 59B(1) and (6) where the context is entirely different and he rejects the proposition that there has to be an assessment before any penalty can raised.

Conclusion

42. I decline to make the declaration which Mr Deacon seeks. There are two reasons for reaching this conclusion.
43. First, even if Mr Deacon is correct in his submissions on the meaning of "payable" in paragraph (a) of sections 95(2) and 95A(2) TMA, his argument concerning the Part 36 offer seems to me to confuse purpose and effect. Whatever the purpose of the agreement which resulted from the acceptance of the offer was from Mr Stockler's point of view, I do not see how it can be said that it was the purpose of HMRC or, perhaps more importantly, the purpose of the agreement viewed objectively, to preclude the making of a penalty determination. What was agreed by HMRC was simply that they would withdraw the amendment. That either does, or does not, have the effect as a matter of construction of the legislation for which Mr Deacon contends. Whether or not it does so is a matter which I consider is best determined in accordance with the appeal process which has been laid down by statute. Mr Stockler has the right, which he has exercised, to appeal the penalty determination to the Special Commissioners. If Mr Deacon's submissions are correct, Mr Stockler will win his appeal and the effect of the Part 36 agreement will be that a penalty cannot be raised because the difference between the amounts referred to in paragraphs (a) and (b) of each of sections 95 and 95A TMA will be nil. But he will win not because the purpose of the Part 36 agreement is that he should not be liable to a penalty but because that is the effect of the legislation. It will, from the point of view of HMRC, be an unexpected result but that will be because they would, on this footing, have misunderstood the effect of the legislation.
44. Secondly, and in any event, having heard and read the extensive competing arguments of Mr Deacon and Mr Nawbatt in relation to the true construction of sections 95(2) and 95A(2) TMA, I can only conclude that Mr Deacon is wrong in his suggestion that the effect of the provisions, as applied to the facts of the present case where the amendment to the partnership return have been "withdrawn" is clearly as he submits. He may be right; he may be wrong but, either way, there are powerful arguments that he is wrong.
45. Of course, I could decide the point on the arguments which I have heard. But as a matter of discretion I would, even if I am wrong in my first reason, decline to do so. Statute provides a scheme for tax appeals before the General or Special Commissioners. It would, I consider, be to subvert that scheme, except perhaps in the clearest of cases, for this court to pre-empt the ruling of the Special Commissioners on a matter which is properly within their territory. It would further distort the appeal process since, instead of this Court being an appellate court on the issue, with any further appeal to the Court of Appeal being a second tier appeal, it would be a court of first instance with an easier route to the Court of Appeal.
46. Accordingly, this application is dismissed.