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Cite as: [2007] UKSPC SPC588, [2007] UKSPC SPC00588

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Auntie’s Café v Revenue & Customs [2007] UKSPC SPC00588 (27 January 2007)

SPC 00588

CORPORATION TAX - Penalties for late filing of Returns claimed to be in breach of the taxpayer's human rights - Whether the penalties charged were disproportionate such that they infringed the appellant's human rights under Article 1 of the First Protocol to the European Convention on Human Rights - Whether the penalties were excessive - The inter-relation between domestic tax legislation and the provisions of the Convention - Appeal dismissed

THE SPECIAL COMMISSIONERS

AUNTIE'S CAFÉ LIMITED Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: HOWARD M. NOWLAN

Sitting in public in London on 11 December 2006

Mr. Martin Dawe for the Appellant

Mr. Gerry C. Facenna, counsel, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

INTRODUCTION

This was an appeal by Auntie's Café Limited ("the Appellant") against two fixed penalties, each of £1000, imposed on it for being late in filing its Corporation Tax returns for its accounting periods ended 30.6.00 and 30.60.01.

The Appellant conceded that the penalties had been properly charged under the terms of the Taxes Management Act 1970 ("TMA 1970") and the Finance Act 1998. In other words it conceded that the domestic tax legislation prescribed fixed penalties of £1000 for the late filing of the two returns, and it conceded that it had never argued and was not now contending that it had had a reasonable excuse for the delay in filing either of the two returns, such that s. 118(2) TMA 1970 might have deemed the filings not to have been late. The Appellant's only contention was that the penalties were inconsistent with its rights under Article 1 of the First Protocol to the European Convention on Human Rights ("the ECHR").

The Respondents ("HMRC") defended the case before me entirely by contending that the penalty structure of TMA 1970 and the Finance Act 1998 were consistent with the terms of the ECHR, and in particular with Article 1.

Both at the commencement and the end of the hearing, I asked to be addressed on what seemed to me to be the antecedent question, namely whether the penalties would have been wrongly charged as a matter of United Kingdom law if I concluded that the penalties were charged in accordance with the United Kingdom tax statutes, but that they nevertheless infringed the Appellant's human rights. I also asked to be addressed on the related question of whether I had any jurisdiction to give any remedy if I reached the conclusion that the penalties charged indeed breached the Appellant's human rights.

Since I had not been addressed on the matters referred to in 4 above, I gave an immediate oral decision in favour of the Respondents on the points on which I had been addressed, to the effect that the whole of the fixed penalty structure with which I had been concerned complied with the ECHR, and more specifically that the imposition of the penalties in the present case did not infringe the Appellant's human rights. The appeal was accordingly dismissed.

I did however repeat the observation that I was unclear in which of two ways I should frame my decision. The first would be to follow the assumption clearly made by both parties to the effect that a different conclusion on the human rights points would have meant that the penalties would have been wrongly charged, and that I would have had jurisdiction to overturn them. I would then dismiss the appeal because I accepted all of HMRC's contentions in relation to the compatibility of the domestic legislation with the ECHR. In the alternative I might frame my decision on the basis that the penalties had been properly charged under domestic law, and that any infringement of the taxpayer's human rights would have had no effect on that conclusion, or at least it would have occasioned no wrong for which I could give any redress. The only consequence of any such breach on this hypothesis would have been for the taxpayer to appeal to the High Court for a declaration that this part of the tax legislation did not comply with the ECHR. On this approach I would dismiss the appeal because there was no ground in domestic law to challenge it, and not because of any view formed on the human rights points.

Following my decision I agreed and the Appellant accepted, that HMRC should submit further written submissions on the points mentioned in 4 above. This HMRC did on two occasions, contending in outline that the Human Rights Act 1998 had a major bearing on how the duties of officers of HMRC should be conducted, with the result that had the penalties imposed in the present case breached the taxpayer's human rights, this would have rendered them unlawful, and then it was open to me to conclude that I had jurisdiction to give a remedy. HMRC contended however that because I had anyway reached the conclusion that the penalty structure had not breached any of the taxpayer's human rights, it was unnecessary for me to reach a decision on the difficult point of inter-relation between tax law and the provisions of ECHR, and the extent of my jurisdiction, and that because the point had not been fully argued in the hearing, it was inappropriate for me to reach any view of this relatively difficult point.

I accept that this point was not considered in the initial hearing, and indeed I consider that it was strange that it was not even raised by the parties. I also concede that because it was not fully argued the conclusions that I have reached in relation to it should be regarded as somewhat qualified. I nevertheless decide (for reasons which I will explain below) that it is appropriate for me to decide the matters referred to in paragraph 4 above and to decide whether I agree with the argument on the substantive point advanced by HMRC just referred to. .

My decision is that had the penalty structure infringed the taxpayer's human rights, then this is something that would have rendered the penalties unlawful, and for either one of two reasons I would have had jurisdiction to vacate the penalties. I then confirm my oral decision that the taxpayer's rights were not infringed by the penalty structure in dispute, and thus it is for this reason that the appeal is dismissed.

THE FACTS

The simple and agreed facts were that the Appellant, having been late in filing its tax returns for the two preceding periods, was 21 months late in filing its tax return for the period ending 30.6.00 and 9 months late in filing its return for the following period ending 30.6.01. As a result it incurred fixed penalties of £1000 for the late filing of those third and fourth returns. No appeal was made against the smaller penalties that would have been incurred in the earlier two years (when the fixed penalties would only have been of £100 or £200 depending on whether the returns were filed less than or more than 3 months late). The appeal thus related to the penalties for the third and fourth periods only.

The Appellant had no taxable profits in the two periods for which the £1000 penalties were imposed.

THE LAW

The relevant provisions of domestic law required all companies to file tax returns within 12 months of the end of their accounting periods, regardless of whether they considered that they would have a tax liability or not. The structure of penalties included both fixed penalties and "tax geared penalties". The fixed penalties were of amounts prescribed by paragraph 17 to Schedule 19 of the Finance Act 1998. This paragraph provides that the fixed penalties for late filings of tax returns were and remain now at £100 and £200 according to whether the filing is less than or more than 3 months late, with the two figures being increased to £500 and £1000 for any period when the company was also late in filing its two previous returns. It was of course because the returns for the periods ending June 2000 and June 2001 had each been more than 3 months late, and had each been preceded by two consecutive earlier late filings that the penalties were £1000 for each of the two years in the present case.

There are three circumstances in which the above penalties might not be chargeable.

• Section 118 (2) TMA 1970 provides that "where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased".

• Section 102 TMA 1970 provides that "The Board may in their discretion mitigate any penalty, or stay or compound any proceedings for a penalty, and may also, after judgment, further mitigate or entirely remit the penalty".

• An extra-statutory concession provides that late filing by no more than 7 days will be ignored.

In this case the extra-statutory concession was plainly not in point, and the Appellant neither argued that it had had any reasonable excuse for the late filings nor that the Board's discretion under section 102 should have been exercised in its favour. It was simply contended that the penalties breached the Appellant's rights under Article 1 of the ECHR.

ARTICLE 1 OF THE ECHR

Article 1 of the First Protocol to the ECHR provides that:

"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties".

THE EVIDENCE

No evidence was given by or on behalf of the Appellant. Evidence was given by three officers of HMRC, namely David John Stephens, John Stell Hurst, and Keith Grant Andrews. These three officers were responsible for different aspects of the penalty system, being general policy, technical assistance and administration. Their evidence covered the policy and alleged justification for the legislation providing for fixed penalties as well as tax based penalties, the circumstances in which reasonable excuse would be accepted for late filing, and the circumstances when the Board might mitigate penalties. Considerable evidence was also given as to the statistical success of the penalty system in encouraging timely compliance by taxpayers with their filing and other liabilities. In so far as this evidence is material to this appeal, I will summarise it below in listing the contentions on behalf of HMRC and the reasons for my decision on the issue of whether the system is or is not ECHR "compliant".

THE CONTENTIONS ON BEHALF OF THE APPELLANT

It was contended on behalf of the Appellant that:-

• fixed penalties impacted more onerously on small companies with modest assets than on large profitable companies, and in particularly they impacted disproportionately when imposed on companies with no tax liabilities, so that the implicit principle of Article 1of ECHR (requiring penalties to be "proportionate") was breached;

• the fixed penalty in the present case was excessive to compensate the tax collecting authority for its loss, since there had been no loss as the Appellant had no tax liability for either of the periods in contention; and that

• it was unfair that companies that continued in existence had to pay penalties for late filings etc, when companies that were struck off the Register of Companies would escape without paying their penalties.

THE CONTENTIONS ON BEHALF OF THE RESPONDENTS

It was contended on behalf of HMRC that:-

• although the imposition of the fixed penalties on the Appellant deprived the Appellant of some of its property, this could be justified if it was in the public interest, and subject to the conditions imposed by law, and in particular so as to secure the payment of taxes or other contributions or penalties;

• although it was accepted that it was not enough for HMRC to assert (as the wording of Article 1 actually said) that the penalty structure was simply deemed by it to be "necessary to secure the payment of taxes", and did not therefore infringe the taxpayer's rights, the penalty structure still complied with the Article;

• the central question was one of proportionality, requiring any interference with the protected rights to achieve a fair balance between the demands of the general interest of the community and the requirements of the protection of the individual's rights;

• the penalty system had been carefully constructed and there was good reason for the potential imposition of both fixed and tax based penalties;

• tax based penalties were required to deal with defaults by large taxpayers to whom the fixed penalties would be of little consequence;

• fixed penalties were required because if all penalties were geared to the amount of tax at stake, there would be no machinery to induce nil or low taxpayers to make returns;

• returns were required from all companies within the charge to tax for the efficient administration of the tax system;

• were returns not required from nil taxpayers, HMRC would have no way of checking whether the non taxpayer's assumptions behind its expectation of not being liable for tax were right;

• the ability to carry forward losses gave HMRC an added interest in being able to obtain returns from companies currently expecting to have no tax liabilities;

• the penalties were imposed to promote the efficient operation of the taxation system and not to compensate HMRC for lost or late paid tax so that the fact that no tax was payable by the Appellant did not mean that HMRC was being compensated for a loss that it had not suffered;

• the amounts of the fixed penalties were very modest, and in 2006 had been unchanged for 16 years;

• companies were notified of the possibility of penalties shortly after the end of their accounting periods; again one month before the expiry of the 12 month filing period; and following a default they were again warned that if the failure continued the penalties might be increased without further notice (i.e. they might be increased if the delay was for more than 3 months);

• the modest fixed penalties only rose to the higher (albeit still modest) figures of £500 and £1000 if the defaults occurred in years following two earlier successive defaults so that taxpayers could hardly claim that the imposition of the increased penalties came as a surprise or impacted on companies that generally complied with their liabilities;

• postal and other delays of less than 7 days were ignored by concession;

• delays for which there was reasonable excuse were deemed not to be delays, this being a matter which it was accepted that the Commissioners could review on appeal;

• the Board could exercise a discretion to mitigate penalties, over which the only review was said to be by way of proceedings before the High Court for judicial review, which remedy might be available for instance if the discretion had been exercised inconsistently or improperly; and finally that

• the very sparing use of the Board's power to mitigate was justified because the force of fixed penalties would be eroded if taxpayers believed that the penalties would often be waived.

MY DECISION

The decision that I gave orally at the end of the hearing was that I accepted all of the arguments that HMRC had advanced that I have just listed, and decided that the penalties imposed in the present case did not infringe the Appellant's human rights.

The decisive point in the present case between the Appellant's and HMRCs' arguments is what has to be balanced in judging whether the deprivation of property survives the "proportionality" test. I consider that it is not enough, as the Appellant suggests, merely to suggest that a fixed penalty impacts more adversely on a taxpayer with fewer assets than on one with more assets. The factors that must be balanced are whether the deprivation of property is justified because it is effected under legislation that is in the public interest and that is required for the collection of taxation and penalties. In my judgment HMRC has amply demonstrated that some form of modest fixed penalties are a sensible and required feature of the taxation system; the penalties are extremely modest; there are several safeguards to deal with postal delays, and reasonable excuse; and the penalties only rise from figures of £100 and £200 (which for companies one might describe as derisory) to still very modest figures of £500 and £1000 for companies which can fairly be described as "persistent offenders".

It is interesting to note that in two cases where tax collection machinery has been challenged in the past on human rights grounds, the relevant tribunals concluded that the tax legislation was compatible with the terms of ECHR, notwithstanding that in both of those cases the seizure of property and imposition of penalties were far more extreme than the modest penalties charged in this case. In one of those cases, the tax authority was held to be justified in seizing property to satisfy tax liabilities notwithstanding that the property was owned by someone other than the taxpayer. In the other the default surcharge machinery of the United Kingdom Value Added Tax legislation was challenged. In my view, where a taxpayer is one day late in paying its Value Added Tax, having an excuse that is deemed by the legislation not to be a reasonable excuse, so that the possible 10% increment to the Value Added Tax charge can impose a tax burden that could represent a multiple of the taxpayer's profits, this surcharge is markedly more serious than the penalties now in question.

The Appellant's third contention, geared to companies that might escape paying their penalties by being struck off the Register of Companies is irrelevant. In any case where HMRC consider that there is a prospect of collecting tax or penalties, HMRC can and doubtless will pursue all remedies and can prevent a company with assets and a liability for penalties from being struck off. Where HMRC and doubtless other creditors might observe the obvious point , namely that "there is no way of getting blood out of a stone", such that no objection is taken to a company being struck off, this has no bearing on the coherence and fairness of the system of penalties for the mass of companies that are not insolvent.

THE JURISDICTION POINT

As mentioned above, at the end of the hearing, I said that although the Appellant's appeal was dismissed on any approach, I was still not clear as to which of the two ways of reaching my decision that I outlined in paragraph 6 above was the correct one. Furthermore if it was right that I should ignore contentions based solely on incompatibility of the domestic law with ECHR, I was not even convinced that there had been a valid appeal at all, because the Appellant had not advanced any ground of appeal that could possibly have resulted in the appeal being allowed.

Although I have been requested by HMRC to ignore all these point, I consider that it is not right to do so. It seems very unsatisfactory for there to be a decision to the effect that "there has in my opinion been no breach of the taxpayer's human rights", then observing however that " I do not know whether I am competent to consider that matter or whether I have jurisdiction to do so: and I do not know either whether the effect of the domestic law is that any breach of human rights would be relevant". Quite apart from such an approach being unsatisfactory, it seems that the points concerning the relationship between the tax statutes and the ECHR and the level of my jurisdiction are logically the antecedent questions which should be decided first. Having decided those points, it then becomes clear whether any infringement of human rights is, on one conclusion of the first issue, irrelevant to me; or whether in the alternative I do have to consider those points, and it will be my conclusion on those points that will result in the appeal being allowed or dismissed.

The first point that I accept is the proposition, advanced by HMRC, that the taxpayer can make a valid appeal against assessments or penalties simply by appealing and then outlining the ground of appeal. That ground need not be one that has the slightest chance of prevailing. HMRC's example was of an appeal against penalties on the grounds of maladministration. Whilst such an appeal would be a valid appeal, the ground of appeal would be one which could only be dealt with by proceedings for judicial review, and the Commissioners would have to dismiss any appeal advanced only on that ground. More frivolously I assume that it follows that if a taxpayer appealed and specified the ground of appeal as being that it objected to paying tax, the appeal would obviously be dismissed, but there would still have been a valid appeal.

Having established that there was a valid appeal in this case, HMRC contended that if I had decided the infringement of rights point in favour of the Appellant, then it would have followed that the "penalty would have been determined unlawfully, i.e. in breach of the Human Rights Act, [and that] the Commissioners could arguably set the penalty aside because 'it appears to them that no penalty has been incurred'." It would then be for me to decide whether to follow the decision of Special Commissioner Wallace in Sharkey v. De Croos (HMIT), SpC 00459 26 January 2005 and conclude that I had no jurisdiction under section 100B(2) TMA 1970 and no power to give any remedy; or alternatively I might conclude that my jurisdiction under s. 100B(2) enabled me to set aside the penalty. Section 100B(2) provides that in the case of an appeal against a fixed penalty the Commissioners may, "if it appears to them that no penalty has been incurred, set the determination aside". It was suggested that I might conclude that I had the relevant power to set aside the penalty.

Subsections (1 ) and (2) of Section 6 of the Human Rights Act 1998 provide that:-

"(1) It is unlawful for a public authority to act in a way which is incompatible with a Convention right.

(2) Subsection (1) does not apply to an act if-

(a) as the result of one or more provisions of primary legislation, the authority could not have acted differently; or

(b) in the case of one or more provisions of, or made under, primary legislation which cannot be read or given effect in a way which is compatible with the Convention rights, the authority was acting so as to give effect to or enforce those provisions."

It follows from this that if the imposition of fixed penalties did infringe a taxpayer's Convention rights, then that act of imposing the penalties would be unlawful unless HMRC could establish both that "they could not have acted differently", and that they could not have "interpreted the tax legislation in such a way as to avoid the incompatibility between the domestic tax legislation and the Convention rights".

HMRC have suggested that for two reasons subsection (2) does not qualify subsection (1) in this case, so that if the penalties imposed had breached the taxpayer's human rights they would have been "unlawful". First it is suggested that on the permissible strained construction of primary legislation required by subsection 3(1) of the Human Rights Act 1988, although paragraph 17(1) of Schedule 18 Finance Act 1998 provides that the taxpayer making various late filings "is liable to a flat-rate penalty", that liability does not necessarily mean that HMRC must actually impose the penalty. Even on a strained interpretation I am not quite persuaded that this argument prevails but this is irrelevant because the other suggested flexibility, open to HMRC, seems unquestionably to enable HMRC to "act differently". This is because HMRC can always exercise its discretion under s. 102 TMA 1970 to mitigate or remit penalties altogether.

The existence of the Board's unfettered discretion under s. 102 plainly means that an imposition of penalties that infringed a taxpayer's human rights under the Convention would be "unlawful". The next question is whether this consequence enables the General or Special Commissioners to set aside an unlawful penalty.

Section 100B (2) (a) enables the Commissioners:-

(i) to set the determination of a fixed penalty "aside, if it appears to them that no penalty has been incurred"; and

(iii) "if the amount determined appears to them to be incorrect, to increase or reduce it to the correct amount".

Without even placing much reliance on Section 3 of the Human Rights Act 1998, which provides that "So far as it is possible to do so, primary legislation and subordinate legislation must be read and given effect in a way which is compatible with the Convention rights", it seems that the Commissioners do have jurisdiction to set aside a penalty which is unlawful under the Human Rights Act 1988. The effect of Section 6 of the Act is that HMRC should have remitted the penalty under section 102 TMA 70 in order to avoid the incompatibility between the fixed penalty and the taxpayer's human rights, and it therefore seems appropriate to say that the penalty has not properly been incurred. Although paragraph (iii) of Section 100B (2)(a), just quoted, is more directed to the incorrect amount of penalties, it again appears tenable to say that if a penalty has been imposed "unlawfully", then its amount is "wholly incorrect", and therefore under that paragraph the Commissioners can and should reduce the penalty to the correct amount of nil.

Another approach to the jurisdiction issue is based on Section 7 of the Human Rights Act 1998. So far as is relevant, this provides that:-

(1) A person who claims that a public authority has acted .. in a way which is made unlawful by section 6(1) may …. (b) rely on the Convention right or rights concerned in any legal proceedings …. if he is .. a victim of the unlawful act".

Section 8 then provides that "In relation to any act .. of a public authority which the court finds is .. unlawful, it may grant such relief or remedy, or make such order, within its powers as it considers just and appropriate". The Commissioners are plainly a tribunal and thus a court for the purposes of these two sections, and whilst the Commissioners could not, under Section 8, "award damages", they could set aside the penalties. The qualification in section 8 that the relief or remedy that the court or tribunal can give should be "within its powers" does not mean that the jurisdiction under Section 8 can never exceed or add to the jurisdiction that the tribunal or court has under the primary legislation setting up the tribunal or court. That construction would appear to make Section 8 virtually meaningless, and so the right construction must be that the court or tribunal can grant the relief or remedies appropriate to the matter in question. In the case of fixed penalties the jurisdiction that the Commissioners have is to remit, confirm or vary the penalties, and that thus is the appropriate relief to be given under Section 8. The only qualification to this is that if rules have been made by the Secretary of State that remove these powers from the Special and/or General Commissioners (on which I was not addressed, though I believe it not to be the case) then this second ground for concluding that the Commissioners would have jurisdiction to grant the remedy of remitting the penalties would fall away.

My decision is accordingly that in making my decision, in confirming or setting aside the penalties charged in this case, I do, on the grounds set out in paragraphs 30 and 31 above, have to consider all the matters that were debated in the hearing as to whether the penalties in this case did or did not infringe the taxpayer's human rights. My conclusion was and is that they did not and it is therefore for this reason that this appeal is dismissed.

I should make the point that this conclusion does not conflict with the point made, correctly in my view, by HMRC that in normal circumstances the question of whether the Board should exercise its discretionary power under s. 102 TMA 1070 is one that the Commissioners cannot review, and one that can only be reviewed in judicial review proceedings. Where human rights are infringed, it is the discretion under section 102 TMA 1970 that results in the imposition of the penalties becoming unlawful, which then brings the matter back within the jurisdiction of the General and Special Commissioners. Where a taxpayer wishes to contend that the Board has wrongly failed to exercise its discretion to remit penalties without there being any suggestion that the taxpayer's human rights have been breached, then naturally it follows that that matter of discretion is not one on which the General or Special Commissioners can comment, and the taxpayer can only seek redress by applying for judicial review.

HOWARD M. NOWLAN

SPECIAL COMMISSIONER

RELEASED: 27 January 2007

SC/3001/2006