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Cite as: [2008] UKSPC SPC670, [2008] UKSPC SPC00670

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Flaxmode Ltd v Revenue & Customs [2008] UKSPC SPC00670 (29 January 2008)

Spc00670

Income Tax – Penalties under section 97AA TMA in respect of failure to produce documents etc as required by section 19A TMA – Whether a letter informing a partner that an enquiry was to be made into a partnership return was a `notice' to that partner within section 12AC TMA – Letter sent by mistake to that partner as a matter of courtesy rather than formally addressed to partner as the nominated partner – Held: it was a `notice' and thus a notice of enquiry to that partner and accordingly that section 19A requirement to produce documents etc applied to that partner

THE SPECIAL COMMISSIONERS

FLAXMODE LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: CHARLES HELLIER

Sitting in public in London on 15 January 2008

R L C Bibby of West Tax for the Appellant

Graham Conway, HMRC, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Flaxmode Ltd appeals against penalty determinations under section 97AA(1)(a) and (b) in the period 3 May 2007 to 9 October 2007.

These determinations were made by the Respondents on the grounds that:

(i) notices had been given to Flaxmode under section 12AC TMA 1970 by an officer of the Board of his intention to enquire into two partnership returns (for the years ending 5 April 2004 and 2005);

(ii) pursuant to section 19A(2) the officer had required Flaxmode to furnish the officer with documents, accounts and particulars;

(iii) none of the documents or particulars had been produced as required; and

(iv) accordingly liability to penalties arose under section 97AA(1)(a) and (b).

The Appellant did not dispute before me that an officer had written to Flaxmode requiring the documents and information in (ii), or that these had not been furnished, or that as a result (so long as (i) was satisfied) a liability to penalties arose. However the Appellant argued that valid notices were not given in compliance with section 12AC, that as a result section 19A cannot bite and thus that penalties are not exigible.

The Statutory Provisions

Section 97AA provides that `where a person fails to comply with a notice or requirement under section 19A(2) … he shall be liable … to a penalty …".

Section 19A provides:-

"(1) This section applies where an officer of the Board gives notice of enquiry under section 9A(1) or 12AC(1) of this Act to a person ("the taxpayer").

(2) … the officer may … by notice in writing require the taxpayer …

(a) to produce to the officer … documents … and

(b) to furnish the officer with such accounts or particulars as he may reasonably require …"

There are two aspects of section 19A to be noted. First that it applies only where notice of enquiry has been given : if it has not been given any requirement purportedly under section 19A(2) is not a "requirement under section 19A(2)" and so no penalty can arise under section 97AA(1).

Second the person to whom the requirement may be addressed is the person to whom the enquiry notice was given and no other.

Section 12AC provides:

"(1) An officer of the Board may enquire into a partnership return if he gives notice of his intention to do so ("notice of enquiry") –

(a) to the person who made and delivered the return, or his successor,

(b) within the time allowed."

Thus if notice is given only to a person other than the person who "made and delivered the return, or his successor", for example to another partner, then that notice is not a "notice of enquiry" under section 12AC, and section 19A cannot take effect by reference to it.

The importance of the person who made and delivered the return is apparent too from section 19A: it is only to that person (the "taxpayer") that the requirement for further information may be addressed. That seems in the case of a partnership return to reflect an administrative scheme intended so that the dealings with HMRC in relation to a partnership return are principally with one person for the partnership and not any old partner.

Section 12AA deals with partnership returns. Subsection (2) provides that the Board may, by a "notice given to the partners require such person as is identified in accordance with rules given with the notice" to make and deliver a return.

Accordingly it is on the person so identified (whom the parties called the "nominated partner") to whom the enquiry notice must go and to whom a requirement may be addressed and whose failure will occasion a penalty.

The Appellant says that no enquiry notices were served on the nominated partner.

The Facts

The facts were not in dispute. I draw them from the Statement of Facts not in dispute and the papers in the bundle before me.

(1) J&A Gibbons is a partnership whose partners are: Flaxmode Ltd, J C M Gibbins, A G Gibbins and P Gibbins. Its business is that of catering butchers.

(2) The Respondents sent partnership tax returns for the years ended 5 April 2004 and 2005 to "J & A Gibbins". The returns incorporated a legend under the heading "Who should send me the Partnership Tax Return?" which indicated that when the return had not been issued in the name of a particular partner (which it had not) but had been issued in the name of the partnership, then the partner nominated by the other partners (or in default by the inspector) should complete and send back the return.

(3) On 31 January 2005 the 2003/04 return was received by HMRC and on 1 February 2006 the 2004/05 return was received. The returns indicated that Flaxmode Ltd was the nominated partner (being the partner nominated by the other partners in accordance with the rules on the return given with the notice on the return).

(4) On 7 November 2005 and 22 September 2006 an officer of HMRC wrote to each of the partners advising them (to use a neutral phrase) of the intention to enquire respectively into the 2003/04 and 2004/05 returns.

(5) On the same dates an officer of HMRC wrote to Mr J C M Gibbins (who was not the nominated partner) asking for documents and particulars.

(6) On 1 March 2007 an officer of the Board wrote two letters to the Company Secretary of Flaxmode Ltd (the nominated partner) requiring specified documents and particulars under section 19A, one letter in respect of 2003/04 and the other for 2004/05. These letters were sent because HMRC had become aware that the letters in (5) above had not been sent to the nominated partner.

(7) The documents and particulars so required by the 1 March letters were not produced.

I must now return to the letters mentioned at (4) above. The letters the partners received were different:-

(i) the letters to Flaxmode and, I believe, all the partners other than Mr J C M Gibbins said:-

"I am writing to tell you that I intend enquiring into the Tax Return for the year ended 5 April [2004/2005] of [J & A Gibbins] of which [you] are a member. I will write to Mr J C M Gibbins, as nominated partner to ask separately for the information needed.

… if we decide to make enquiries into any non-partnership aspects of [your] return we shall write separately to tell you."

(ii) the letter to Mr J C M Gibbins said:-

"I am writing to tell you that I intend enquiring in relation to [the] Return. … My enquiry is into certain aspects of the return …

… I attach a copy of a letter I am sending to your adviser requesting information about the [Return]. I will be dealing with your tax adviser to obtain the information. You should talk to them about my letters."

On the same days a letter was sent to West Tax indicating "I have today given notice under section 12AC Taxes Management Act to Mr J C M Gibbins as nominated partner, of my intention to enquire into the partnerships tax return … I attach a copy of the notice."

Now Mr Bibby's contention is this: a valid notice under section 12AC can be given only to the nominated partner; the nominated partner was Flaxmode Ltd not Mr J C M Gibbins; and the letter to Flaxmode was not a "notice of … intention" to enquire within section 12AC(i). Thus no enquiry notice had been given and no penalty could be due.

It is clear to me that the letters to Mr J C M Gibbins described in 14(ii) above could not be notices within section 12AC since they were not given to the nominated partner. I do not believe that the specificity of these provisions permits one to treat a notice given to one partner as a notice given to all: to do so would defeat the object of the provisions.

Thus the only question for me is whether the letters to Flaxmode were such notices. If they were then the 1 March 2007 letters described in 13(6) above are properly described as being requirements under section 19A.

Mr Bibby says that the letter sent to Mr J C M Gibbins was in a form which could possibly be a notice to the nominated partner, but the letter to Flaxmode was merely a courtesy letter with no statutory function. The letters to Flaxmode and the partners other than Mr J C M Gibbins were informal letters written in accordance with good practice.

Mr Bibby referred to the guidance in HMRC's manual. He said that it showed that courtesy letters of the sort sent to Flaxmode were aimed at keeping good relations and were not intended to be (and could not be) formal notices. In section EM 7042 of that manual the following appears:

"You must give notice … to the nominated partner …

"Forms SA 621, and SA 622 on LFC should be used …

"In addition, a letter should be sent to each partner using form …

"Section 12AC(6) provides that the giving of a notice under section 12AC(1) shall be `deemed to include the giving of notice under s.9A(1) …'.

The notification to partners that an enquiry under Section 12AC has been opened does not therefore have a statutory function but is merely a matter of good customer service, and something we have undertaken to provide. It is not a `notice' in any formal sense and you should ensure that any notification you give that the deeming provision applies cannot be construed as a separate notice in its own right." [my emphasis].

This Mr Bibby says makes clear that the letter to Flaxmode could not have been intended to be and was not a section 12AC notice.

Mr Bibby refers me to the formality of section 12AC: a "notice" must be given, not a courtesy letter written. That statutory formality may not require express reference to the enabling section(though something of that sort would help give the formality of a notice) but "telling you" I intend to enquire and that I would be writing to "Mr J C M Gibbins as nominated partner" is not enough.

And the very reference to Mr J C M Gibbins as nominated partner when he was not suggests that the writer did not intend the letter to be a notice for the nominated partner.

Finally Mr Bibby says that any defect in the giving of notice cannot be saved by section 114 TMA: he says that the purported notice is so faulty, so misleading that it cannot be rescued. He quotes Megarry J's example in Fleming v London Produce Co Ltd 44 TC 582 of a letter addressed to the wrong person completely rather than to a person whose name is spelled wrongly as a gross and serious mistake incapable of rescue by section 114; and Slade LJ in Bayliss v Gregory [1987] STC 297 at 324 who says that an assessment for the wrong year cannot be saved – it is something "which they must yet right". The notice of enquiry is the same he says.

Mr Conway admits that the officer who sent the letters was muddled. He agrees that the letters sent on 7 November to Mr J C M Gibbins (see [13](5) above) cannot have been made under section 12AC. But he says the letters to Flaxmode are `notices' within section 12AC and thus that the letters of 1 March 2007 were valid notices of requirement within section 19A.

He says that Mr Bibby is reading too much formality into the requirements of section 12AC. He refers me to Mr Wallace's decision as Special Commissioner in Murat (included in the Tax Cases report of the High Court appeal at 77 TC 122). At para 12 Mr Wallace says:

"I am satisfied that the letter of 11 June 1999 did give notice of enquiry under section 9A(1) although it did not refer to that provision. It stated that it was an enquiry into the Appellant's tax return and enclosed the Code of Practice outlining the enquiry procedure. The only formal requirements in s.9A(1) are that the notice should be in writing, that it should inform the taxpayer of the intention to make the enquiry and that it should be within the period specified in subsection (2)."

There was nothing in the High Court's judgment which cast doubt on this conclusion. Mr Conway says Mr Wallace's decision illuminated section 12AC which is substantially the same terms.

Finally he says that if there was a failure section 114 will save it. This failure did not mislead, it was not gross, it was not something so important that it had to be got right.

Discussion

It does not seem to me that section 12AC requires particular formality about the giving of notice. Chambers English Dictionary 7 Edition defines `notice' as intimation, announcement, information, warning. It seems to me that that purpose of the notice to be given is to warn the taxpayer that an enquiry is underway so that he knows questions may be asked and that time limits may be affected, and to provide a mechanical activation of the enquiry procedure. This does not require something formal: all that is needed is something in writing which informs the taxpayer that an enquiry is underway. It seems to me therefore that a letter which announces that "I intend enquiring into" a tax return is sufficient to be a notice for the purposes of section 12AC.

I am fortified in that conclusion by Mr Wallace's remarks. Whilst section 9A deals solely with notification to the taxpayer in respect of his own return the requirement in section 12AC that the notice must be to the nominated partner does not seem to me to affect the force of his remarks.

But would the officer's understanding that he was not delivering a notice within section 12AC mean that although it was sufficient to be a notice it could not be one? It certainly appeared that the officer thought it was not a section 12AC notice: he refers in his letter to West Tax to the letter to Mr J P M Gibbins as the 'notice', and if he had been an assiduous reader of the manual he may well have regarded his letter to Flaxmode as a mere courtesy letter.

I do not believe that the officer's understanding of what he was doing affects the position. Section 12AC is designed to provide the nominated partner with a warning or intimation of an enquiry: what he receives must be looked at from the recipient's (or at least a reasonable recipient's) perspective not the inspector's. If despite an officer's understanding that he was giving notice of intention his letter was so vague that it could not be taken by the recipient to be such a warning or intimation, then in my judgment it would not be a notice within section 12AC. But the notice Flaxmode received was quite clear: Flaxmode could not have been in doubt that the officer intended to enquire into its returns.

I do not believe that the manual assists the Appellant in this case. It was not suggested that the Appellant was such an assiduous reader of the manuals that when it received this letter it thought `this is not a notice under section 12AC, this is simply a courtesy letter, the manual clearly indicates to me that I can ignore it': if that had been the case then it might have been possible to say that the letters when read with the recipient's adherence to the manuals meant that it did not get a true warning of an enquiry, but the circumstances which would support that conclusion would I think have to be extreme and would have, I believe, to support the conclusion that for a reasonable recipient, the letter was not adequate warning or intimation of an enquiry.

Neither do I find the language of the manual of assistance in reaching my conclusion. The writer may be taking a cautious view as to the effective statutory effect of a courtesy letter or may be wrong.

As a result I do not need to consider whether section 114 can save the notice. If I had found that it was essential that the `notice' be formally addressed only to the nominated partner (and perhaps described as a notice under section 12AC) indicating to him in his capacity as nominated partner that an enquiry was intended, then I would have had some difficulty in concluding that section 114 saved it; but I did not so find.

As a result I dismiss the appeal. But I would like to pay tribute to the clarity and expertise with which Mr Bibby and Mr Conway presented their arguments and to the comprehensive and accessible bundles of documents and authorities.

CHARLES HELLIER

SPECIAL COMMISSIONER

RELEASED: 29 January 2008

Cases referred to in skeleton argument not referred to in the decision:

King v Walden (2001) 74 TC 45

Customs and Excise commissioners v Han & Yau [2001] STC 1188

Harvard Sharkey v HMRC (2006) 77 TC 484

SC 3203/2007