Pipe & Ors v Revenue & Customs [2008] EWHC 646 (Ch)

[2008] EWHC 646 (Ch)Case No CH/2007/APP/0514,0515,0516,0517,0518
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 04/04/2008
Before
THE HONOURABLE MR JUSTICE HENDERSON
Between
MRS M E PIPE (and 4 others)AppellantsTHE COMMISSIONERS FOR H M REVENUE & CUSTOMSRespondents
Mr Oliver Conolly (instructed by Clarke Willmott Solicitors) for AppellantsMr Timothy Brennan QC (instructed by the Acting Solicitor for HMRC) for the RespondentsHearing Hearing date: 27 February 2008
Judgment

Introduction

[1]These are five consolidated and materially identical appeals by case stated from decisions of the General Commissioners for the Division of Exeter and East Devon (“the General Commissioners”) on 12 December 2006, when they held that continuing daily penalties imposed on the taxpayers for failure to deliver tax returns were valid in law, notwithstanding a mistake about the dates for which the penalties had been imposed in the penalty notices dated 29 September 2004 (“the Penalty Notices”) which were sent to the taxpayers.[2]The taxpayers are Mrs M E Pipe, Mr M C Pipe and Mrs M C Pipe in their personal capacities, and Mr M C Pipe in his capacity as trustee of two family settlements, the 1988 Family Settlement and the M C Pipe Children’s Settlement. The five appeals were consolidated and directed to be heard together as a single appeal by order of Warren J dated 24 August 2007.[3]It is common ground that the taxpayers were all served with notices under section 8 of the Taxes Management Act 1970 (“TMA 1970”) requiring them to make and deliver returns of their income and capital gains, typically for the seven tax years from 1996/7 to 2002/3 inclusive, and that they failed to comply with such notices, thereby incurring liability in the first instance to a fixed penalty of £100 for each default pursuant to section 93(2) of TMA 1970. There is no dispute about those initial fixed penalties. Furthermore, although various technical grounds of defence were relied upon before the General Commissioners in relation to the continuing daily penalties notified by the Penalty Notices, none of those grounds has been pursued on the present appeal to the High Court apart from the alleged invalidity of the Penalty Notices because of the failure to state the correct dates for which the penalties were imposed.[4]At the hearing of the taxpayers’ appeals before the General Commissioners, the taxpayers were represented by a taxation consultant, Mr R L C Bibby of WestTax, and the Commissioners for H M Revenue & Customs (“HMRC”) were represented by a Debt Manager from the Cornwall and Plymouth Office, Mrs H Shaw. On the appeal to this court both sides have been represented by counsel, Mr Oliver Conolly for the taxpayers, and Mr Timothy Brennan QC for HMRC.

Facts

[5]The relevant facts can be briefly stated. It is convenient to take the appeal of Mrs M E Pipe as representative.[6]On 16 August 2004 an authorised officer of the Board of Inland Revenue, Mr T Lloyd, applied in writing to the General Commissioners for the Division of Barnstaple for a direction under section 93(3) of TMA 1970, which provides as follows:
“If, on an application made to them by an officer of the Board, the General or Special Commissioners so direct, the taxpayer shall be liable to a further penalty or penalties [i.e. in addition to the fixed penalty of £100 under section 93(2)] not exceeding £60 for each day on which the failure continues after the day on which he is notified of the direction (but excluding any day for which a penalty under this subsection has already been imposed).”
In his application Mr Lloyd stated that Mrs Pipe had been served with notices under section 8 of TMA 1970 on various dates between 6 April 1999 and 13 December 2001 requiring her to make and deliver tax returns for the seven tax years from 1996/7 to 2002/3, and that she had failed to comply with the notices before the due dates (the latest of which was 31 January 2004) or at all. He asked for a direction that she should be liable to a penalty or penalties for each day on which each failure continued after the day on which she was notified of the direction.[7]On 7 September 2004 the General Commissioners for Barnstaple signed the application form and gave a direction in the terms requested, as follows:
“We … hereby direct that Mrs M E Pipe shall be liable to a penalty or penalties under Section 93(3) of the Taxes Management Act 1970 in respect of the failures detailed above for each day on which each failure continues after the day on which she is notified of this direction.”
[8]On the following day, 8 September, an HMRC Recovery Officer, Miss T Parkes, wrote to Mrs Pipe to inform her of the direction and give her a last chance to submit the outstanding tax returns. The letter was headed in bold “Late Tax Returns – Daily Penalties”, and referred to section 93(3) of TMA 1970. Miss Parkes then said:
“On 22 July 2004, I wrote to you to remind you to send in your [outstanding tax returns for 1996/7 to 2001/2]. I warned you that if you did not send in the Returns, I would ask the General Commissioners for authority to impose daily penalties. At their meeting on 7 September 2004, they were told you had failed to send in your Tax Returns. They decided that daily penalties of up to £60 a day should be imposed on you for each failure. Please make sure I receive your Returns within 14 days from the date you receive this notification. If I do not, penalties will be charged for each day that the failure continues starting with the day after the date you receive this notification. You will not be sent any further warnings before penalties are charged, so please give the matter your immediate attention. Please phone me immediately if you have any problems with completing the Returns.”
Please phone me immediately if you have any problems with completing the Returns.”[9]No response was received to this letter, and on 29 September 2004 another Recovery Officer, Mrs A J Mosley, wrote again to Mrs Pipe. The letter was headed in bold “Penalty Notice”, and read as follows: “This notice tells you that you are liable to a penalty under the Taxes Acts. It is addressed to you personally, as the law requires. If you have a tax adviser, please show him or her this notice at once. The amount of the penalty is £840.00. This should be paid within 30 days of the date of this notice. The amount shown above will appear on your next Statement of Account. Details of the penalty are shown below. [Information was then given about the right to appeal against the penalty.] Details Penalty under the provisions of [section 93(3) TMA 1970] in respect of your continuing failure to comply with a notice served upon you for the purposes of Section 8 … of that Act … to deliver a return of income and chargeable gains for the year ended 5 April 2003 within the time required by that notice. Daily penalties of £60.00 per day for the period from 15 April 2004 to 28 April 2004 (14 days).” [Information was then given about the right to appeal against the penalty.]

Details

[10]It can be seen at once, with the benefit of hindsight, that the specified period of 14 days from 15 April to 28 April 2004 in respect of which the daily penalty of £60 was purportedly imposed must have been a mistake, and that the period which Mrs Mosley meant to specify was obviously 15 September to 28 September 2004. There was no jurisdiction to impose a daily penalty for the 14 days in April, because no direction under section 93(3) had been obtained or notified to Mrs Pipe before the beginning of that period. On the other hand, a direction had been obtained on 7 September, Mrs Pipe had been notified of it by Miss Parkes’ letter to her of 8 September, and she had also been told to expect penalties to be charged without any further warning. Accordingly, she could hardly have been surprised if she had received, under cover of a letter dated 29 September 2004, a penalty notice which referred to a daily penalty of £60 from 15 to 28 September 2004.[11]I should add that the Penalty Notice which I have quoted in paragraph 9 above is the one which is annexed to the case stated. It relates only to the failure to deliver a return for 2002/3, that being the latest of the seven years for which Mrs Pipe was in default. It is common ground, however, that she also received similar Penalty Notices in respect of each of the other six years, the penalty in each case being the same (£840), making a total of £5,880 (i.e. £840 x 7).[12]It is not clear whether Mrs Pipe, or any other member of the Pipe family, noticed the mistake which had been made. If they did, they said nothing about it. However, on 15 October 2004 Mr Bibby of WestTax wrote to Mrs Mosley appealing against all of the Penalty Notices on behalf of all five of the taxpayers. The letter asked for details of the direction given under section 93(3), and of the submissions made by HMRC on that occasion, “in order that we may state our grounds of appeal”.[13]On 25 February 2005 HMRC replied and supplied the information requested. However, no formal grounds of appeal were prepared before the hearing of the appeals on 12 December 2006. Meanwhile, on 5 April 2006 Mrs Shaw had written to WestTax to say that she would make arrangements for the appeals to be listed for hearing. Her letter included this statement:
“I have noticed from our files that [the Penalty Notices] contained an incorrect date, the notices were completed with the month of April instead of September. I apologise for the mistake and felt you should be made aware that the Penalty Notice obviously covered the period 15 September 2004 to 28 September 2004.”

Statutory Provisions

[14]I have already set out the terms of section 93(3) of TMA 1970 in paragraph 6 above. It should be noted that section 93(3) does not provide for the amount of the further penalty to be fixed by the General or Special Commissioners. What the subsection contemplates is that the Commissioners may give a direction which authorises further penalties to be determined by an officer of the Board, in an amount not exceeding £60 for each day of continuing default. The power to determine such further penalties, pursuant to the direction, is found in section 100(1), which provides that subject to immaterial exceptions “… an officer of the Board authorised by the Board for the purposes of this section may make a determination imposing a penalty under any provision of the Taxes Acts and setting it at such amount as, in his opinion, is correct or appropriate.”[15]Section 100(3) goes on to provide that notice of a determination of a penalty under the section shall be served on the person liable to the penalty, and shall state the date on which it is issued and the time within which an appeal against the determination made be made. By virtue of subsection (4), after the notice of a determination under section 100 has been served “the determination shall not be altered except in accordance with this section or on appeal”.[16]Provision is made in section 100B for appeals against penalty determinations under section 100. By virtue of section 100B(1), the basic rule is that such appeals are to be governed by the same provisions as have effect in relation to appeals against assessments to tax, but subject to certain modifications. One such modification is contained in section 100B(2)(b), which provides that in the case of a penalty which is not required to be of a particular amount the Commissioners who hear the appeal may:
“(i) if it appears to them that no penalty has been incurred, set the determination aside, (ii) if the amount determined appears to them to be appropriate, confirm the determination, (iii) if the amount determined appears to them to be excessive, reduce it to such other amount (including nil) as they consider appropriate, or (iv) if the amount determined appears to them to be insufficient, increase it to such amount not exceeding the permitted maximum as they consider appropriate.”
[17]Part XI of TMA 1970, which contains miscellaneous and supplemental provisions, includes section 114, which provides so far as material as follows:
“114 Want of form or errors not to invalidate assessments, etc. (1) An assessment or determination, warrant or other proceeding which purports to be made in pursuance of any provision of the Taxes Acts shall not be quashed, or deemed to be void or voidable, for want of form, or be affected by reason of a mistake, defect or omission therein, if the same is in substance and effect in conformity with or according to the intent and meaning of the Taxes Acts, and if the person or property charged or intended to be charged or affected thereby is designated therein according to common intent and understanding. (2) An assessment or determination shall not be impeached or affected – (a) … (b) by reason of any variance between the notice and the assessment or determination.”
The words “or determination” were inserted into section 114(1) and (2) by section 160(5) of the Finance Act 1989. (a) … (b) by reason of any variance between the notice and the assessment or determination.”

The decision of the General Commissioners

[18]As I have said, no grounds of appeal were formulated before the hearing of the taxpayers’ appeals on 12 December 2006. This was a breach of TMA 1970 section 31A(5), which applies to appeals from penalty determinations by virtue of section 100B(1) and provides that “The notice of appeal must specify the grounds of appeal”. However, section 31A(6) provides that on the hearing of the appeal the Commissioners may allow the appellant to put forward grounds not specified in the notice, and take them into consideration, “if satisfied that the omission was not wilful or unreasonable”. In the present case, Mr Bibby prepared a skeleton argument for the hearing of the appeals, and it seems that this was treated without objection as a sufficient statement of the grounds of appeal. The relevant contentions in his skeleton argument were to the following effect:(a) the dates specified in the Penalty Notices did not fall within the period authorised by the direction given by the Barnstaple General Commissioners;(b) at no stage had the taxpayers been served with Penalty Notices identifying “the correct days”;(c) “the error” was admittedly pointed out in Mrs Shaw’s letter of 5 April 2006, but that letter did not constitute a notice to the taxpayers, nor was it capable of correcting a fundamental error in the Penalty Notices under section 114 of TMA 1970; and(d) the identification of the days to which a penalty relates is a matter of fundamental importance. Reliance was placed on a decision of a Special Commissioner, Dr John Avery Jones CBE, in Austin v Price [2004] STC (SCD) 487.[19]The General Commissioners summarised these contentions in paragraph 4(2) of the case stated. In paragraph 5 they recorded Mrs Shaw’s contentions for HMRC, the relevant one being that section 114 of TMA 1970 “operated to validate” the penalty notices. Mrs Shaw did not prepare any written submissions or skeleton argument, so it is unclear how far she elaborated this submission, or which part or parts of section 114 she relied upon.[20]The decision of the General Commissioners could hardly have been more concise. The relevant part of paragraph 6 of the case stated reads as follows:
“6. The facts were not in dispute. The Commissioners found that … (2) The imposition of the penalties was not invalidated by the date error on the penalty notices forms. Section 114 Taxes Management Act 1970 applies.” (2) The imposition of the penalties was not invalidated by the date error on the penalty notices forms. Section 114 Taxes Management Act 1970 applies.”
[21]In paragraph 7 of the case stated the General Commissioners said that the relevant question of law for the consideration of the High Court was whether they were correct in law “in finding that the penalty notices were valid notwithstanding the absence of form”. The rather puzzling reference to “absence of form” in this paragraph suggests that the General Commissioners may have regarded the case as one of “want of form” which was cured by section 114(1). There is no positive indication that they were referred to, or directed their minds to, section 114(2)(b), which provides that a determination “shall not be impeached or affected … by reason of any variance between the notice and the … determination”.

Submissions for the taxpayers

[22]In support of the taxpayers’ appeals Mr Conolly advanced two main arguments. First, he submitted that the Penalty Notices were invalid because they contained a fundamental error as to the dates to which they applied. Secondly, and in the alternative, he submitted that liability to the penalties constitutes a criminal offence for the purposes of Article 6(3) of the European Convention on Human Rights (“ECHR”), and that sections 93(3) and 114 of TMA 1970 must be interpreted in the light of Article 6(3) in such a way as to render the Penalty Notices invalid.[23]Mr Conolly accepted that HMRC had made a mistake, and that the period for which they intended to impose daily penalties was 15 to 28 September 2004. However, he submitted that a purported penalty notice pursuant to section 93(3) must specify the correct days for which the penalties are imposed, and if it fails to do so the penalties are invalid. Nor could the error be cured by section 114(1), because the wording of the Penalty Notices was clearly not “in substance and effect in conformity with or according to the intent and meaning of the Taxes Acts”. An error as to the dates for which daily penalties are imposed is fundamental, because what is being penalised is a failure to submit tax returns over a period of particular days.[24]In support of this submission Mr Conolly referred first to the decision of Megarry J in Fleming v London Produce Co Ltd [1968] 1 WLR 1013, where (in a context far removed from the present case) the judge considered the previous enactment of section 114(1) and (2) in section 514(2) and (3) of the Income Tax Act 1952. At 1027H he said that, while not attempting an exegesis of the subsections, “I would be slow to accept that they provide an impervious coverlet for gross errors.” He then instanced typographical errors and faulty spellings as examples of the type of error which might be cured, and said at 1028A:
“The likelihood of the recipient being deceived or misled would also be an important factor.”
[25]Next, Mr Conolly referred to the decision of the Court of Appeal on one point which arose in Baylis v Gregory [1989] AC 398, (1987) 62 TC 1. That case is best known as one of the trilogy of cases on the Ramsay principle which was heard in the House of Lords together with Craven v White and IRC v Bowater Property Developments Ltd. However, a quite separate, technical question arose in relation to one of the assessments under appeal in Baylis v Gregory. The problem was that the notice of assessment sent to the taxpayer’s agent said on its face that it was for the year of assessment 1974/5, whereas the inspector had intended to make the assessment for 1975/6. By the time the error was noticed, it was unfortunately too late to make an assessment for the correct year. The mistake could hardly have caused any confusion or misunderstanding, because the assessment was sent together with 11 others, all correctly dated, which related to the same transactions. The judge at first instance, Vinelott J, held in reliance on section 114(1) that the assessment could be treated as if it had been made for the correct year: see [1986] 1 WLR 624. He considered the dicta of Megarry J in Fleming, but said he was not persuaded that two tests had to be satisfied before what he termed “the dispensing power” in section 114 could be exercised, namely that the error must fall short of gross error and that it must be such that there is no likelihood that the recipient will be deceived or misled: see 629H. He held that the section could apply where the Crown could show that there was a genuine mistake, and that in all the circumstances there was no real possibility that the taxpayer was in any way misled: see 630F-G. He was satisfied on the facts that there was no question of the taxpayer having been misled. Everybody knew to which transactions the assessment was intended to relate, and nothing had happened in 1974/5 on which an assessment could have been founded.[26]In the Court of Appeal the leading judgment was given by Slade LJ, with whom both Parker and Mustill LJJ agreed on this point: see [1989] AC 398 at 451F and 459C. Counsel for the Crown, Mr Jules Sher QC, submitted that since the assessment was obviously meant to refer to 1975/6, and there were only two fiscal years in which the relevant disposal could have taken place, namely 1973/4 or 1975/6, the assessment could properly be treated as an assessment for the latter year, even without recourse to section 114. Alternatively, he submitted that the error could if necessary be cured by section 114. Both submissions were rejected by Slade LJ.[27]With regard to the first argument, Slade LJ said at 436E:
“I have some sympathy with this argument because it would seem to me that Mr Weare’s firm, or their clients, on receipt of the notice of assessment marked 1974-75, could not in all the circumstances, after proper thought, have reasonably believed that either the notice of assessment, or the assessment to which it referred, was intended by the Revenue to relate to any year other than 1975-76. Nevertheless, apart from section 114, to which I will revert, I find it impossible to hold that the assessment either was or took effect as an assessment for 1975-76. Contrary to Mr Sher’s submissions, as I understood them, the year of assessment is of critical importance in relation to capital gains tax. [He then referred to certain statutory provisions, and to the printed prescribed form of notice of assessment]. All these matters illustrate that the year of assessment is an essential element of the assessment itself. The assessment is what is written in the assessment book [Slade LJ’s italics]. Section 114 apart, I find it is impossible to say that an assessment for one specified fiscal year can ever be or take effect as an assessment for another fiscal year. Section 114 apart, the fact that the taxpayer may have appreciated that a mistake has been made on receiving the notice of assessment is, to my mind, irrelevant in this context.”
[28]Slade LJ then turned to section 114, and said that again he had some sympathy with the view expressed by Vinelott J. However, he was unable to agree with it, because he did not think it was warranted by the wording of the section. He then continued at 437F:
“Subsection (2) has no application to the facts of this case. The only words of subsection (1) which can possibly be relied upon by the Crown are the following: “An assessment … which purports to be made in pursuance of any provision of the Taxes Acts shall not … be affected by reason of a mistake … if the same is in substance and effect in conformity with or according to the intent and meaning of the Taxes Act …”
The assessment in the present case, which the Crown asserts “is not to be affected” is an assessment for 1975-75. Mr Flesch accepted and contended that, as an assessment for that fiscal year, it would not be affected by reason of a mistake if the other conditions specified in section 114(1) were satisfied. However, as he pointed out, the subsection does not provide for rectification of an assessment; it is not the equivalent of the “slip rule”. The relevant fiscal year of assessment is an integral, fundamental part of the assessment itself. I, for my part, find it impossible to read the wording of section 114(1), wide though it is, as justifying in any circumstances the treatment of an assessment made for one fiscal year as an assessment made for another fiscal year. If the Revenue make an assessment for the wrong year, their proper course is to issue a new assessment for the correct year. It is pertinent to observe that section 29(6) of [TMA 1970] would preclude them from themselves amending an assessment by substituting a reference to one fiscal year for another.”[29]Slade LJ then referred to Fleming, and continued at 438C:
“Vinelott J in the present case was not persuaded that gross error must be absent before what he described as the “dispensing power in section 114” can be exercised. I would merely make this comment. As I am sure the judge appreciated, section 114, where it applies, does not strictly confer a “dispensing power”
. In a case where it applies, it gives the Revenue or the taxpayer, as the case may be, the statutory right to claim that the assessment, warrant or other proceeding in question shall not be affected by reason of a mistake etc. If, contrary to my view, this statutory right has any relevance in relation to an assessment which has been made for the wrong year, I think it unlikely that the legislature would have intended that it would be exercisable where the error was a gross one – as in the present case I think it must have been. To sum up, however, in my judgment, neither section 114 nor any other statutory provision provides an escape route for the Revenue if they issue an assessment for the wrong fiscal year. This is something they must get right.”[30]Before leaving Baylis v Gregory, I would emphasise that Slade LJ said in terms (at 437F) that section 114(2) had no application to the facts of that case. I infer from this that the mistake made by the Revenue must have been not only a mistake in the form of the notice of assessment sent to the taxpayer’s agent, but also a mistake in the assessment itself which was written in the assessment book. If the entry in the assessment book had been correct, and the only error was in the notice, the Revenue would presumably have been able to rely on section 114(2)(b). That this is the correct interpretation of the facts in Baylis vGregory is confirmed by reference to the case stated, where the Special Commissioners recorded in their decision that “the assessment which was actually made and issued on 15 March 1982 was one stated to be for the year ending 5 April 1975 (i.e. 1974-75)”: see 62 TC 1 at 66E.[31]Mr Conolly also relied, not as binding authority but as persuasive support for his argument, on two decisions of the Special Commissioners, Austin v Price [2004] STC (SCD) 487 and Jacques v Revenue & Customs Commissioners [2006] STC (SCD) 40.[32]In Austin v Price the Revenue sought to recover continuing daily penalties pursuant to TMA 1970 section 97AA for failure to comply with notices issued under section 19A requiring the taxpayer to give details of business profits and dividend income in two different tax years. The penalty notices were erroneous in a number of respects, and the Special Commissioner (Dr Avery Jones) applied the dicta of Megarry J in Fleming in holding that they were invalid and could not be cured by section 114(1). In paragraph 8 of his decision he said (at 491g) that “the taxpayer is entitled to know what he has failed to do for which the penalty is being imposed”, and a few lines later “If a daily penalty is imposed it must be clear to the taxpayer how it is calculated and what is the total, and the notice must state what the taxpayer has failed to do.”[33]In Jacques v Revenue & Customs Commissioners the same Special Commissioner, Dr Avery Jones, followed the same approach in holding that a penalty notice under section 97AA was invalid because it specified the wrong date for the section 19A notice to which it related and also misdescribed the contents of the section 19A notice in a way which might have misled the recipient. He considered that too much uncertainty had been introduced by the wrong date and the misdescription of the terms of the section 19A notice for it to be saved by section 114: see paragraphs 7 to 9 of his decision at 45e to 46d.[34]In relation to section 114(2), Mr Conolly submitted that it was not open to HMRC to rely on section 114(2)(b) because they had not adduced evidence before the General Commissioners that the determination of the penalties had in fact been made for the correct dates, and the burden of adducing such evidence lay on them. He accepted, however, that if such evidence had been adduced and accepted by the General Commissioners section 114(2)(b) would then have applied to cure the error, subject to his alternative human rights argument.[35]The human rights argument proceeds by the following stages.[36]Article 6(3) of ECHR provides as follows:
“Everyone charged with a criminal offence has the following minimum rights: (a) to be informed promptly, in a language which he understands and in detail, of the nature and cause of the accusation against him; (b) …”
Mr Conolly did not contend that any of the other minimum rights set out in Article 6(3) is engaged in the present case.

(b) …”

[37]It is well established that the concept of a “criminal charge” under Article 6 has an autonomous convention meaning, and that the criteria for deciding whether a criminal charge has been imposed are(i) the domestic classification of the offence,(ii) the nature of the offence, and(iii) the nature and degree of severity of the penalty that the person concerned risked incurring. See Customs & Excise Commissioners v Han [2001] EWCA Civ 1040, [2001] STC 1188 (“Han”) at paragraph 26, and the detailed consideration of those criteria in paragraphs 55 to 84 by Potter LJ (with whom Mance LJ agreed in paragraph 86), leading to the conclusion that tax-geared civil penalties for the dishonest evasion of value added tax under section 60(1) of the Value Added Tax Act 1994 are criminal in character for convention purposes, with the consequence that the taxpayer against whom such penalties are levied is entitled to the minimum rights specified in Article 6(3).[38]In King v Walden [2001] STC 822, decided before the Court of Appeal had given judgment in Han, Jacob J held that tax-geared penalties imposed under TMA 1970 section 95(1) for the fraudulent or negligent delivery of an incorrect tax return, and similar defaults all involving fraud or negligence, are also “criminal” for the purposes of Article 6. In paragraph 71 of his judgment Jacob J gave his reasons for reaching this conclusion:
“In my judgment the system of imposition of penalties for fraudulent or negligent delivery of incorrect returns or statements is “criminal” for the purposes of art. 6(2). I so hold for the following reasons: (a) plainly the system is intended to punish the defaulting taxpayer and to operate as a deterrent. (b) The amount of fine is potentially very substantial. (c) The amount of fine is not related to any administrative matter. In particular the fine is not limited to the administrative and other extra cost of dealing with the taxpayer concerned … (d) The amount of fine imposed depends upon the degree of culpability of the taxpayer, the less culpable the more mitigation there is. Mitigation is an essentially criminal rather than civil consideration. (e) It is accepted that generally … it is not for the taxpayer to show that the determination of penalties was wrong. On appeal the burden of proof lies on the Crown. In this regard there is a clear distinction between a penalty determination and an appeal against ordinary assessment where the burden of showing it was wrong lies on the taxpayer.”
[39]On the other side of the line, in Harvard Sharkey v HMRC [2006] EWHC Ch 300, 77 TC 484, Etherton J held that the imposition of an initial fixed penalty of £50 under TMA 1970 section 97AA(1)(a) for failure to comply with a notice served under section 19A did not involve a criminal charge for Article 6 purposes. In so concluding he was influenced by the very modest and fixed amount of the penalty, the absence of any enquiry into any criminal conduct on the part of the taxpayer, and the view (which he accepted) that the primary objective of the penalty was to procure the production of the documents requested in the section 19A notice: see paragraphs 37 and 39 of the judgment. The judge emphasised in paragraph 38 that the initial fixed penalty with which he was concerned is quite separate from the continuing daily penalties which could be imposed if the taxpayer continued to fail to provide the requisite documents. He pointed out that the imposition of any such continuing penalties would depend upon a new and independent exercise of the Revenue’s powers in the light of the particular circumstances then existing. The mere fact of continued failure to comply would not lead inevitably to the imposition of further daily penalties.[40]Mr Conolly submitted that the imposition of continuing penalties in the present case pursuant to section 93(3) of TMA 1970 should be classified as criminal for Article 6 purposes, because the penalties are designed to punish the failure of taxpayers to comply with directions obtained from General or Special Commissioners under that subsection, to deter taxpayers from failing to comply with their obligations under such a direction, and to provide an incentive to comply with it forthwith. The fact that it is necessary for HMRC to obtain a direction from the Commissioners under section 93(3) before they can impose continuing penalties under the section is an indication that Parliament wished to introduce a degree of judicial oversight into the process by which the penalties were imposed, which in turn suggests that the penalties are criminal and not merely civil in nature. Furthermore, the amount of the penalties is potentially very substantial, particularly if imposed at the maximum rate of £60 per day.[41]On the footing that Article 6(3) does apply, Mr Conolly submitted that the Penalty Notices plainly failed to inform the taxpayers of the nature and cause of the accusation against them, because the notices specified the wrong dates, and moreover dates in respect of which no prior direction from the Commissioners had been obtained. The mistake could not be cured by section 114(2)(b), assuming that provision to be otherwise applicable, because section 3(1) of the Human Rights Act 1998 requires it to be read and given effect, so far as it is possible to do so, in a way which is compatible with Article 6(3). In the present context that interpretative obligation could be met by reading section 114(2)(b) as subject to a proviso or exception which would disapply it in cases where its application would deprive the recipient of proper notice of the nature and cause of the accusation against him.

Submissions for HMRC

[42]At the forefront of his submissions for HMRC, Mr Brennan QC relied upon an analysis of the statutory scheme of TMA 1970 sections 93 and 100 which he set out in his skeleton argument. This analysis was accepted as correct by Mr Conolly, and in my judgment it is very helpful. The analysis (which I have modified in some minor respects) distinguishes nine stages, as follows:(a) Stage 1: where the taxpayer defaults in an obligation to deliver a return, there is a fixed penalty of £100 (section 93(1) and (2)).(b) Stage 2: where the default continues, an officer of the Board may apply without notice to the taxpayer and obtain a direction from the General or Special Commissioners under section 93(3). The Commissioners do not themselves impose an actual penalty, nor do they fix its amount.(c) Stage 3: once the Commissioners have made a direction under section 93(3), the taxpayer must be notified of the direction. No penalty may be imposed in respect of any date prior to such notification: see again section 93(3).(d) Stage 4: if the failure still continues, a penalty may then be determined by an officer of the Board in exercise of the powers conferred by section 100(1).(e) Stage 5: notice of a determination of a penalty under section 100 must be served on the person liable to the penalty, and must state the date on which it is issued and the time within which an appeal against the determination may be made: see section 100(3).(f) Stage 6: after the notice of the determination has been served, the determination shall not be altered except on appeal (subject to immaterial exceptions): see section 100(4).(g) Stage 7: an appeal may be brought against the determination of a penalty under section 100: see section 100B(1). The appeal lies against the determination of the penalty, and not against either of the notices which have been served at stages 3 and 5 above. The appeal is treated in the same way as an appeal against an assessment to tax, and the appeal provisions in Part V of TMA1970 apply: see sections 100B(1) and 48(2).(h) Stage 8: notice of appeal must be given in writing and must specify the grounds of appeal, subject to a discretion to allow further grounds to be relied upon at the hearing: see section 31A(5) and (6).(i) Stage 9: the Commissioners hear the appeal. They may set aside the determination of the penalty, confirm the determination, reduce the amount of the penalty, or increase its amount: see section 100B(2)(b)(i) – (iv).[43]Mr Brennan submitted that no mistake had been made at the stage of determination of the penalties, stage 4, and it was only at stage 5, notification of the penalties to the taxpayers, that the mistake had been made in the Penalty Notices. However, TMA 1970 does not confer a right of appeal against notifications of penalties. It was only the determination of the penalties which could be appealed at stage 7. Although the taxpayers had appealed against the determinations, their notice of appeal had not specified any grounds of appeal, and Mr Bibby’s skeleton argument had concentrated on the error in the Penalty Notices. The correctness of the underlying determinations was therefore not put in issue by the taxpayers, and no challenge was made to the description of the mistake in Mrs Shaw’s letter of 5 April 2006. Indeed, Mr Bibby expressly accepted in his skeleton argument that “the error” had been pointed out in that letter.[44]On the footing that the underlying determinations had not been effectively challenged, Mr Brennan went on to submit that the case was plainly covered by section 114(2)(b), and the General Commissioners had rightly decided that the imposition of the penalties was not invalidated by the error in the Penalty Notices. To ask whether the Penalty Notices were invalid was to ask the wrong question, because an appeal lies only against the determination of the penalties. The correctness of this analysis, said Mr Brennan, is confirmed by section 100B(2)(b), which sets out the powers of the Commissioners on the hearing of the appeal. Those powers are confined to setting aside or confirming the determination, or reducing or increasing the amount determined. They have no power to quash or set aside a notice of determination of a penalty.[45]Turning to the human rights argument, Mr Brennan submitted that the penalties were not criminal in nature. They were imposed, if at all, at a modest level, and served the essentially administrative purpose of securing production of the taxpayers’ outstanding tax returns. The penalties were prospective, not retrospective, following notification of the direction by the Commissioners under section 93(3), and their amount would only be substantial if the taxpayer chose to remain in default, with full knowledge of his liability and the consequences of further inaction.[46]Even if that is wrong, and the penalties were criminal in character, Mr Brennan argued that there was still no breach of Article 6(3). The taxpayers always knew what the position was. Not only did they know in detail the “accusation” against them (persistent failure to lodge their tax returns over a period of years) but they were told in advance about the Commissioners’ direction. They knew what they had to do, and they also knew what would happen if they did not comply. It was their subsequent failure to comply, after receiving this warning, which triggered the penalties. The error in the dates was subsequent to determination of the penalties, and did not involve any failure to inform the taxpayers of the “nature and cause of the accusation” against them.[47]Finally, Mr Brennan submitted that Mr Conolly’s proposed construction of section 93(3) went beyond the permissible bounds of interpretation and amounted to a rewriting of the legislation.

Discussion and conclusions

[48]Having recited the rival arguments at some length, I can now state my conclusions quite shortly.[49]In my judgment the correct starting point is Mr Brennan’s proposition, which I accept, that the taxpayers’ appeals lay only against the determination of the penalties at stage 4. Those determinations, as opposed to the subsequent notification of the penalties to the taxpayers at stage 5, were not put in issue on the taxpayers’ appeals, and it was accepted on their behalf that a mistake had been made in the Penalty Notices by referring to April instead of September 2004. If the underlying determinations had also been made in error for April, there would have been no mistake in the Penalty Notices because they would have accurately reflected the determinations. Accordingly, acceptance that a mistake had been made in the Penalty Notices implied acceptance that the underlying determinations had been made for the correct dates.[50]In these circumstances, there was in my judgment no burden or obligation on HMRC to adduce evidence before the General Commissioners about the making of the determinations at stage 4. There was simply no issue about them raised by the taxpayers’ appeals. What was in issue was the notification of the determinations to the taxpayers at stage 5. However, no appeal lay against the Penalty Notices as such, and in any event section 114(2)(b) provided that the determinations were not to be “impeached or affected” by reason of the discrepancy between the dates specified in the Penalty Notices and the dates for which the determinations were actually made.[51]In my judgment there is nothing in the authorities, properly understood, which contradicts this analysis. If the case were one where HMRC had to rely on section 114(1) to cure the defect in the Penalty Notices, I would agree with Mr Conolly that the mistake was of too fundamental a nature to fall within the scope of that subsection. It was indeed a gross error, and one that, viewed objectively, might have been misleading, because it could have led the recipient to believe that an earlier determination had been made by the Commissioners in or before April 2004, and that such earlier determination had either not been notified at all or the notification had gone astray. If the Penalty Notices were the documents which founded liability to the penalties, there would be much to be said for the view, echoing Slade LJ in Baylis v Gregory, that specifying the correct dates is something HMRC must get right. However, Baylis v Gregory, as I have already pointed out (see paragraph 30 above), was not a decision on section 114(2) at all, and the language of section 114(2)(b) is clear and unqualified. The force of the words “any variance” is that no variance of any description between the notice and the determination is to invalidate the determination. I accept that there may come a stage where the error or discrepancy in question is so fundamental in character that it could not properly be described as a “variance” at all; but in my judgment a mistake about dates of the type made in the present case gives rise to a “variance” within the ordinary and natural meaning of that word.[52]The only question I have to consider is whether there is any error of law in the decision of the General Commissioners as recorded in the case stated. Leaving aside for the moment the human rights argument, I cannot detect any error in the brief statement of their reasons in paragraph 6(2) of the case stated. They rightly focused on the “imposition of the penalties”, which I read as a reference to the determination of the penalties (stage 4) rather than their notification to the taxpayers (stage 5), and they rightly held that it was not invalidated by the date error in the Penalty Notices because section 114 applied. I am not prepared to assume that they wrongly thought section 114(1) to be the relevant provision, merely because of the puzzling reference to “the absence of form” in paragraph 7 of the case stated. However, even if I am wrong on this point, and they did mistakenly think that section 114(1) cured the error, the result would still be the same because in my view section 114(2)(b) leads ineluctably to the conclusion that the determinations cannot be impeached.[53]Does the human rights argument make any difference to this conclusion? In my judgment it does not. Even assuming in the taxpayers’ favour that the continuing penalties in the present case are criminal in character for the purposes of Article 6(3), I accept HMRC’s submission that the requirements of Article 6(3) were clearly satisfied. The notification to the taxpayers of the section 93(3) direction at stage 3 can have left them in no possible doubt about the default alleged against them (failure to send in their tax returns) and the consequences if they failed to remedy the default within 14 days (penalties of up to £60 a day would be charged for each day of continuing default after receipt of the notification). Thus the taxpayers were told:(a) what they were alleged to have done wrong;(b) what they had to do to remedy the situation; and(c) the nature and maximum amount of the penalties that would be imposed for continued non-compliance. Accordingly, the taxpayers were in my judgment informed, in appropriate detail, of the “nature and cause of the accusation” against them.[54]The mistake that was made came at a later stage, and was simply a mistake in the notification to the taxpayers of the penalties which had been determined. In my judgment a mistake of that nature does not engage the provisions of Article 6(3) at all.[55]In view of the conclusion which I have reached, it is strictly unnecessary for me to decide whether the taxpayers were indeed “charged with a criminal offence” within the meaning of Article 6(3). However, as the point was fully argued I will briefly express my view. In the light of the guidance in Han and King v Walden, I consider that continuing daily penalties imposed pursuant to a direction under section 93(3) are penalties imposed for a criminal offence within the autonomous convention meaning of Article 6(3). Such penalties do in my judgment have a distinct and substantial punitive and deterrent element, as well as the administrative purpose of securing belated compliance with the taxpayers’ obligations. The punitive element is brought out by the discretion as to the amount of the penalties, subject only to the upper limit of £60 a day, and the fact that the amount of the penalty imposed for each default can become quite substantial over a fairly short period (for example 30 days at a daily rate of £60 makes a total of £1,800, and as the present case shows one such penalty may be imposed for each outstanding return). In addition, the need for HMRC to make a positive decision to impose daily penalties, and the need (in the context of section 93) to obtain a prior direction from the Commissioners, are in my view pointers towards the same conclusion.[56]I cannot accept Mr Brennan’s submission that the penalties are simply an administrative means of securing production of the returns, and in my judgment the decision of Etherton J in Harvard Sharkey v HMRC (with which I respectfully agree) is clearly distinguishable. The fixed penalties in issue in that case were automatic, small in amount, and (as the judge pointed out) were not necessarily a prelude to further daily penalties. They could therefore properly be regarded as primarily an administrative spur to encourage compliance.[57]For all these reasons, I consider that the General Commissioners came to the right conclusion and that these appeals must therefore be dismissed.

Cited in 29 later judgments

and 20 more of the most senior