The High Court upheld a decision of the general commissioners 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 which were sent to the taxpayers.

Facts

The taxpayers in five consolidated appeals were four individuals and one trustee of two family settlements who were all served with notices under TMA 1970, s. 8 requiring them to make and deliver returns of their income and capital gains, for the tax years 1996–97 to 2002–03 inclusive. They failed to comply with those notices, thereby incurring liability in the first instance to a fixed penalty of £100 for each default pursuant to TMA 1970, s. 93(2). There was no dispute about the initial fixed penalties.

On 16 August 2004 a Revenue officer obtained a direction from the general commissioners under s. 93(3) of TMA 1970 for a further penalty not exceeding £60 for each day on which the failure continued after the day on which the taxpayers were notified of the direction, excluding any day for which a penalty under that subsection had already been imposed. In their application the Revenue stated that the taxpayers had been served with notices under TMA 1970, s. 8 on various dates between 6 April 1999 and 13 December 2001 requiring them to make and deliver tax returns for the relevant tax years and that they had failed to comply with the notices before the due dates or at all. On 8 September, a Revenue officer wrote to the taxpayers to inform them of the direction and give them a last chance to submit the outstanding tax returns within 14 days of the notification. If not, penalties would be charged for each day that the failure continued, starting with the day after the date the notification was received.

Penalty notices were later sent out which specified a period of 14 days from 15 April to 28 April 2004 in respect of which the daily penalty of £60 was purportedly imposed. With hindsight that was a mistake since the period which should have been specified was 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 s. 93(3) had been obtained or notified to the taxpayers before the beginning of that period. On the other hand, the taxpayers could not have been surprised if they 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.

The taxpayers appealed contending that: the dates specified in the penalty notices did not fall within the period authorised by the direction given by the general commissioners; at no stage had the taxpayers been served with penalty notices identifying the correct days; ‘the error’ was pointed out in a 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 TMA 1970, s. 114 (which provided that want of form or errors would not invalidate assessments or determinations, etc.) since the identification of the days to which a penalty related was a matter of fundamental importance. The general commissioners found that the daily penalties were valid in law and that the imposition of the penalties was not invalidated by the date error on the penalty notices forms and that TMA 1970, s. 114 applied.

The taxpayer appealed, contending that the penalty notices were invalid because they contained a fundamental error as to the dates to which they applied; alternatively, liability to the penalties constituted a criminal offence for the purposes of art. 6(3) of the European Convention on Human Rights (ECHR), and TMA 1970, s. 93(3) and 114 should be interpreted in the light of art. 6(3) so as to render the penalty notices invalid.

Issue

Whether the commissioners were correct in law in finding that the penalty notices were valid notwithstanding the absence of form.

Decision

Henderson J (dismissing the appeal) said that the correct starting point was that the taxpayers’ appeals lay only against the determination of penalties, rather than the subsequent notification of the penalties to the taxpayers. The language of TMA 1970, s. 114(2)(b) was clear and unqualified and 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. There was nothing in the authorities, properly understood, which contradicted that analysis (Craven (HMIT) v White; IR Commrs v Bowater Property Developments Ltd; Baylis (HMIT) v Gregory [1988] BTC 268 considered).

The force of the words ‘any variance’ in s. 114(2)(b) was that no variance of any description between the notice and the determination was to invalidate the determination. There might come a stage where the error or discrepancy in question was so fundamental in character that it could not properly be described as a ‘variance’ at all; but a mistake about dates of the type made in the present case gave rise to a variance within the ordinary and natural meaning of that word.

The only question for the court was whether there was any error of law in the decision of the general commissioners as recorded in the case stated. Leaving aside the human rights argument, no error had been detected in the brief statement of their reasons in the case stated. They rightly focused on the imposition of the penalties, a reference to the determination of the penalties rather than their notification to the taxpayers, and they rightly held that it was not invalidated by the date error in the penalty notices because s. 114 applied.

The human rights argument did not make any difference to that conclusion. Even assuming in the taxpayers’ favour that the continuing penalties in the present case were criminal in character for the purposes of art. 6(3), the requirements of art. 6(3) were clearly satisfied. The notification to the taxpayers of the s. 93(3) direction could have left them in no 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 what they were alleged to have done wrong; what they had to do to remedy the situation; and the nature and maximum amount of the penalties that would be imposed for continued non-compliance. Accordingly, the taxpayers were informed, in appropriate detail, of the ‘nature and cause of the accusation’ against them. 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. A mistake of that nature did not engage the provisions of art. 6(3).

In view of that conclusion, it was strictly unnecessary to decide whether the taxpayers were charged with a criminal offence within the meaning of art. 6(3).

However, in the light of the guidance in Han & Yau v C&E Commrs [2001] BTC 5,328 and Kingv Walden (HMIT) [2001] BTC 170, continuing daily penalties imposed pursuant to a direction under s. 93(3) were penalties imposed for a criminal offence within the autonomous convention meaning of art. 6(3). Such penalties had 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 was 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 could 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 the Revenue to make a positive decision to impose daily penalties, and the need (in the context of s. 93) to obtain a prior direction from the commissioners, were pointers towards the same conclusion. The penalties were not simply an administrative means of securing production of the returns, and the decision of Etherton J in Sharkey vR &C Commrs [2007] BTC 650 was clearly distinguishable. The fixed penalties in issue in that case were automatic, small in amount, and were not necessarily a prelude to further daily penalties. They could therefore properly be regarded as primarily an administrative spur to encourage compliance. In all the circumstances, the general commissioners came to the right conclusion.

Chancery Division.
Judgment delivered 4 April 2008.