In Tager & Ors v HMRC  EWCA Civ 1727, in allowing the taxpayers' appeals, the Court of Appeal has provided some general observations on the scope and purpose of HMRC's power to impose tax-related penalties under paragraph 50, Schedule 36, Finance Act 2008, for failure to comply with information notices issued under paragraph 1, Schedule 36, Finance Act 2008.
Mr Romie Tager QC got into difficulty with HMRC both in respect of his personal tax affairs and also in relation to the estate of his father, for which Mr Tager acted as the de facto administrator and his personal representative for IHT purposes.
Almost three years after the proscribed date, Mr Tager provided an IHT account relating to his father's estate which indicated IHT payable of £168,579.60.
With regard to his own tax returns, Mr Tager had been late in filing his returns but he made substantial payments on account which were more than sufficient to cover his liabilities to income tax and interest when his liability was eventually calculated.
HMRC opened enquiries into Mr Tager's late returns as well as making enquiries and requests in relation to the IHT account which he had filed.
Having received no reply to its enquiries, HMRC issued various information notices under Schedule 36, Finance Act 2008, which were not complied with. HMRC therefore issued penalties under paragraphs 39 and 40, Schedule 36, Finance Act 2008, but the information notices were still not complied with. Finally, and for the first time, HMRC applied to the Upper Tribunal (UT) requesting the imposition of a penalty under paragraph 50, Schedule 36, Finance Act 2008.
Paragraph 50 provides:
"50 Tax-related penalty
(1) This paragraph applies where-
(a) a person becomes liable to a penalty under paragraph 39,
(b) the failure … continues after a penalty is imposed under that paragraph,
(c) an officer of Revenue and Customs has reason to believe that, as a result of the failure … the amount of tax that the person has paid, or is likely to pay, is significantly less than it would otherwise have been,
(d) before the end of the period of 12 months beginning with the relevant date … an officer of Revenue and Customs makes an application to the Upper Tribunal for an additional penalty to be imposed on the person, and
(e) the Upper Tribunal decides that it is appropriate for an additional penalty to be imposed.
(2) The person is liable to a penalty of an amount decided by the Upper Tribunal.
(3) In deciding the amount of the penalty, the Upper Tribunal must have regard to the amount of tax which has not been, or is not likely to be, paid by the person.
(4) Where a person becomes liable to a penalty under this paragraph, HMRC must notify the person.
(5) Any penalty under this paragraph is in addition to the penalty or penalties under paragraphs 39 or 40.
(7) In sub-paragraph (1)(d) "the relevant date" means –
(a) in a case involving an information notice against which a person may appeal, the latest of -
(i) the date on which the person became liable to the penalty under paragraph 39,
(ii) the end of the period in which notice of an appeal against the information notice could have been given, and
(iii) if notice of such an appeal is given, the date on which the appeal is determined or withdrawn, and
(b) in any other case, the date on which the person became liable to the penalty under paragraph 39."
In the UT, Judge Bishopp clearly found Mr Tager's repeated inaction difficult to comprehend. When faced with numerous enquiries and mounting penalties, Mr Tager had simply paid the relevant fines and continued to not comply with the information notices which had been issued by HMRC.
In calculating the level of the penalty to be imposed, the UT considered that paragraph 50 is intended to be punitive and in the instant case should reflect the very significant trouble Mr Tager had put HMRC to.
The UT concluded that there was a comparison to be made between the paragraph 50 penalty and those imposed for "deliberate concealment" since, in its view: "the mischief targeted by them is materially the same". From this, the UT considered the terms of Schedule 55, Finance Act 2009, in which penalties of 200% may be imposed. Although it considered a penalty of 200% would be too high, it felt a penalty of 100% was appropriate.
The UT applied tax-related penalties in the aggregate sum of £1,246,020 in March 2015. This was later reduced to £1,075,210 after some computational errors came to light.
Mr Tager appealed.
Court of Appeal judgment
The appeal was allowed.
The Court commented on the fact that this was the first time paragraph 50 had been used and set out how it considered the legislation was intended to operate.
First, it observed that it was penal in nature and, accordingly, should be reserved for the most serious of cases.
Second, there must be a link between the non-compliance and the amount of tax which the taxpayer is likely to have to pay.
Third, the UT should have regard to any reasons for the failure when deciding the quantum of the penalty.
Fourth, it is for the UT itself to decide on the amount of tax unpaid or likely to be unpaid based on the evidence available to it. The burden being on HMRC.
The Court agreed with the UT that the level of the penalty is not a proxy for the tax unpaid. The Court considered the UT's focus on the penalty provisions contained in Schedule 55, Finance Act 2009. The 100% penalty settled on was akin to the penalty for "deliberate and concealed" behavior. The Court emphasised that such a penalty necessarily involved conduct which was "dishonest" and conduct which would be akin to fraud. Although no such argument had been advanced by HMRC, the Court thought Judge Bishopp had equated the scale of Mr Tager's non-compliance with an intentional lack of transparency, such that he found that: "Mr Tager's failure, in respect of all the notices, was comparable in gravity to deliberate concealment". In the view of the Court this went too far. It commented:
"Many disobliging epithets can be used to characterise Mr Tager's deplorable conduct in this case, and a selection of them may be found in the three Decisions as well as in this judgment; but they should not be permitted to blur the important distinction between conduct which is dishonest (or akin to dishonesty) on the one hand, and conduct which is grossly, or even recklessly, negligent, on the other hand. Mr Tager was assuredly guilty of conduct of the latter type, but not the former".
The Court went on to consider the appropriate penalty to be imposed based on an assessment of Mr Tager's conduct, the sums of tax which went unpaid and the duration over which the underpayment persisted. The Court emphasised that it was not always necessary to show a clear link between the amount of tax in issue and the penalty. The Court should instead take into account the broad considerations of conduct, scale and circumstances in arriving at an appropriate figure. The Court decided to reduce the penalty to £220,000.
The Court of Appeal's decision leaves a significant amount of discretion in the hands of the UT when determining the level of a paragraph 50 penalty.
Although such applications are not likely to become common, as the imposition of lesser penalties under paragraphs 39 and 40, Schedule 36, Finance Act 2008, will normally be sufficient to persuade the recipient of an information notice to comply with the notice, the judgment does include a helpful list of the types of issues the UT should take into account when deciding the quantum of a paragraph 50 penalty. Importantly, the judgment emphasises once again the important distinction between conduct which is negligent or careless and conduct which is dishonest.
A copy of the judgment can be viewed here.