The court declined to make a declaration that the Revenue were precluded from issuing a penalty determination under TMA 1970, s. 95 following acceptance of an offer to settle the taxpayer's appeal, since it was not the purpose of the Revenue, or of the settlement agreement viewed objectively, to preclude the issuing of penalties.

Facts

The taxpayer was a firm of solicitors. S was the partner responsible for preparing the partnership tax return and was the representative partner for the purposes of the Taxes Management Act 1970. Returns were prepared and submitted for the tax years 1996-97 to 1998-99. The Revenue took the view that, in computing the amount of the profits of the taxpayer, certain sums had been deducted which were not wholly and exclusively laid out for the purpose of the profession of the taxpayer. Those were sums which the Revenue considered to be simply personal liabilities of S. The Revenue accordingly amended the partnership return under the powers conferred by TMA 1970, s. 30B(1) on the basis that S was guilty of negligence within s. 30B(5). Where a partnership return was amended under s. 30B(1), it was provided by s. 30B(2) that notice should be given to each relevant partner amending the individual return which he made under s. 8.

The taxpayer's appeal against that amendment was dismissed by the special commissioners on the basis that S had been guilty of negligent conduct within the meaning of s. 30B(5). The taxpayer appealed to the High Court. The taxpayer then made an offer under Pt. 36 of the Civil Procedure Rules (‘CPR’) to settle the appeal on the basis that the amendments were withdrawn. The Revenue accepted that offer but stated in a covering letter that ‘penalties are not, of course, in issue in the present proceedings’. The sum due under the settlement agreement was paid by S. The Revenue subsequently made a penalty determination pursuant to TMA 1970, s. 95 on S. He appealed to the special commissioners but also made an application in the taxpayer's appeal against the special commissioners’ decision for a declaration that the Revenue had ‘failed to honour the terms’ of the taxpayer's Pt. 36 offer by issuing penalty notices when the right to do so was precluded in consequence of their acceptance of the offer.

The taxpayer's argument was that as a matter of construction of TMA 1970, s. 95(2) and s. 95A(2) the maximum amount of the penalty which the Revenue could raise was nil, because the Revenue was obliged by the settlement agreement to withdraw the amendments with the result that the amount of tax ‘payable’ within s. 95(2)(a) and s. 95A(2)(a) was that shown in the unamended assessments. The Revenue submitted that the tax ‘payable’ within s. 95(2)(a) and s. 95A(2)(a) was not limited to any amount actually assessed but included amounts of tax paid by way of settlement and in particular the additional tax paid by S pursuant to the Pt. 36 agreement.

Issue

Whether the acceptance of the Pt. 36 offer was so clearly to prevent the Revenue from raising penalties that the court ought to make a declaration to that effect.

Decision

Warren J (dismissing the application) said that even if the taxpayer was correct in his submissions on the meaning of ‘payable’ in s. 95(2)(a) and 95A(2)(a), his argument concerning the Pt. 36 offer confused purpose and effect. Whatever the purpose of the agreement which resulted from the acceptance of the offer was from S's point of view, it could not be said that it was the purpose of the Revenue or of the agreement viewed objectively to preclude the making of a penalty determination. The Revenue had simply agreed that they would withdraw the amendment. That either did or did not have the effect, as a matter of construction of the legislation, for which the taxpayer contended. No provision allowed an adjustment of that nature, following a decision on an appeal to the special commissioners, to be made to a return by agreement between the taxpayer and the Revenue. Figures could be changed following the determination of an appeal to reflect the decision, but in the present case, the actual decision of the special commissioners determined that the amendments which had been made to the partnership return by the Revenue should stand.

That was not to say that the Pt. 36 agreement could not be given effect to. It was doubtful whether the absence of a withdrawal in the sense of an absence of a formal change in the partnership return to reinstate the original figures had any impact on the amount ‘payable’ within s. 95(2)(a) and s. 95A(2)(a). Whether or not the taxpayer's construction was correct was a matter best determined by the special commissioners in accordance with the appeal process laid down by statute. S had the right, which he had exercised, to appeal the penalty determination to the special commissioners. If the taxpayer was correct, S would win his appeal and the effect of the Pt. 36 agreement would be that a penalty could not be raised because the difference between the amounts referred to in para. (a) and (b) of each of TMA 1970, s. 95(2) and 95A(2) would be nil. But he would win, not because the purpose of the Pt. 36 agreement was that he should not be liable to a penalty but because that was the effect of the legislation.

It would be possible for the court to determine the true construction of TMA 1970, s. 95(2) and 95A(2), on the arguments advanced at this hearing but, as a matter of discretion it would decline to do so. Statute had provided a scheme for tax appeals before the general or special commissioners and it would be to subvert that scheme, except perhaps in the clearest of cases, for the court to pre-empt the ruling of the special commissioners on a matter which was properly within their territory. It would further distort the appeal process since, instead of the court being an appellate court on the issue, with any further appeal to the Court of Appeal being a second tier appeal, it would be a court of first instance with an easier route to the Court of Appeal. Accordingly, the application for declaratory relief was dismissed.

Chancery Division.
Judgment delivered 13 December 2007.