The taxpayer’s father died intestate in late-March 2005 and he was treated as being his father’s personal representative for inheritance tax purposes. The taxpayer failed to provide an inheritance tax account of his father’s estate until late-January 2009 which disclosed a total chargeable estate of £684,449 and tax payable of £168,579.60. The taxpayer also filed late personal income tax returns for 2008/09, 2009/10 and 2010/11 in April 2012 and the revenue opened inquiries into each of those returns. The taxpayer failed to comply with two information notices regarding his income tax position and one regarding the inheritance tax position served on him by the revenue under paragraph 1(1) of Schedule 36 to the Finance Act 2008. The revenue imposed fixed and daily default penalties permissible under paragraphs 39 and 40 of Schedule 36 respectively of £26,540 which was deducted from the money held by the revenue on account. On the revenue’s two applications to the Upper Tribunal under paragraph 50 of Schedule 36 for additional penalties against the taxpayer having issued the fixed penalties under paragraph 39, the Upper Tribunal judge had in mind the regime of tax-geared penalties in Schedule 55 of the Finance Act 2009 which provided for a penalty of 100% of any liability to tax for failure to file a return or other relevant document in time due to deliberate concealment of information. The judge, having regard to the requirement under paragraph 50(3) to the amount of tax not or not likely to be paid although not discharging liability for the tax found to be due, imposed aggregate penalties in March 2015 totalling £1,246,020, later reduced to £1,075,210. The judge, in refusing an application by the taxpayer under rule 43 of the Tribunal Procedure (Upper Tribunal) Rules 2008 to set aside the decision and remake it on the ground that it contained procedural errors, took the view at a further hearing that he had not finally determined the revenue’s applications for paragraph 50 penalties because the taxpayer had finally complied with the inheritance tax notice and undertakings given to the tribunal to provide specified information, which meant he would be able to revisit his original assessment of the tax at risk and that the parties should be given an opportunity to agree the amount of tax payable. The judge accepted at a third hearing that it was not in fact possible for him to revisit his quantification of the tax liable aside from clerical mistakes and accidental slips or omissions under rule 42 of the 2008 Rules and directed that the inheritance tax penalty be reduced to £1,000,210. The taxpayer appealed against all three decisions on the ground, inter alia, that the penalties far exceeded the amount that a reasonable Upper Tribunal should have imposed where the total amount of tax unpaid was subsequently agreed to have been income tax of £1,250 and inheritance tax of £195,471 and that the judge had erred in his interpretation and application of paragraph 50(3) of Schedule 36.
On the taxpayer’s appeal
Held, appeal allowed. The power under paragraph 50 of Schedule 36 to the Act to enable the Upper Tribunal to impose a tax-related penalty was to be reserved for serious cases of non-compliance with an information notice. A causal link must be shown between the loss of tax which would have been paid, or be likely to have been paid, but for the taxpayer’s failure to comply with a notice although it was sufficient for the purposes of paragraph 50(1)(c) for the revenue’s investigating officer to subjectively have reason to believe in the existence of such a causal connection. There was no upper limit on the penalty the Upper Tribunal may impose and paragraph 50(3) of Schedule 36 to the Act merely required the Upper Tribunal to have regard to the amount of tax which was not or not likely to be paid and form a view on that amount although the burden was firmly on the revenue to satisfy the Tribunal of the amount at issue. For an Upper Tribunal to consider it appropriate under paragraph 50(1)(e) to impose that additional penalty, it should have regard to the usual considerations applicable to the imposition of a tax penalty, such as the reasons for non-compliance, the extent to which a position has been remedied, the gravity and duration of the non-compliance, the presence of aggravating or mitigating factors, the availability of other methods to recover the tax at risk and generally the need to achieve a fair and proportionate outcome, having regard to the interests of the public purse and the general body of taxpayers as well as the circumstances of the non-compliant taxpayer. There was a clear contrast between the deliberately non-prescriptive language of paragraph 50 and the carefully calibrated regime of tax-geared penalties in Schedule 55 to the Finance Act 2009. In the present case, it was clear that the Upper Tribunal judge used the provisions of Schedule 55 as a guideline when considering the taxpayer’s level of culpability and took 100% of what he considered to be the tax at risk as his starting point. The judge was wrong not to have heavily discounted the revenue’s figures for the tax unpaid to reflect variously acknowledged uncertainties to which they were subject and that he drew a flawed analogy with the tax-geared penalty regime in Schedule 55 of the 2009 Act which led him to wrongly equate the present case with one of deliberate concealment under that regime. The penalties imposed by the judge fell to be set aside. In re-making the decision, having in mind subsequent agreement on the amounts of tax unpaid, it was appropriate to impose a penalty of £20,000 for the taxpayer’s failure to comply with the income tax notices and a penalty of £200,000 for his much more serious failures to comply with the inheritance tax notice (paras 8, 86, 87–91, 93, 95, 96, 105, 110, 111, 112).
Hui Ling McCarthy QC (instructed by Withers LLP) for the taxpayer.
David Yates (instructed by General Counsel and Solicitor to HM Revenue and Customs) for the revenue.