Murat v HM Inspector of Taxes [2003] UKSC SPC00394 (29 December 2003)

INCOME TAX – PENALTIES – Failure to produce documents – Notice of enquiry followed by section 19A Notice - £30 daily penalties imposed for 141 days – Proportionality – Chartered accountant – Small business – TMA 1970 s.9A(1), 19A(2), 97AA(1)(a)(b), 100B(2) – Daily penalties reduced
 
THE SPECIAL COMMISSIONERS

	M Y H MURAT	Appellant

	- and -

              S ORNOCH
	(INSPECTOR OF TAXES)    	Respondent

				Special Commissioner:	THEODORE WALLACE

Sitting in private in London on 28 November 2003

The Appellant appeared in person

Dominic Stewart, Inspector of Taxes, for the Respondent

(Published without anonymization at request of Appellant)

© CROWN COPYRIGHT 2004

DECISION

1.	This appeal concerns penalties imposed on a chartered accountant for failing to comply with a notice served under section 19A(2) of the Taxes Management Act 1970 requiring him to produce specified documents relating to his business and personal affairs including a balance sheet for the business for the purposes of an enquiry into his 1996/97 tax return..

2.	The notice was dated 19 November 1999 and followed a notice of enquiry dated 11 June 1999.

3.	The Appellant’s appeal against the section 19A notice was heard by Dr Brice on 5 May 2000 and was dismissed in decision Sp 258 dated 8 June 2000, Accountant v Inspector of Taxes.

4.	The Appellant did not comply with the notice following the determination by Dr Brice.

5.	On 1 August 2000 a fixed penalty of £50 was issued under section 97AA(1)(a) for failure to comply.  That was followed on 12 September 2000 by a penalty under section 97AA(1)(b) of £1,260 being £30 a day for the 42 days from 2 August to 12 September. Additional penalties were issued under section 97AA(1)(b) on 20 November for £2,070 for 69 days to 20 November and on 21 December for £900 for 30 days to 20 December 2000.  The daily penalties thus totalled £4,230 for 141 days.

6.	The Appellant contended that the original notice of enquiry was invalid thereby making the section 19A notice invalid, that the penalty notices were invalid because the details were incorrect and it was impossible for him to produce a balance sheet.

7.	The section 19A notice required the Appellant to produce by 5 January 2000 the following documents:

“1.	All business records relating to the accounts of Messrs Murat & Co covering the period 1 September 1994 to 31 August 1996 inclusive, including all records of income and expenditure together with any invoices issued in respect of the turnover and invoices/receipts in respect of the expenditure claimed.

2.	A Profit and Loss account for the period 1 September 1994 to 31 August 1996 together with a Balance Sheet as at 31 August 1996.

3.	Bank/Building Society statements, passbooks etc in respect of all interest-bearing accounts held for the year ended 5 April 1997.

4.	Dividend counterfoils for the year ended 5 April 1997.

5.	Bank statements, paying-in books and cheque book counterfoils and/or Building Society, etc passbooks relating to all Bank etc, accounts used by you, including the business accounts for Messrs Murat & Co, covering the period 1 September 1994 to 31 August 1996 inclusive.”

8.	The notice under section 9A(1) upon which the section 19A notice depended by reason of section 19A(1) did not in fact refer to section 9A(1) and did not contain the words “notice of enquiry”.  It was contained in a letter.  The opening paragraph was as follows:

“I am writing to tell you that I intend to make some enquiries into your 1996/97 Tax Return.”

It enclosed Code of Practice 11, “Enquiries into tax returns by local Tax Offices.”  The letter requested documents “To enable me to commence my enquiries.”

9.	The Appellant contended that the Notice of Enquiry was invalid because it did not state that it was a notice under section 9A(1).

10.	Mr Stewart said that the validity of the section 9A notice had not been challenged in the appeal against the Section 19A notice and that the determination by Dr Brice of the appeal against the requirement in the latter notice was final and conclusive by reason of section 19A(11).  It was not open to the Appellant to challenge the section 9A notice in the present appeal.  In any event he submitted that there was no legal requirement that the section 9A notice should refer to that section.

11.	In my judgment Mr Stewart was correct in both submissions.  The validity of the section 9A notice cannot be challenged following Dr Brice’s decision.

12.	I am satisfied that the letter of 11 June 1999 did give notice of enquiry under section 9A(1) although it did not refer to that provision.  It stated that it was an enquiry into the Appellant’s Tax Return and it enclosed the Code of Practice outlining the enquiry procedure. The only formal requirements in section 9A(1) are that the notice should be in writing, that it should inform the taxpayer of the intention to make the enquiry and that it should be within the period specified in sub-section (2).

13.	In my judgment it would be good administrative practice for such notices to be headed “Notice of Enquiry” and to refer to section 9A(1).  That is however not a legal requirement.

14.	The Appellant’s next contention was that the penalty notices were invalid because the details on the Notices of Penalty Determination were incorrect.  

15.	The details on the £50 notice dated 1 August 2000 were as follows:
“Penalty under the provisions of Section 97AA(1)(a) of the Taxes Management Act 1970 in respect of your failure to comply with the notice served upon you on 19 November 1999 under the provisions of section 19A(2) of that Act requiring you, on or before 8 July 2000 to produce such document as were specified in that notice.”

8 July 2000 was not of course the date specified in the notice but was 30 days after the determination in Sp 258 on 8 June referred to in paragraph 3 above.  

16.	The Appellant’s contention was that under section 19A(10) and the Interpretation Act 1978, s.7 the date should have been at least two working days later to allow 30 days notice; he cited Self-Assessed v Inspector of Taxes [1999] STC (SCD) 253 and Holly v Inspector of Taxes [2000] STC (SCD) 253.

17.	Section 19A(1), (2) and (10) provides as follows:
“(1)	This section applies where an officer of the Board gives notice of enquiry under section 9A(1) … to a person (‘the taxpayer’).
(2)	For the purposes of the enquiry, the officer may at the same or any subsequent time by notice in writing require the taxpayer, within such time (which shall not be less than 30 days) as may be specified in the notice –
(a)	to produce to the officer … documents … and
(b)	to furnish the officer with such accounts or particulars as he may reasonably require for that purpose.
(10)	Where, on an appeal …, the Commissioners confirm the notice under subsection (2) … above so far as relating to any requirement, the notice shall have effect in relation to that requirement as if it had specified 30 days beginning with the determination of the appeal.”

18.	The effect of section 19A(10) is therefore that on the determination of the appeal by Dr Brice the notice of 19 November 1999 had effect as if it had specified 30 days beginning with the determination of the appeal which was on 8 June 2000.  30 days from 8 June expired on 8 July.

19.	In Self-Assessed v Inspector of Taxes, Mr Everett held that the taxpayer was entitled to a minimum of 30 days from the receipt of the section 19A notice which was not the same as 30 days from the date of the notice.  In Holly v Inspector of Taxes.  Dr Brice held that where a notice under section 9A was posted within the time limit but due to postal delays was received outside the time limit notice had not been given in time.

20.	In my judgment neither of those decisions is relevant when section 19A(10) applies.  Subsection (10) expressly provides that the notice has effect as if it had specified 30 days from the determination.  It is thus different from section 19A(2) which requires the time to be “not less than 30 days” from the giving of the notice.  Section 9A(1) again refers to “gives notice”. When the Tribunal confirmed the section 19A notice on 8 June no further notice was required by an officer of the Board, the original notice took effect as if it had specified 8 July being 30 days from the date of determination.

21.	It follows that the reference to 8 July in the notice of penalty at paragraph 14 above was not incorrect. Ideally the details might have contained a reference to section 19A(10) but the absence of such reference is not in my judgment material.

22.	It is to be noted that the fixed penalty was not issued until 1 August at which date the Appellant was still in default. The three daily penalty notices all referred to 8 July also but the first penalty was only applied from 2 August. The same reasoning applies to those notices

23.	Mr Murat made other criticisms of the decision of the Tribunal in sp 258, including a contention that the section 19A notices involved forced or compulsory labour contrary to Article 4 of the European Convention on Human Rights and discrimination contrary to Article 14. I am satisfied that there is no merit in either complaint.  Article 4.3d specifically excludes from “forced or compulsory labour” any work or service which forms part of normal civic obligations compliance with a section 19A is in my view a civic obligation.  He did not specify what form the alleged discrimination took. In any event the determination in 2000 was final and conclusive by reason of section 19A(11).

24.	This brings me to the final issue.
25.	Under section 100B(2)(b) of the Taxes Management Act 1970 which applies to penalties which are not fixed the appeal commissioners may set the determination aside, confirm it, reduce it or increase it.  The relevant sub-paragraph here where the maximum penalty has been imposed is

“(iii)	if the amount determined appears to them to be excessive, reduce it to such other amount (including nil) as they consider appropriate.”

26.	These penalties are different from penalties such as those under VATA 1994 s.63, 64 and 67 where the penalty is a fixed percentage subject to mitigation with limitations. Here the penalty is at large from nil to the statutory maximum. There is no presumption that the penalty starts at the maximum.

27.	It is necessary therefore for the Tribunal to consider whether the penalties imposed are excessive, and if so by how much they should be reduced.  In this respect it substitutes its own judgment for that of the Commissioners, see Potter and Prosser, Tax Appeals at para 10-06.

28.	It is now well settled that the power of a State to enforce such laws as it deems necessary to secure the payment of taxes under the second paragraph of Article 1 of the First Protocol to the Human Rights Convention is not absolute but is subject to the basic principles of proportionality. There must be “a reasonable relationship of proportionality between the means employed and the aim pursued”, see Gasus Dosier-Und Fordertechnik v Netherlands (1995) 20 EHHR 403 at paragraph 62 and Lindsay v Customs and Excise Commissioners [2002] STC 588 at paragraph 52.  It is necessary to consider the individual case to ensure that the penalty imposed is fair.  It must be proportionate to the gravity of the infringement.

29. 	In Willey v East Dereham General Commissioners (1984) 59 TC 649, which concerned the powers under section 100(8), Scott J said that there should not be any artificial restrictions on the matters to be taken into account when deciding the proper penalties.  Although the wording of section 100B(2) is somewhat different from the former section 100(8), that principle is still relevant.

30.	It seems to me that proportionality necessarily involves some consideration of the amount of tax involved.  The Appellant told me (and this was not disputed) that the amount returned as payable by him for 1996/97 was £5,681.38 which had been paid in two instalments; no assessment had been raised.  He told me that his liability for 2000/01 was £3,463 which has not been challenged.

31.	The Appellant has not helped his case by the fact that he has not provided any of the material sought, so that the Revenue have not been able to check his return.  Nevertheless the total daily penalties of £4,260 were thus very substantial by comparison with his apparent tax liability. There was no suggestion that the enquiry was anything other than random; the enquiry letter referred to commencing enquiries.  If material underdeclaration was suspected it seems unlikely that the matter would have been left to rest even with the penalties.

32.	For a small business the maximum penalty which can be imposed under section 97AA can easily exceed the penalty in the case of fraud under section 95 which is equal to the amount underdeclared.

33.	In my judgment it is relevant that £5,681 tax has been paid and that the daily penalties imposed three-quarters.  Any underdeclaration would have had to be very substantial before the maximum penalty under section 95 would have been as great.

34.	On the other side of the coin, the failure of the Appellant to comply with the Notice frustrated the enquiry into the 1996/97 Return.

35.	The Appellant told me that he has dividend counterfoils and bank statements and counterfoils although he has not produced them.  He said that it was not possible for him to produce a balance sheet because his tax returns had been prepared on an earnings basis and he did not have schedules of outstanding fees at the relevant dates.  While in the absence of some supervening event such as a fire, the Appellant cannot at this stage raise the impossibility of complying with the notice, he can raise the difficulty by way of mitigation.  However he gave no evidence of any attempt to comply.  He said that as a chartered accountant he could not make an estimate.  I do not accept this.

36.	Mr Stewart said that a higher penalty of £150 a day could have been imposed under section 97AA(2)(b). However any argument as to proportionality would have been more powerful had the higher maximum been imposed. The fact is that even the lower penalty was very substantial for a small trader. While £30 a day is very little for a large trader, it is large for a small business.

37.	In all the circumstances of the case although the infringement is serious and prolonged I have determined that the penalties should be reduced by one-third to £20 a day.  Subject to that reduction the penalty determinations are confirmed.

THEODORE WALLACE
SPECIAL COMMISSIONER

SC  3148/01