Spc00644

Penalties for failure to file an end of year return of subcontractors by the due date – section 98A TMA 1970 – whether calculation of penalty in Appellant’s case in breach of Article 1 Protocol 1 of the European Convention of Human Rights – whether penalty ‘grossly disproportionate’ in the Appellant’s case – whether covered by the State’s margin of appreciation – application of section 6 HRA 1998 – appeal dismissed

THE SPECIAL COMMISSIONERS

	BYSERMAW PROPERTIES LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Special Commissioner:	Malcolm Gammie CBE QC

Sitting in public in London on 3 May 2007

Mr M J Grundy (Director) for the Appellant

Ms Rebecca Haynes (Counsel) instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Background and issues
1.	Bysermaw Properties Limited (“the Appellant”) appeals against the imposition of penalties resulting from the Appellant’s late filing of a PAYE return by the due date of 19 May 2002.  By Notices dated 23 September 2002 and 27 January 2003 Her Majesty’s Revenue and Customs (“the Respondents” or “HMRC”) imposed penalties upon the Appellant, each in the amount of £400, pursuant to s 98A(2)(a) of the Taxes Management Act 1970 (“TMA”) for failure to submit a return as required by Regulation 43 of the Income Tax (Employments) Regulations 1993, on or before 19 May 2002.
2.	By virtue of s 98A(3)(a) TMA, in cases where the number of persons in respect of whom particulars should be included in the return is fifty or less, the penalty applicable under s 98A(2)(a) is £100 per month or part of a month during which the failure to make a return continues subject to a maximum of 12 months.
3.	The parties had agreed a statement of facts which, with the basic documents before me, was to the following effect.  The Appellant, who had engaged one subcontractor in the relevant year, failed to make a return in respect of the subcontractor until around 24 March 2003, over 10 months after the date by which the return was required to be made.  The aforementioned Notices applied penalties relating only to a total of 8 months during which the Appellant failed to make a return and no additional Notice was issued in respect of the additional 2 months failure.
4.	The Appellant’s return, as submitted on 24 March 2003, showed that the total payments that had been made to the Appellant’s single contractor were £13,300 of which £7,600 related to the cost of materials used by the subcontractor under the contract.  The Appellant had deducted £1,026 from the balance.  On the front of the return the Appellant was reminded that any tax still due for the year 2001/2002 should be paid by 19 April 2002 and that interest would be charged on any tax paid after that date.  It was not alleged that the Appellant had failed to deduct sufficient tax.  The return also drew attention to the fact that penalties would be chargeable if the completed return did not reach HMRC by 19 May 2002 and that for the tax year 2001/2002 penalties would be levied if the return was not received by 24 May 2002.
5.	By a letter of 27 March 2003, the Appellant contended in what was expressed to be the briefest outline of its contentions that the penalties imposed on it were void ab initio.  The Appellant contended in summary that:
(1)	The penalty imposed on it in respect of a return comprising one subcontractor was the same as would have been sought from an employer engaging 50 subcontractors;
(2)	The relevant legislative provision is cast in terms of a “banded per capita” basis;
(3)	Even acknowledging the wide margin of appreciation afforded to the Respondents in taxation matters, the imposition of a penalty on the Appellant that is 50 times more onerous on a per capita basis than a comparable case cannot be considered proportionate to the aim of the legislation and constitutes an infringement of the Appellant’s right to the peaceful enjoyment of its property guaranteed by the Human Rights Act 1998.
6.	The letter was treated by the Respondents as a late appeal against the relevant penalty notices but did not subsequently oppose the Appellant’s application to the General Commissioners to have its appeal considered out of time.  That application was granted by the General Commissioners on 2 March 2005.  The appeal was, at the same time, transferred by consent to the Special Commissioners, who accepted jurisdiction by a letter dated 8 March 2005.
7.	The questions for my determination were agreed to be as follows:
(1)	Did the imposition of penalties by Notices dated 23 September 2002 and 27 January 2003, or each of them, constitute an infringement of the Appellant’s right to peaceful enjoyment of its possessions guaranteed by Article 1 Protocol 1 of the European Convention of Human Rights (and the Human Rights Act 1998) as being disproportionate to the aim of s 98A TMA in imposing the same penalty on an employer engaging one subcontractor as would have been applicable to an employer engaging 50 subcontractors?
(2)	If so, are the penalties void ab initio or what, if any, is the appropriate remedy?
The relevant legislation
8.	Section 98A provides:
“(1) PAYE regulations or regulations under section 70(1)(a) or 71 of the Finance Act 2004 (sub-contractors) may provide that this section shall apply in relation to any specified provision of the regulations.

(2) Where this section applies in relation to a provision of regulations, any person who fails to make a return in accordance with the provision shall be liable—
(a) to a penalty or penalties of the relevant monthly amount for each month (or part of a month) during which the failure continues, but excluding any month after the twelfth or for which a penalty under this paragraph has already been imposed, and
(b) if the failure continues beyond twelve months, without prejudice to any penalty under paragraph (a) above, to a penalty not exceeding 
(i) in the case of a provision of PAYE regulations, so much of the amount payable by him in accordance with the regulations for the year of assessment to which the return relates as remained unpaid at the end of 19th April after the end of that year, or
(ii) in the case of a provision of regulations under section 70(1)(a) or 71 of the Finance Act 2004, £3,000.

(3) For the purposes of subsection (2)(a) above, the relevant monthly amount in the case of a failure to make a return—
(a) where the number of persons in respect of whom particulars should be included in the return is fifty or less, is £100, and
(b) where that number is greater than fifty, is £100 for each fifty such persons and an additional £100 where that number is not a multiple of fifty.

(4) Where this section applies in relation to a provision of regulations, any person who fraudulently or negligently makes an incorrect return of a kind mentioned in the provision shall be liable to a penalty not exceeding the difference between—
(a) the amount payable by him in accordance with the regulations for the year of assessment (in the case of a provision of PAYE regulations) or period (in the case of a provision of regulations under section 70(1)(a) or 71 of the Finance Act 2004 to which the return relates, and
(b) the amount which would have been so payable if the return had been correct.

9.	Article 1 of the First Protocol to the ECHR provides:
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions.  No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

The evidence
10.	David John Stephens gave evidence on behalf of the Respondents.  Mr Stephens is one of the Respondents’ officers and a policy adviser in HMRC’s Cross-Cutting policy team since 26 November 1991.  He has had specialist policy responsibility for penalties including the penalties in question under s. 98A TMA.  Mr Grundy for the Appellant had previously indicated that he did not intend to cross-examine Mr Stephens and his witness statement was therefore admitted as uncontested evidence of the matters stated therein.  Mr Grundy adduced no witness or documentary evidence.
11.	I record Mr Stephens’ evidence in the following paragraphs.  Mr Stephens had seen Mr Grundy’s letter dated 27 March 2003 on behalf of the Appellant in which Mr Grundy had asserted that the penalty under s 98A TMA, to the extent that it is cast in terms of a ‘banded per capita penalty’, did not pursue a legitimate aim and was disproportionate.  Mr Stephens said that did not believe that the Appellant was suggesting that a late filing penalty does not per se pursue a legitimate aim.  
12.	Mr Stephens said that at the end of a tax year, employers and contractors are required to make end of year returns providing details of pay, PAYE/tax and NICs deductions for their employees or subcontractors.  Originally the date by which these end-of-year returns had to be filed was 19 April but section 165 of the Finance Act 1989 extended the date to 19 May.  Section 165 also introduced section 98A TMA with new penalties for the late filing of such returns.  
13.	Section 165 implemented a recommendation of the Committee on Enforcement Powers of the Revenue Departments under the chairmanship of Lord Keith of Kinkel (known as “the Keith Committee”).  It was introduced following a full consultation process with a cross-section of interested parties including employers and representative bodies.  Its purpose was to complete a package of measures designed to encourage voluntary compliance by employers and contractors in paying over to HMRC the tax that they deducted under PAYE (or similar rules in respect of contractors) from the wages and salaries of their employees or subcontractors.  Responses from the consultation showed that there was general support for the proposals.  Although the main representative bodies expressed reservations over automatic penalties, the large majority of respondents accepted that the late filing date of 19 May was fair and reasonable and that the level of penalties was about right.
14.	Mr Stephens said that the returns were (and still are) needed as soon as possible after the year end:
•	to check that deductions made by employers/contractors had been paid to HMRC and to take appropriate action if they had not,
•	because HMRC and the (then) Department of Social Security (“DSS”) needed the details of tax and National Insurance contributions paid by each employer/contractor so that HMRC could make repayments to the employee/subcontractor of any tax overpaid and the DSS could ensure that the employee/subcontractor obtained his/her full benefit entitlements, and
•	to aid efficient administration.
15.	At the time that the measure was introduced as clause 160 of the 1989 Finance Bill research showed that many end-of-year returns were late, particularly from employers who had failed to pay all their PAYE and NIC deductions to HMRC.  There was a major problem of delay by small employers.  Many small employers retained the money that they had deducted from their employees’ salary or wages rather than account for it to HMRC.  They then delayed submitting their end-of-year return to HMRC and as a result it was difficult for HMRC to ensure compliance.  The new penalties were specifically designed to counter that problem.
16.	It was recognised at the time that the delay was a serious and growing problem in that the total amount paid late and the period for which it remained unpaid showed a disturbing increase.  The Public Accounts Committee (“PAC”) had drawn attention to the problem and recommended the early implementation of the measures proposed by the Keith Committee to improve compliance by employers/contractors, including the introduction of automatic penalties for late end of year returns.  For instance, the PAC 12th Report “Matters relating to the Inland Revenue Department”, following hearings in May 1987 on the 1985-86 Appropriation Accounts, said:
“We are disappointed at the time it is taking to implement the proposals from the Keith Committee which have been the subject of previous recommendations of this Committee, especially those concerning prompt payment by employers to Inland Revenue of PAYE tax deductions.  We find it difficult to accept that implementation of all the proposals should be delayed to the same extent.”

17.	At the relevant time, research showed one half of all employers, together paying one third of the total due, were behind with their monthly payments – one quarter by two months or more.  In 1986, £7.4 billion which should have been paid during the tax year remained unpaid at the year end.  £4.7 billion was recovered within one month and a further £1.4 billion in the next five months, leaving £1.3 billion unpaid six months after the year end.  The research further showed at that time that the last figure had doubled in the four years between 1982 and 1986.  The interest cost to the Exchequer of money delayed beyond the year end at that time was said to be £150 million a year.  The concern was expressed was that the longer a payment was delayed, the greater the risk that it would prove irrecoverable and that there had been a worrying increase of amounts which had to be written off as irrecoverable over those recent years.
18.	Following consultation with the tax industry the proposal was to allow employers (and contractors) an extra month to make the end of year return (i.e. the new filing date of 19 May) in the hope that with the extra time, and the return being reasonably straightforward, the employers/contractors would find it much easier to meet their reporting obligations.
19.	The penalty for late returns introduced was £100 per month, for up to 12 months.  For the larger employers/contractors, with more than 50 employees/subcontractors, the monthly penalty increased by £100 for each additional 50 employees/subcontractors.  Larger penalties for larger employers/contractors (i.e. those with more than 50 employers/subcontractors) were considered right because of the greater risk to the Exchequer and the greater administrative burden to HMRC caused by such late returns.  HMRC’s papers showed that there were some suggestions in the consultations that separate rules should be introduced for very small employers/contractors, for instance with less than ten employees/subcontractors in that the penalties should be smaller and the employers/contractors allowed a longer time to complete the return.
20.	Consideration was given to these suggestions and the burden that regulations could place on small employers/contractors was recognised. However, it was felt at the time that HMRC had done a great deal to cut the burden down through deregulation initiatives.  A review of the flow of paper passing between HMRC and employers/contractors was then also taking place to see what further reductions could be made.  That review built on the substantial improvements already made to the guides and instructions for employers/contractors.
21.	Having taken the suggestions into account, it was decided that the proposals as introduced struck a proper balance between the interests of the individual taxpayer and the wider interests of the generality of taxpayers.  The extra month for completing the returns was seen as providing a very small employer/contractor adequate time to make his return.  This was because, as set out below, it was considered that the smaller the number of employees/subcontractors, the easier it was to complete the end of year return.
22.	Mr Stephens explained that the employer/contractor is required to keep a deduction working sheet for each employee/subcontractor during the tax year.  He uses this to record each payment to the employee/subcontractor and to work out the PAYE/tax and NICs to deduct.  He therefore has to complete the working sheet before making the payment.  The employer/contractor is then required to pay over to HMRC the PAYE/tax and NICs deducted in each tax month (i.e. the month beginning on the 6th of one month and ending on the 5th of the next) within 14 days of the end of the tax month (i.e. by the 19th).
23.	In respect of employees, at the end of the tax year (April 5), the employer is required to transcribe the relevant details of pay and PAYE and NICs deducted for each employee from the working sheet to a form P14.  There is no direct equivalent of the P14 for contractors.  The nearest equivalent is the CIS25, which contractors submit monthly (whilst the P14 is submitted yearly).  The CIS25 is a three-piece form – one part is given to the subcontractor to confirm the level of deductions made by the contractor, one part is retained by the contractor and the third part is submitted to HMRC.
24.	Thereafter, at the end of the tax year the employer/contractor is required to prepare a summary of the forms P14/CIS25 on a form P35/CIS36 and to total the PAYE/tax and NICs deducted.  The end of year return consists of the forms P14 (one for each employee/subcontractor)/and remaining CIS25s and the form P35/CIS36.  He is required to send the completed end of year return to HMRC by 19 May.
25.	As the above shows, an employer/contractor has to complete deduction working sheets during the year (otherwise he could not operate PAYE or similar rules for contractors).  At the end of the year the employer/contractor has to copy the relevant figures from the working sheets onto the end of year return and send it to HMRC.  If there are only a few employees/subcontractors it was considered that that was quite a simple task and therefore there was really no reason for a small employer/contractor to be late with the end of year return.
26.	Since the current measures were introduced, further research on the delay in filing the end-of-year returns suggested that the new penalties had improved compliance.  Mr Stephens said that he had been advised by Peter Lumb of HMRC’s Knowledge Analysis and Intelligence (‘KAI’) Analysis team that an analysis of the KAI – Analysis extract from HMRC’s Employer Compliance Computer System revealed the following data.  The data analysed covered the filing of P35 (Employers) and CIS36 (Contractors) end of year returns for the 2002/2003 tax year and covered all returns filed until the time the extract was taken in around March 2004.  The data showed that 1.554 million PAYE schemes had filed returns for tax year 2002/2003 by when the extract was taken.  Of these 1.419 million (91 per cent) had filed by 26 May 2003 (the due date of 19 May plus allowance for ESC B46).  As regards schemes filing a CIS36 return, 221.4 thousand schemes had filed at the time of the extract, and of these 188.8 thousand (85 per cent) had filed by 26 May 2003.
27.	In the light of this research Mr Stephens expressed the view that the policy and thinking underlying the penalties imposed by s 98A TMA 1970 remained sound for the same reasons identified in 1989.
The Appellant’s contentions
28.	Mr Grundy for the Appellant said that the Human Rights Act 1998 (“HRA”) provides that, so far as it is possible to do so, primary legislation and subordinate legislation must be read and given effect to in a way that is compatible with the Convention rights.  Those rights include that found in Article 1 of the First Protocol.  Mr Grundy referred to the case of Gasus Dosier-und Fördertechnik GmbH v The Netherlands (1995) 20 EHRR 403 where the European Court of Human Rights had noted at paragraph 55 that Article 1 comprises three distinct rules—
“The first, which is expressed in the first sentence of the first paragraph and is of a general nature, lays down the principle of peaceful enjoyment of property.  The second, in the second sentence of the same paragraph, covers deprivation of possessions and makes it subject to certain conditions.  The third, contained in the second paragraph, recognises that the Contracting States are entitled to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties  However, the three rules are not ‘distinct’ in the sense of being unconnected: the second and third rules are concerned with particular instances of interference with the right to peaceful enjoyment of property and should be construed in the light of the general principle enunciated in the first rule.”

29.	Mr Grundy noted that the reservation in favour of the right of States to secure payment of taxes and penalties in the second paragraph of Article 1 is itself subject to the reservation that taxation must satisfy the principles underlying the Convention, i.e. the provisions adopted must be a proportionate means to achieve the end sought.  He referred again to Gasus Dosier-und Fördertechnik GmbH at paragraph 62 where the Court explained that—
“ the second paragraph of Article 1 of Protocol No. 1 (P1-1) must be construed in the light of the principle laid down in the Article’s (P1-1)  first sentence  Consequently, an interference must achieve a ‘fair balance’ between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights.   there must therefore be a reasonable relationship of proportionality between the means employed and the aim pursued.”

30.	Mr Grundy noted that Ms Haynes appeared to accept this in her skeleton argument by acknowledging that the central question in applying Article 1 is one of proportionality (citing paragraph 62 of Gasus Dosier- und Fördertechnik GmbH).  Mr Grundy acknowledged that the legislature must be allowed “a wide margin of appreciation” in these matters (Gasus Dosier- und Fördertechnik GmbH at paragraph 60).  He said that in the present case, however, the penalty subject to appeal is up to fifty times more onerous for a contractor such as the Appellant with one subcontractor than it is for a larger contractor.  
31.	In Mr Grundy’s submission the question is what meaning should one give to ‘proportionate’ for these purposes?  Mr Grundy said that if the penalty were ‘disproportionate’ then it could not be ‘proportionate’ and if it was ‘grossly disproportionate’ then it cannot be ‘proportionate allowing for a margin of appreciation’ – even a wide margin.  Mr Grundy noted that particular penalties as a whole might be set at a level that was disproportionate as a general matter in most cases, so that the question for the court would then be whether it should so conclude and substitute its own view for that of the legislature as to what was a proportionate penalty for the particular failure with which the penalty was designed to deal.  He emphasised, however, that he was not arguing in this case that the general level of the penalties imposed by section 98A TMA was disproportionate to the aim or purpose of the provision.  It was not his intention to open the floodgates to other cases.  He was concerned solely with the proportionality of the penalty in the Appellant’s case where the Appellant had engaged only one subcontractor.
32.	He said that the question was whether there was a reasonable relationship of proportionality in the Appellant’s case by reference to the penalties imposed in other cases under this penalty regime.  He was not arguing for a narrow mathematical meaning of proportionality.  He accepted that a more relaxed definition should be accorded the concept of proportionality in this context.  It should bear a meaning that captured the essence or flavour of the term.  In this case he suggested that the essence of proportionality emerged from comparison with other contractors.  It was not a matter of subjective reasonableness but comparison could convey the flavour of proportionality.  Thus, a penalty geared at a factor of five times might be heavily disproportionate and a factor of ten times might be thought of as substantially disproportionate but still within the margin of appreciation allowed.  A factor of 50 times, however, so that it was the same penalty for a company with one subcontractor as it was for a company with fifty subcontractors was ‘grossly disproportionate’ and could not therefore be regarded as ‘proportionate’ even allowing for the availability of a wide margin of appreciation.  The penalty was disproportionate to the general interest of society of securing the timely compliance with tax filing obligations.
33.	Mr Grundy said that the European Court of Human Rights usually referred to the national courts issues of the community interest involved in particular measures.  He drew my attention to Mr Stephens’ evidence on the aim to be achieved by the present measures.  He said that the decision to implement this penalty regime had pre-dated the Human Rights Act 1998.  The decision had been to adopt a penalty system at effectively £2 per capita per month, with direct proportionality between the level of penalty and the number of subcontractors engaged with banding into multiples of 50 contractors.  Although Mr Stephens’ evidence had been that the proposals struck a proper balance between the interests of the individual taxpayer and the wider interests of the generality of taxpayers, this could no longer be considered correct following the introduction of the Human Rights Act because it gave rise to grossly disproportionate results, as in the Appellant’s case.
34.	Mr Grundy noted that Mr Stephens’ description of the penalty system introduced in 1989 made it sound as if it were a fixed penalty of £100 per month with a top up for larger employers.  He said that if this were a fixed penalty regime then the position might be different but in fact it was not a fixed penalty system but a variable one in which the per capita penalty was combined with banding into groups of 50 subcontractors.  Combating the delay by many small employers in paying their tax who then delayed their returns to hinder the Revenue’s efforts to secure payment compliance might have been an adequate response in 1989.  The idea that you could pay for a default involving one subcontractor and not have to pay anything for a default involving the next 49 subcontractors, however, was disproportionate and could not survive the introduction of the Human Rights Act 1998.  Mr Grundy accepted that some element of genuinely fixed penalty or some modest increase in the per capita penalty would be proportionate but the current per capita banded system of 50 subcontractors was not.  The banding served no practical purpose in relation to the aim of this penalty system (see below).  
35.	Mr Grundy said that the Respondents had the necessary power under section 1 TMA to deal with the present situation.  Section 1 provides that the Respondents shall be responsible for the collection and management of income tax.  He said that the Respondents could exercise their general management power to produce a penalty regime that was compliant with the Human Rights Act.  The present system was based on a per capita penalty that gave direct proportionality between the level of penalty and number of subcontractors, which was then banded in multiples of 50 contractors.  It was the banding element that produced a penalty for contractors with only one subcontractor that was wholly disproportionate to the penalty for larger contractors.  Mr Grundy said that it was open to the respondents to ‘undo’ the banding that created that situation while preserving the underlying per-capita structure of the legislation and in that way resolve the disproportionality.  Thus, for example, rather than a banding based on 50 times the Respondents could adopt banding based on 7 times, so that the penalty imposed on one contractor was never more than 7 times more onerous than another contractor in the same band.  This would still be disproportionate but it would not be grossly disproportionate and in breach of the Human Rights Act.
36.	Mr Grundy noted that that the use by the Respondents of their powers under section 1 TMA had been considered by the House of Lords in R v The Commissioners of Inland Revenue ex parte Wilkinson [2005] UKHL 30.  That case concerned a widower, Mr Wilkinson, who claimed that he was entitled to the benefit of the widow’s bereavement allowance on the basis that the grant of this allowance to widows but not to widowers was an unlawful act by the Revenue under section 6(1) HRA.  By the time of the proceedings in Wilkinson the Respondents no longer denied that the allowance came within the scope of Article 1 of the First Protocol.  Furthermore they did not seek to justify the discrimination of which Mr Wilkinson had complained but admitted that the refusal of allowances to widowers was a breach of their Convention rights.  What the Respondents did say in Wilkinson, however, was that they were not in breach of section 6(1) of the Act.  
37.	Section  6(1) HRA provides that—
“It is unlawful for a public authority to act in a way which is incompatible with a Convention right.”

This is subject to section 6(2), which provides that—
“Subsection (1) does not apply to an act if—
(a) as the result of one or more provisions of primary legislation, the authority could not have acted differently; or
(b) in the case of one or more provisions of, or made under, primary legislation which cannot be read or given effect in a way which is compatible with the Convention rights, the authority was acting so as to give effect to or enforce those provisions.”

38.	The Respondents said that they had no statutory power to make a widower’s allowance and that they therefore could not have acted differently within the meaning of section 6(2)(a).  Mr Wilkinson for his part said that section 1 TMA conferred the necessary power on the Respondents on the basis that this was the Respondents’ authority for issuing extra-statutory concessions and therefore for granting Mr Wilkinson a widower’s allowance to comply with his Convention rights.  The Respondents denied that their powers under section 1 TMA extended to granting an allowance in Mr Wilkinson’s case.  Even if section 1 conferred such a discretionary power so that section 6(2)(a) did not apply, however, the Respondents said that in granting allowances to widows they were giving effect to section 262 of the Taxes Act 1988 (under which the allowance was granted to widows) and that therefore section 6(2)(b) applied to protect them.
39.	The Court of Appeal accepted that the Respondents’ powers under section 1 TMA did not go so far as to allow them to grant Mr Wilkinson an extra-statutory allowance.  It followed that the Respondents could not have acted differently and were protected by section 6(2)(a).  The House of Lords thought that the Court of Appeal’s judgment on this point was unanswerable.  In so deciding Lord Hoffmann, in paragraph 20 of his speech, had referred to Lord Diplock in R v Inland Revenue Commissioners, Ex p National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617 where he had alluded to the Respondents having a wide managerial discretion to obtain for the national exchequer the highest net return that is practical.  At paragraph 21, Lord Hoffmann said that—
“This discretion enables the commissioners to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which as statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of Parliamentary time.  The commissioners publish extra-statutory concessions for the guidance of the public and Miss Rose drew attention to some which she said went beyond mere management of the efficient collection of the revenue.  I express no view on whether she is right about this, but if she is, it means that the commissioners may have exceeded their powers under section 1 of TMA.  It does not justify construing their powers so widely as to enable the commissioners to concede, by extra-statutory concession, an allowance which Parliament could have granted but did not grant, and on grounds not of pragmatism in the collection of tax but of general equity between men and women. ”

40.	Mr Grundy said that the exercise of the Respondents’ powers under section 1 TMA for which he was arguing in this case did not amount to granting an allowance against tax that was clearly extending the scope of the legislation and was at variance with its plain language.  Parliament had created a system of penalties based on a per capita amount, ensuring direct proportionality between the level of penalty and the number of subcontractors engaged, combined with a system of banding that produced a grossly disproportionate result for taxpayers such as the Appellant.  The ‘banding’ served no practical purpose in the scheme of this regime because it was necessary to establish the number of subcontractors to establish in which penalty band the contractor fell, so that the penalty could just as easily have been based on the actual number of subcontractors engaged.  ‘Undoing’ the banding would resolve the gross disproportionality in the Appellant’s case whilst retaining the underlying structure of the legislation without extending its scope.  Mr Grundy submitted therefore that the Respondents did have the power under section 1 TMA and accordingly the obligation to act in compliance with the Appellant’s Convention rights.
41.	Mr Grundy drew my attention to paragraph 53 of the Court of Appeal’s judgment in Wilkinson, in which the Court said that—
“If circumstances arise under which it is necessary to exercise the power [under section 1 TMA] in order to avoid a breach of Convention rights, we can see no basis upon which the Commissioners can rely upon section 6(2)(b) to justify a refusal to exercise the power.”

Mr Grundy said that there was nothing in the speeches in the House of Lords that called this statement in paragraph 53 into question.  
42.	Finally, Mr Grundy said that if the structure of the penalty system that Parliament had adopted produced a situation in which the penalties imposed were grossly disproportionate, then it was not possible to redeem that situation by casting around for other benchmarks, e.g. that the penalty for a one-subcontractor contractor was nevertheless modest in absolute terms.  He suggested that any argument that the penalty is modest in absolute terms merely fortifies the argument that HMRC should use section 1 TMA to ‘deal pragmatically with the minor anomaly’ (see Wilkinson at para 21).
The Respondent’s contentions
43.	Ms Haynes for the Respondents said that the only issue for my determination is whether the penalties at issue are, as the Appellant contends, incompatible with the European Convention on Human Rights (“ECHR”).  She accepted that the imposition of a penalty for failure to file a tax return is an interference with the peaceful enjoyment of possessions under Article 1 of the First Protocol.  It involves a deprivation of possessions within the second sentence of that Article.  That sentence required that any deprivation of property must be 
(1)	in the public interest, 
(2)	subject to the conditions provided for by law, and
(3)	by the general principles of international law.
In addition the second paragraph of the Article explicitly recognises the right of the State to secure the payment of taxes or other contributions or penalties.  
44.	She submitted that the central question in applying the Article is one of proportionality.  Citing the decisions in Sporrong and Lönnroth v Sweden (1982) 5 EHRR 35, Gasus Dösier- und Fördertechnik GmbH v The Netherlands (1995) 20 EHRR 403 and Greengate Furniture Limited v Commissioners of Customs and Excise [2003] V & DR 178, she said that this meant that any interference with the right protected must achieve a fair balance between ‘the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights’.  She noted by reference to Hentrich v France (1994) 18 EHHR; Gasus Dosier (1995) 20 EHHR 403 and Greengate Furniture that the imposition of penalties for the late filing of a return, and the prevention of tax evasion generally is a legitimate objective which is plainly in the public interest.  She said that it was also clear that the penalties in the Appellant’s case were subject to conditions provided for by law, in that they have been imposed in accordance with s 98A TMA.  There was no issue of international law.
45.	Referring to Mr Grundy’s submissions, Ms Haynes said that he had no issue with the legitimacy of the aims of the penalties.  They were a legitimate means of securing compliance and the submission of returns.  Mr Grundy also had not taken issue with the overall level of the penalties or with the concept of a banded system.  The Appellant’s real complaint lay with the width of the band adopted and its impact at the lower level.  On that she submitted that there was a simple answer, namely that it was well within the wide margin of appreciation for the legislation to establish a banded system of penalties.  In essence this was a system of fixed penalties based on bands.  It was well within the discretion of the legislature to adopt a system of banding and to set it at an administratively workable level.  She submitted that the fact that it would be ‘fairer’ if the bands were narrower did not make the present banding unfair.
46.	Ms Haynes said that Mr Grundy’s argument that a system based on bands of 50 subcontractors produces a situation in which it was 50 time mores onerous to engage one subcontractor as compared to engaging 50 was not a logical argument.  Anyone who engages a subcontractor is placed under the obligation to submit an end-of-year return by the due date.  The penalty did not depend upon the amount paid or the tax due.  One had to have regard to the administrative burden on the individual employer or contractor.  A contractor with one subcontractor had a simple task as compared to one with 50.  There is no need for the regime to rely on some restrictive mathematical proportionality but that was what Mr Grundy was actually suggesting as a way to achieve a fairer result.  In Greengate Furniture the taxpayer had come nowhere near demonstrating that the system banded penalties was devoid of reasonable foundation or harsh or unfair and it was the same in this case.  She dismissed Mr Grundy’s submission that Mr Stephens’ evidence was no longer relevant because it related to decision taken before the enactment of the Human Rights Act.  The circumstances at the time justified the adoption of a banded penalty system and nothing had changed to affect that justification.
47.	Furthermore, Ms Hayes said that the concept of proportionality was one that was tested vis-à-vis the State not the person.  She said that Mr Grundy had had no problem with the penalty regime as such but had questioned why the Appellant had to pay the same penalty as others.  Proportionality as a facet of discrimination was not part of the test in this case.  She said that the only issue, therefore, is whether the system of banded penalties in section 98A is proportionate, i.e. whether it reflects a fair balance between the general interest and the Appellant’s individual right to peaceful enjoyment of its possessions (in this case the £800 it is required to pay in satisfaction of the penalties).
48.	Based on Mr Stephens evidence she said that the system of banded penalties put in place by Parliament in the TMA 1970 is neither arbitrary nor unnecessary.  The State has a wide margin of discretion in respect of the collection of taxes (recognised in the second paragraph of Article 1 of the First Protocol).  She submitted that the banded penalties, both in this case and generally, fulfil the requirements of Article 1 of the First Protocol given—
(1)	administrative need to ensure early submission of returns and to avoid risk to the revenue;
(2)	the proportionate monthly increase in the penalty relative to the period of default (subject to a 12 month ceiling);
(3)	the proportionate increase in penalties according to employee/contractor multiples relative to the revenue at stake; and
(4)	the relative burden on employers in relation to the number of employees/contractors in completing a return: the fewer the contractors, the lesser the administrative burden involved;
49.	She said that the system of banded penalties cannot be described as ‘devoid of reasonable foundation’ or ‘not merely harsh but plainly unfair’ (see Greengate Furniture at para 113, referring to Gasus Dosier and International Transport Roth  GmbH v Secretary of State for the Home Department  [2003] QB 728).
50.	Turning to section 1 TMA and the decision in Wilkinson, Ms Haynes pointed out that the Court of Appeal, in the passage in paragraph 53 to which Mr Grundy had referred, was saying that if section 1 could be used to provide an extra-statutory concession, section 6(2)(b) HRA could not be relied upon by HMRC to protect them from their obligation under section 6(1).  The Court of Appeal had concluded, however, that section 1 TMA could not be used in that way and the House of Lords had agreed.  She said that the House of Lords’ decision was conclusive that section 1 could not be used in this sort of case by the Commissioners or the Tribunal to adopt a different banded penalty system that accorded with what was said to be fair.  She said that the primary legislation could not be construed differently and the Tribunal’s function did not extend to rewriting the legislation.  
The Appellant’s reply
51.	In his reply Mr Grundy took issue with Ms Haynes’ submission that the system should be seen as a system of fixed penalties.  These were fixed penalties based on bands and the system of banding deprived the system of the essential feature of fixed penalties.  Instead they became per capita penalties that were then banded.  He accepted the difficulty of arguing against a fixed per contractor penalty and said that he was not arguing against the per capita banded structure of the system.  It was possible within the margin of appreciation allowed to have a system of banding but its acceptability as a proportionate system depended upon the width of the bands.  
52.	Mr Grundy said that he did not arguing on the basis of what was fair but for what was proportionate.  He was also not seeking a strict mathematical proportionality.  The content of the system could be the most relaxed that a system with a flavour of proportionality would allow.  Referring to Ms Haynes suggestion that his argument was not logical (see paragraph 46 above), he pointed out that the penalty was not related to turnover or the amount of tax in issue but had regard to the number of subcontractors engaged.  It was therefore not a fixed penalty. The fact that a contractor with a single subcontractor had a simple task did not mean that the contractor should suffer a disproportionate penalty for its failure to comply.  If the Appellant should suffer a penalty proportionately 50 times greater than a contractor with 50 subcontractors because his compliance task was 50 times easier, then the Appellant’s task was 100 times easier than a contractor with 100 subcontractors.
53.	As regards Ms Haynes submission that the Appellant’s case was nowhere near the Greengate Furniture test that the system was “devoid of reasonable foundation” or “not merely harsh but plainly unfair”, Mr Grundy pointed out that Greengate Furniture would have opened the floodgates of claims against the default surcharge for late payment of VAT.  That system was of necessity ‘proportionate’ so that the concept of proportionality did not help in that case and the Tribunal had to look to surrogates.  In this case it was unnecessary to go beyond the question of what was ‘proportionate’ in the circumstances.  
54.	Mr Grundy rejected Ms Haynes suggestion that the introduction of the Human Rights Act did not represent a significant change as compared to 1989 and that his real complaint lay in the lack of proportionality vis-à-vis other contractors rather than the State.  He said that his argument started by illustrating how the penalty was grossly disproportionate in the Appellant’s case vis-à-vis other contractors but proceeded to consider the societal aim of the provision and how it was said that HMRC had struck a proper balance.  If the proposals struck a proper balance between the interests of the individual taxpayer and the wider interests of taxpayers in general, as Mr Stephens had said, how could a penalty 50 times more onerous than the penalty imposed on another represent a reasonable balance?  The concept of proportionality in relation to other people translated into what was proportionate vis-à-vis the state in answering whether it struck a fair balance between the general interest and the Appellant’s individual right to peaceful enjoyment of its possessions
55.	Finally, the taxpayer had striven in Wilkinson to bring the grant of a widow’s allowance to a widower within the scope of HMRC’s powers under section 1 TMA.  He said that this was a forlorn task but in this case Mr Grundy merely argued that HMRC had power to deal with the situation pragmatically.  HMRC had exercised their power not to charge any penalty for the final two months’ default and equally could remit the penalties and impose them at a lower level that was not grossly disproportionate to the aim of the provision.  
My decision: the ‘margin of appreciation’
56.	Is the penalty to which the Appellant is liable under section 98A TMA disproportionate within the meaning accorded to that term in relation to the Appellant’s rights under the ECHR, as Mr Grundy on its behalf claims?  The imposition of fixed penalties to secure compliance by taxpayers with their obligations to file returns is clearly a deprivation of possessions but one that is permitted within the second paragraph of Article 1 of the First Protocol (Gladders v Prior SpC 361 [2003] STC (SCD) 245).  The Appellant does not contest that but complains that the penalty in its case is significantly disproportionate having regard to the structure of the penalty regime in question.  
57.	Mr Grundy seeks to establish this by comparison with other contractors who have a larger number of subcontractors but who suffer no higher penalty, even though the penalty provisions in this case reflect a view that the penalty should be higher for those contractors with larger number of subcontractors.  Mr Grundy has likened the banding effect to paying for 1 subcontractor getting the next 49 free and refers to a per capita charge of £2 per contractor.  He does not, however, seek strict mathematical proportionality between the penalty and the number of subcontractors engaged in the year.  He accepts the current banding approach (as he must to make his case) but says, in effect, that banding for every 50 contractors produces a disproportionate result in the case of a contractor such as the Appellant with just one subcontractor.
58.	The question, therefore, is whether the banding of 1 to 50 is too wide and whether, instead, the penalty should depend upon a narrower banding, such as 10 or 25.  Ms Haynes tells me that the State has a wide margin of appreciation within which to act and that this case clearly falls within it.  It would be easy to accept that argument on the basis that the space between 10, 25 or 50 must be covered by that concept.  I need to consider what precisely this ‘margin of appreciation’ involves, however, before concluding on that basis.
59.	In James and Others v The United Kingdom (1986) 8 EHRR 123, the Court had to consider the validity of the UK legislation dealing with compulsory leasehold enfranchisement.  The Court started by noting the “three distinct rules” of under Article 1 of the First Protocol (see paragraph 28 above).  It then considered whether the legislation, which could operate to confer considerable financial benefits on individual tenants at the expense of their landlords, was in the public interest.  It concluded that the taking of property in pursuance of legitimate social, economic or other policies may be “in the public interest” even if the community at large had no direct use or enjoyment of the property taken.  
60.	The Court then moved on to consider the “margin of appreciation”.  On this it noted (at paragraph 46) that—
“Because of their direct knowledge of their society and its needs, the national authorities are in principle better placed than the international judge to appreciate what is “in the national interest”.  Under the system of protection established by the Convention, it is thus for the national authorities to make the initial assessment both of the existence of a problem of public concern warranting measures of deprivation of property and of the remedial action to be taken (see, mutatis mutandis, the Handyside judgment of 7 December 1976, Series A no. 24, p. 22, para 48).  Here, as in other fields to which the safeguards of the Convention extend, the national authorities accordingly enjoy a certain margin of appreciation.
Furthermore, the notion of “public interest” is necessarily extensive.  In particular, as the Commission noted, the decision to enact laws expropriating property will commonly involve consideration of political, economic and social issues in which opinions within a democratic society may reasonably differ widely.  The Court, finding it natural that the margin of appreciation available to the legislature in implementing social and economic policies should be a wide one, will respect the legislature’s judgment as to what is “in the public interest” unless that judgment be manifestly without reasonable foundation.  In other words, although the Court cannot substitute its own assessment for that of the national authorities, it is bound to review the contested measures under Article 1 of Protocol No. 1(P1-1) and, in doing so, to make an inquiry into the facts with reference to which the national authorities acted.”

61.	Later, at paragraph 49, the Court referred back to this passage and noted that the Court had jurisdiction to inquire into the factual basis of the justification pleaded by the respondent Government but that that review was limited to determining whether the legislature’s assessment of the relevant social and economic conditions came within the State’s margin of appreciation.  As paragraph 46 of the Court’s judgment indicated, this reflected the Court’s earlier decision in Handyside v The United Kingdom (1976) 1 EHRR 737 where the Court had noted that “by reason their direct and continuous contact with the vital forces of their countries” state authorities are in principle in a better position than the international judge to express a view on the necessity of particular measures.  
62.	In the present case there is no dispute that the imposition of penalties as a means of encouraging compliance with the obligation to file a particular tax return represents a legitimate interference with the Appellant’s rights under Article 1 of the First Protocol.  The tax return demanded in this case does not demand new information but is an end of year summary of matters that should already have been reported to the Respondents during the course of the tax year in question.  Nevertheless, nobody would suggest that it is an onerous or inappropriate obligation that is not within the margin of appreciation that the Court would recognise as legitimate.
63.	In James, the Court, having concluded that the UK’s belief in the need to correct a social injustice through compulsory leasehold enfranchisement could not be characterised as manifestly unreasonable (and therefore outside the margin of appreciation applied by the Court), continued (at paragraph 50)—
“This, however, does not settle the issue.  Not only must a measure depriving a person of his property pursue, on the facts as well as in principle, a legitimate aim “in the public interest”, but there must also be a reasonable relationship of proportionality between the means employed and the aim sought to be realised (see, amongst others, and mutatis mutandis, the above-mentioned Ashingdane judgment, Series A n. 93, pp. 24-25, para. 57).  This latter requirement was expressed in other terms in the Sporrong and Lönnroth judgment by the notion of the “fair balance” that must be struck between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights (Series A n. 52, p. 26, para. 69).  The requisite balance will not be found if the person has had to bear “an individual and excessive burden” (ibid., p. 28, para. 73).  Although the Court was speaking in that judgment in the context of the general rule of peaceful enjoyment of property enunciated in the first sentence of the first paragraph, it pointed out that “the search for this balance is  reflected in the structure of Article 1 (P1-1)” as a whole (ibid., p. 26, para. 69).”

64.	It is apparent from this that there is a difference between the “margin of appreciation” in its broader application to the assessment of the public interest that justifies the infringement of the Convention right and the question of whether the particular measure is a proportionate measure.  The margin of appreciation is an area of freedom of action within which the European Court of Human Rights will not interfere with the state’s judgment.  The principal justification for the doctrine of margin of appreciation is that “state authorities are in principle in a better position that the international judge to give an opinion on the exact content of” restrictions on Convention rights and their necessity (Handyside v UK (1976) 1 EHRR 737, para 49; Brannigan & McBride v UK (1993) 7 EHRR 539).  A national court, such as this Tribunal, has the benefit of direct contact with the parties and witnesses and is better placed to assess questions of justification and proportionality.  
65.	There may be a “margin of appreciation” to be applied in assessing proportionality but it seems to me important to keep the distinction in mind in considering the Court’s decisions.  In this respect I note that Clayton and Tomlinson in The Law of Human Rights (2000) Vol. 1 at paragraph 6.82 say that—
“One of the critical issues to be decided under the Human Rights Act is whether the doctrine of the margin of appreciation has any role to play when the court applies the principle of proportionality.”

66.	I do not propose in this decision to delve further into that issue as it would be unwise of me to do so without the benefit of further argument on the matter.  The Tribunal in Greengate Furniture Ltd v Commissioners of Customs and Excise [2003] V & DR 178 heard submissions over several days including those of amicus curiae.  The case concerned the proportionality under Community Law and under the ECHR of default surcharge arising from late payment of VAT.  The taxpayer had made considerable efforts to comply with its obligations and had only been late in paying its VAT by a few days but because there were repeated defaults the rate at which the surcharge penalty was charged had increased to the maximum 15 per cent rate.  The surcharges applied to the four VAT accounting periods in question were equivalent to annualised interest of 122, 152, 684 and 912 per cent.
67.	The default surcharge legislation, like section 98A in this case, was enacted following recommendations by the Keith Committee.  The decision in Greengate Furniture records the scale of non-compliance in relation to VAT returns, the Keith Committee’s recommendations and the enactment and subsequent amendment of the default surcharge regime.  Against that background the Tribunal concluded that the legislature had a wide margin of appreciation when framing policies in the area of taxation and that a system of penalties based on automatic assessment was necessary to ensure compliance.  Nevertheless, was the regime a proportionate measure in the appellant’s circumstances?  The Tribunal’s conclusion that in the circumstances of that case it was is at first reading a surprising one.  The Tribunal had concluded that Greengate Furniture had made considerable efforts to comply with its obligations, that the defaults were for short periods and that if the Tribunal did have power to mitigate the penalties a reduction of some at least of the surcharges would have been appropriate.
68.	In its conclusions, starting at paragraph 75, the Tribunal deals with the issue of proportionality, referring (inter alia) to paragraph 62 of Gasus Dosier-und Fordertechnik GmbH (see paragraph 29 above).  At paragraphs 96 to 98, the Tribunal in Greengate Furniture conclude in the light of its examination of the cases that—
“It is clear that a system of penalties is necessary to ensure compliance and that, given that some 12 to 14 per cent of the 1.7 million registered traders still default in any one year, a system of surcharges is necessary based on the automatic assessment of penalties in given fact situations.  A tax based penalty in which the percentage depends on the number of defaults is a logical system which takes account of two important aspects of the gravity of the infringement – the amount of tax involved and the compliance record of the trader.
The fact remains however it is a blunt instrument which only takes limited account of the blameworthiness of the trader. If the trader cannot establish a reasonable excuse, the legislation takes no account of the difference between the trader who has made a genuine effort to comply albeit without success and the trader who has made very little effort and it takes no account whatever of the extent of lateness.  Either the trader is on time or he is not; either he exercises due diligence or he does not. No account is taken of the degree of culpability.  Indeed a trader may properly and reasonably rely on another to prepare his return and yet be liable for the dilatoriness of that other person; a defaulting trader is often criticised before the Tribunal for failing to obtain the necessary help when under pressure.
In our opinion any lack of proportionality caused by those aspects of the regime would be met of there was a proper power to mitigate exercisable by the Tribunal.  Any such power would be on a case by case basis although in order to promote consistency it would be necessary for the Tribunal and the Commissioners to develop guidelines.”

69.	The Tribunal then turned to consider whether the absence of any power to mitigate was “strictly necessary” or went “further than is necessary in order to obtain the objective”.  At paragraph 110 the Tribunal concluded that 
“We find the justifications for the absence of a power to mitigate to be less than convincing.  Viewed as at the time of the surcharges under appeal, it does not seem to us that the absence of a power to mitigate is strictly necessary, see Louloudakis, and it seems to us that without such power the regime arguably goes “further than is necessary”, see Garage Molenheide.”

70.	 Nevertheless, in paragraph 111 the Tribunal notes that the legislature has “a wide margin of appreciation” when framing implementation policies in the area of taxation and in paragraph 113 the Tribunal says that it is unable to conclude that the system of default surcharges is “devoid of reasonable foundation” or “plainly unfair”.  The Tribunal did not rule out the possibility that there could be cases where the default surcharge could be described as “plainly unfair” and an illustration of that may be found in Crime Novel Films (UK) Limited v Her Majesty’s Revenue and Customs (VAT Decision 20019).  Nevertheless, based on Greengate Furniture, it is apparent that the Appellant in this case has an almost impossible task, notwithstanding Mr Grundy’s extremely able arguments.  
Proportionality in this case
71.	I think that it would be inappropriate to dismiss the Appellant’s appeal merely on the basis of the outcome in Greengate Furniture.  I have indicated by reference to James and Handyside why, from the perspective of the European Court of Human Rights, States are allowed a wide margin of appreciation in framing and implementing taxation policies.  As the national tribunal that is called upon to decide whether the penalties imposed in this case under section 98A TMA are or are not proportionate, however, I think a more detailed consideration of the penalty provisions in question is called for.
72.	Mr Stephens’ evidence alludes to the Keith Committee background to these provisions.  The Respondents provided nothing on the background to these matters beyond Mr Stephens’ witness statement.  The background is in fact well summarised in the Inland Revenue’s consultative document, Keith – Further Proposals, published in July 1988.  A first consultative document, The Inland Revenue and the Taxpayer, issued in December 1986 had made a start in implementing the Keith Committee’s proposals for the enforcement powers of the Revenue Departments.  Paragraph 1.8.4 of that consultative document, however, noted that the question of a more general interest charge on late PAYE payments, and fixed penalties for late end-of-year returns, would be for study and consultation separately over the longer term.
73.	The 1988 consultative document notes that Keith made a number of recommendations to modernise and streamline the administrative arrangements under which employers paid to the Revenue the PAYE tax that they had deducted from their employees’ wages.  It was also one of the Keith Committee’s recommendations that the rules of the deduction scheme for subcontractors working in the construction industry should be kept broadly in line with those for PAYE.  Paragraph 6.15 of the 1988 document starts to deal with the subject of automatic penalties for end of year returns.  It records the purposes of those returns, which accord with Mr Stephens’ evidence.  His evidence to that extent may have been based on this consultative document.  Paragraph 6.15 records the penalty position at that time.  There were no automatic penalties for late returns but the Revenue could take proceedings before the Commissioners for penalties to be imposed.  It states that 
“Proceedings are taken in selected cases only – normally, not until the return is at least three months overdue.”

74.	 It may be that this Departmental practice survives in the form of only issuing penalty determination notices once the default has continued for a particular period (see paragraph 88 below).  Keith had recommended that a more realistic filing date should be introduced for the end of year return (leading to the proposal to extend the filing date from 19 April to 19 May each year) and that there should be automatic penalties for delay.  The Keith Committee’s suggestion was that these initially should be at a daily rate of £10, increasing to £20 or £30 for repeated offences.  Keith also recommended that the Revenue should examine penalties related to the tax at risk.
75.	Paragraph 6.20 of the 1988 consultative document comments on these recommendations—
“The purposes of a time-geared penalty would be to encourage employers to file their returns promptly.  The penalty ought, therefore, to be automatic (see paragraph 3.8).  As it stood, Keith’s recommendation would have led to some disproportionately large penalties, eg at £30 per day the penalty would be £21,900 for two year’s delay by a small employer.  The proposals which follow modify this so that automatic penalties based on time gearing would run for 12 months only, and take account of the number of employees.”

76.	Paragraph 6.22 notes that the proposal for delays beyond 12 months and for incorrect returns is for tax-geared and fully mitigable penalties.  Paragraph 6.23 then sets out the penalty regime that is now found in section 93A TMA, illustrating specifically that the penalty is £200 per month where there are between 51 and 100 employees/contractors and £300 per month where they are between 101 and 150, etc.  
77.	It is clear that those responsible for proposals in the 1988 consultative document considered what would be a proportionate proposal bearing in mind Keith’s recommendation that there should be an automatic penalty and that this should be based on the time the default continued.  Any automatic penalty has to be set at a level that will have some meaning.  Automatic late-filing penalties are not usually mitigable as such, although the default may be excused in certain circumstances.  On the other hand the actual imposition of any late filing penalty may be made dependent upon whether the return actually shows any outstanding tax.  In the present case there is no question that tax was paid late or, indeed, that anything of particular substance turned upon the submission of the return.  The sole question is whether Parliament, in deciding that the penalty should be geared to the number of employees or contractors has chosen a banding that produces, as Mr Grundy puts the matter, a grossly disproportionate effect.  
78.	One can ask whether £100 is the right figure to encourage the filing of a return on time.  £100 is, for example, the level set for late filing of ordinary personal tax returns.  The Appellant in this case argues for less on the basis that the penalty regime incorporates banding, which facilitates comparison with other contractors.  It seems to me that the main problem for the Appellant’s argument lies in the need for an automatic penalty for late filing to be set at some meaningful level to achieve its purpose.  Under any such regime there will be some taxpayers to whom £100 means a great deal and others for whom it means rather less.  It is not argued that the penalty is disproportionate because there was no outstanding tax; nor is it said that the return was unnecessary nor that an automatic late filing penalty inappropriate.  If £100 is a proportionate amount to charge for failure to deliver the return in time, then however narrow the banding the Appellant will suffer that penalty because any band must start at one.  
79.	Mr Stephens alluded to the consideration that had been given to introducing separate rules for very small contractors e.g. with less than ten employees or subcontractors, who would then suffer a smaller penalty but that was rejected.  The fact that that rejection took place in 1988 when one assumes that those concerned did not have the Human Rights Act in mind does not suggest to me that I should reach a different decision now that these penalties are being reviewed in the light of the HRA.  The fact that completing the return was thought to be straightforward for a contractor with only one or two subcontractors does not suggest that they deserve to be penalised more for their default but that the application of the same penalty on them as on other, larger contractors was not disproportionate.  
80.	Mr Stephens says relatively little about the decision to band the penalties (and the consultative document throws no additional light on this refinement of the system).  According to Mr Stephens it was because of the increased risk to the Exchequer and the greater administrative burdens to the Department caused by late returns covering larger numbers of employees or contractors.  The fact that the risk and the burden may have been minimal in the Appellant’s case does not seem to me to be a reason for concluding that the penalty in its case was disproportionate given the function that a late filing penalty fulfils and the fact that not even the Appellant has sought to say that it should suffer no penalty in this case for a default that continued over 10 months.  The adoption of banding is a refinement to a fixed penalty regime for the late filing of returns and does not in my view convert the penalty into a per capita penalty.  As such I do not consider it disproportionate in the Appellant’s case.  The fact that the Appellant has ended up with a penalty of £800 (as compared to tax deducted of £1026) reflects its failure over 10 months to complete and file the return but I do not think that Mr Grundy took issue with the fact that the penalty would be up to ten times whatever monthly figure was considered proportionate.
The application of Wilkinson in this case
81.	In case the Appellant is not convinced on this first point, I shall now deal with the point that arises from the decision in ex parte Wilkinson.  Both the Court of Appeal and the House of Lords concluded that section 1 TMA gave the Respondents no power to grant an extra-statutory allowance in that case.  Accordingly, the Respondents could not have acted differently and were protected by section 6(2)(a) HRA (see [2005] UKHL 30 per Lord Hoffmann at paragraphs 11 and 20).  This was because—
“The [Respondents] are not “the Crown”, owners of the consolidated fund and able to deal with its property like any other owner (see Secretary of State for Trade and Industry v Frid [2004] 2 AC 506, para 27).  In that respect, this case is different from Hooper’s case.  The [Respondents] are a statutory body created by the Inland Revenue Regulation Act 1890.  They are charged by section 13(1) of the Act to “collect and cause to be collected every part of inland revenue.” Section 1 of TMA gives them what Lord Diplock described in R v Inland Revenue Commissioners, Ex p National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617, 636 as:
“a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection.”

82.	Wilkinson was concerned with an individual’s substantive tax liability, namely the availability of an allowance against taxable income which had the effect of reducing the tax that Parliament had otherwise prescribed should be collected in Mr Wilkinson’s case.  The National Federation case also concerned the substantive tax liabilities of particular taxpayers, being the past undeclared liabilities of a substantial number of casual workers in the printing industry then based in Fleet Street.  The House of Lords concluded in that case that the National Federation had no sufficient interest to require the Respondents to pursue particular tax liabilities of other taxpayers.  As such the decision is not direct authority for the proposition that section 1 TMA gives the Respondents power in particular cases to forego collection of tax or to forgive particular tax liabilities.  Lord Wilberforce regretted the limitation of the decision to the issue of the National Federation’s standing to seek judicial review because, as he pointed out, whether a person has sufficient interest in the matter necessarily raises the question of what were the duties of the Inland Revenue and the breaches and failures of which the National Federation complained.
83.	Nevertheless, I think it is clear from the National Federation case that it involved circumstances in which the Respondents acted within their powers under section 1 TMA to forego the tax that Parliament otherwise required them to collect.  The evidence was that the Revenue properly believed that if it was to obtain agreement to put an end to the particular form of tax evasion concerned, it needed to draw a line under the past and not pursue the tax for past periods.  To pursue the past could have delayed or frustrated agreement for the future and was unlikely to see the recovery of any substantial sums of money.  
84.	The extent of the Respondents’ power to forego tax otherwise chargeable was also an issue in Fayed and others v Advocate General for Scotland (2004) 77 TC 273.  In that case the Court of Session (Inner House) accepted that there are circumstances in which the Respondents have power to enter into an agreement with a taxpayer for the payment of a sum of money in respect of the taxpayer’s tax liability, even where it may be said that they have foregone the collection of some part of the total amount of tax which was due.  The existence of that power is not doubted in the case of a back tax agreement where the Respondents agree a compromise with the taxpayer having properly taken account of all relevant factors.  The forward tax agreements entered into by the Respondents with members of the Fayed family in that case were nevertheless ultra vires.  
85.	The scope of the Respondents’ power under section 1 TMA was summarised briefly by Lord Hoffmann at paragraph 21 of his speech in Wilkinson (see paragraph 39 above).  Wilkinson, the National Federation and the Fayed cases all concerned substantive tax liabilities.  The present case, however, is concerned with part of the system for securing compliance with taxpayers’ obligations to report and pay tax.  The penalties that Parliament prescribes for failure to comply with an obligation to file returns are not part of the taxes that it prescribes shall be collected.  They are in their nature an element of the care and management powers that the Respondents hold to enable them to fulfil their function of securing the highest net return that is practicable of the taxes that Parliament requires them to collect.  
86.	In this respect it seems to me that Lord Hoffmann’s description of the Respondents’ discretion in paragraph 21 of his speech in Wilkinson is expressed by reference to the circumstances in which the Respondents are empowered to alleviate legislation dealing with substantive tax liabilities rather than how they should administer provisions providing for penalties, with which I am concerned here.  It seems to me that the scope of the Respondents’ powers that they derive from section 1 TMA may be somewhat broader when one comes to consider the administrative provisions of the Act designed to secure the proper collection of tax.  In saying that, I do not intend to suggest that in relation to administrative provisions, in contrast to what I have described as substantive tax provisions, section 1 TMA allows the Respondents carte blanche to apply or dispense with the provisions as they think fit.  Ultimately, as the cases to which I have referred illustrate, the question is whether the Respondents’ have exercised their powers lawfully.  Nevertheless, section 1 TMA is likely to be more directly relevant to deciding the practical application and operation of administrative or procedural provisions than it will be to determining substantive tax liabilities.  
87.	The potential scope of the Respondent’s practical ability to impose and collect penalties or not, even when there is no express power to mitigate or excuse the penalty, is illustrated in Greengate Furniture Ltd.  The Tribunal in that case noted that from time to time there were certain “administrative reductions” in the way in which HM Customs and Excise operated the scheme.  This is despite the fact that there are no provisions explicitly allowing for any mitigation of the default surcharge.  Thus paragraph 43 records that from October 1993 no surcharges were issued for less than £200 (increased to £400 from November 2001) calculated at the lower 2 or 5 per cent rates.  The Tribunal assumed that the legal basis for that action was that section 76 of the Value Added Tax Act 1994 (which provides for assessment to surcharges) is permissive rather than mandatory.  Similarly, after November 2002 for businesses with an annual turnover of up to £150,000 a surcharge liability notice was not sent for the first default.  The Tribunal assumed that the legal basis for this practice turned on the fact that the surcharge regime depends upon service of a surcharge liability notice but the Commissioners of Customs and Excise can decide not to serve a notice.  Finally, Customs’ evidence was that surcharges are sometimes inhibited in advance in special circumstances, the legal basis for this being either section 59(10) of the VAT Act or the Commissioners’ general powers of care and management corresponding to section 1 TMA.
88.	The present case affords another illustration of the Respondents’ practical ability not to apply the penalty regime that Parliament has prescribed.  As I recorded in paragraph 1 above, the Respondents issued two Notices, one dated 23 September 2002 and the other 27 January 2003, imposing penalties upon the Appellant, each in the amount of £400.  The Notices covered the period 20 May 2002 to 19 January 2003 but the Appellant’s return was only submitted on 24 March 2003.  No penalty has been charged for the further two months’ default.  At the end of the parties’ submissions I asked Ms Haynes if she could explain this.  She thought that the most likely reason was that the two previous Penalty Notices had been issued after the default had continued for four months but by the time the next Notice would have been issued the default had been cured so that no action had been taken.  
89.	The penalty in this case arises under section 98A(2) TMA, which I have set out in paragraph 8 above.  As that subsection indicates, a person who fails to make the required return “shall be liable” to the specified penalty but that penalty has to be imposed by an officer of the Board who “may make a determination imposing a penalty”.  The expression of liability and the requirement of a determination correspond broadly to the need for assessment in relation to the imposition of a substantive liability to tax.  The first stage in the imposition of a tax is the declaration of liability by the statute of the tax that persons must pay in respect of their property or income. The second stage is assessment. Liability does not depend on assessment but assessment particularises the exact sum which a person liable has to pay (see Whitney v Inland Revenue Commissioners [1926] AC 37 per Lord Dunedin at 52).  Section 1 TMA does not empower the Respondents to assess liability or not as they please but the language of charge and assessment does not tend to use permissive language such as “may make a determination”. In some cases, penalty legislation includes specific provision to the effect that no penalty shall be imposed in respect of a failure at any time after the failure has been remedied (see e.g. s.98(3), (4) TMA).  Limiting the Respondents’ power to impose a penalty in those circumstances, however, does not mean that they are bound to impose one where there is no such specific provision.  As a general matter, section 100 TMA does not appear to place the Respondents under an obligation to issue a penalty determination notice even though the circumstances are such that the taxpayer “shall be liable” to a penalty.  
90.	There was no evidence indicating whether the Respondents’ usual practice is only to issue Penalty Notices every four months or whether Notices are routinely not issued if the default has already been remedied notwithstanding a period of default.  It is hard to believe that the Respondents would have a general practice of issuing default notices only once the default has continued for four months because this would seem to defeat the aim of securing timely submission of returns.  At the same time, however, if the Respondents believe in this case, as it appears the Commissioners of Customs and Excise did in relation to VAT default surcharges, that they need not impose penalties at all by the expedient of not issuing penalty notices, assessments or surcharge liability notices, it seems odd for them to say, as Ms Haynes did on their behalf, that they cannot rely on section 1 TMA to take the smaller step of exacting a lesser penalty that accords with what can be regarded as fair.
91.	I therefore have some sympathy with Mr Grundy’s submission concerning the application of section 1 TMA, on the basis that it may have broader scope in the practical application and operation of administrative provisions than it has in the context of substantive tax provisions and that Greengate Furniture and this case illustrate one way in which this may work.  That said, it is one thing for Parliament to allow the Respondent some leeway in deciding whether to issue a penalty determination or not, in particular if the default has been remedied or if collecting the penalties would be unduly difficult or administratively burdensome in the circumstances.  That does not mean, however, that if there has been a default (as here) and they do decide to issue a penalty determination, they can do so on a completely different basis to that prescribed by Parliament.  
92.	Mr Grundy sought to limit his argument to the Appellant’s case and said that he was not seeking to open the floodgates of other appeals.  The only relevant factor he put forward, however, to justify the application of a different, lower penalty in the Appellant’s case, was that the Appellant engaged only one contractor and that the penalty was therefore grossly disproportionate in comparison to a contractor who had engaged 50 contractors.  This case is not comparable to Greengate Furniture, therefore, in which the Tribunal concluded that some mitigation would be appropriate because the taxpayer had done everything he could to avoid late payment of VAT.  To meet the Appellant’s complaint, the Respondents would have to exercise their power under section 1 TMA to substitute a number lower than fifty in section 98A(3) TMA.  If they do that in the Appellant’s case it seems to me that they would have to apply that approach across the board.  I think that this is more than section 1 TMA permits.  
93.	The Appellant was clearly in default in failing to deliver the return for ten months after the due date.  For whatever reason a penalty was only imposed for eight of those months but for the eight months the only penalty that the Respondents could impose was that required by section 98A TMA.  It may be that the discretion that Parliament allows the Respondents not to issue a penalty determination notice under section 100 TMA takes this case out of section 6(2)(a) HRA on the basis that the Respondents could have acted differently.  If that is correct, however, the situation appears to be covered by section 6(2)(b) HRA because the primary legislation in question cannot be read or given effect to in any other way and in issuing the Notices in this case the Respondents were acting to give effect to or enforce that legislation.
94.	This seems to me to follow from the House of Lords decision in R v Secretary of State for Work and Pensions ex parte Hooper and others [2005] UKHL 29, which was delivered immediately before the decision in Wilkinson.  It also concerned a widower’s entitlement to claim widow’s benefits, in Hooper’s case under the Social Security Contributions and Benefits Act 1992 rather than the Taxes Acts.  The Government did not seek to justify the discrimination but relied on section 6(2)(b) HRA on the basis that the legislation could not be read as applying to widowers.  It accepted, however, that the Act did not make it unlawful for the Crown to make equivalent extra-statutory payments to widowers.  Section 6(2)(a) was therefore not in point because the Secretary of State could have acted differently.  Nevertheless, in deciding not to make extra-statutory payments, the Secretary of State was giving effect to the Act and in doing so was protected by section 6(2)(b).
95.	Lord Hope of Craighead explained the statutory purpose of section 6 HRA as follows ([2005] UKHL 29 at paragraphs 70 to 73)—
“Paragraphs (a) and (b) [of section 6(2)] both qualify the basic principle in section 6(1) that it is unlawful for a public authority to act in a way that is incompatible with the Convention rights.  The purpose of these paragraphs is to prevent section 6(1) being used to undermine another of the Act’s basic principles.  This is that in the final analysis, if primary legislation cannot be interpreted in a way that is compatible with them, Parliamentary sovereignty takes precedence over the Convention rights.  As section 3(2)(b) and (c) [HRA} make clear, the validity and continuing operation or enforcement of primary legislation, and of subordinate legislation too where the removal of the incompatibility is prevented by primary legislation, is unaffected by the Act if it cannot be read and given effect in a way which is compatible with the Convention rights: see also section 4(6)(a).
The situation to which paragraph (a) is addressed arises where the effect of the primary legislation is that the authority has no alternative but to do what the legislation tells it to do.  The key to its application lies in the fact that the effect of this legislation, wherever it is found, is that a duty is imposed on the authority.  If the legislation imposes a duty to act, the authority is obliged to act in the manner which the legislation lays down even if the legislation requires it to act in a way which is incompatible with a Convention right.  The authority has no discretion to do otherwise. 
The situation to which paragraph (b) is addressed on the other hand arises where the authority has a discretion, which it has the power to exercise or not to exercise as it chooses, to give effect to or enforce provisions of or made under primary legislation which cannot be read or given effect to in a way which is incompatible with the Convention rights. 
The important point to notice about paragraph (b) is that the source of the discretion does not matter.  What matters is (a) that the provisions in regard to which the authority has this discretion cannot be read or given effect compatibly with the Convention rights and (b) that the authority has decided to exercise or not to exercise its discretion, whatever its source, so as to give effect to those provisions or to enforce them.  If it does this, this paragraph affords it a defence to a claim under section 7(1) that by acting or failing to act in this way it has acted unlawfully.  In this way it enables the primary legislation to remain effective in the way Parliament intended.  If the defence was not there the authority would have no alternative but to exercise its discretion in a way that was compatible with the Convention rights.  The power would become a duty to act compatibly with the Convention, even if to do so was plainly in conflict with the intention of Parliament.”

96.	The passage to which Mr Grundy drew my attention in paragraph 53 of the Court of Appeal’s decision in Wilkinson relates to section 62(2)(b) HRA.  The Court of Appeal there was saying that if circumstances did arise in which section 1 TMA did confer the necessary power on the Respondents and it was necessary to exercise the power to avoid a breach of Convention rights, the Court of Appeal would see no basis upon which the Respondents could rely on section 6(2)(b) to justify their refusal to exercise the power.  But as Lord Hope said in Hooper (at paragraph 76)—
“In my opinion this reasoning, which treats the power as a duty to act compatibly with the Convention rights, fails to give effect to the true purpose and function of [section 6(2)(b)].  It overlooks the principle which lies at the heart of the scheme of the Act that the Convention rights must in the end, if it is not possible under section 3(1) to interpret legislation in a way which is compatible with them, given way to the sovereignty of Parliament.”

97.	Their Lordships were not unanimous in their views on section 6(2)(b) in Hooper (see Lord Scott at paragraph 95).  Lord Brown in particular agreed with the reasoning of the Court of Appeal (see paragraphs 113 to 117) but nevertheless did not agree that the section 6(2)(b) defence in Hooper or Wilkinson must fail as the Court of Appeal had suggested it must (see paragraph 122).  In Wilkinson itself Lord Hoffmann for the majority (disagreeing with the Court of Appeal’s view in paragraph 53 of their decision) repeated his view that, for the reasons given in Hooper, section 6(2)(b) HRA would protect the Respondents because (in the Appellant’s case) they were giving effect to section 98A when they decided to issue the Notices.  Lord Brown disagreed with Lord Hoffmann’s reasoning but still agreed that had the Respondents’ powers under section 1 TMA been wide enough to confer a widower’s allowance, they would still have been protected under section 6(2)(b) because it would have been unlawful for them to exercise that power inconsistently with Parliament’s manifest will that widows alone should benefit (see paragraph 43 of Wilkinson).
98.	In the end, it seems to me that even if the Appellant’s Convention right was infringed by section 98A, the Respondents are entitled to rely upon section 6(2) HRA.  For my part my power in this matter is constrained by the provisions dealing with appeals against penalty determinations.  These are found in section 100B TMA, which provides that—
(1) An appeal may be brought against the determination of a penalty under section 100 above and, subject to sections 93, 93A and 95A of this Act and the following provisions of this section, the provisions of this Act relating to appeals shall have effect in relation to an appeal against such a determination as they have effect in relation to an appeal against an assessment to tax.
(2) Subject to sections 93(8) and 93A(7) of this Act on an appeal against the determination of a penalty under section 100 above section 50(6) to (8) of this Act shall not apply but—
(a) in the case of a penalty which is required to be of a particular amount, the Commissioners may—
(i) if it appears to them that no penalty has been incurred, set the determination aside,
(ii) if the amount determined appears to them to be correct, confirm the determination, or
(iii) if the amount determined appears to them to be incorrect, increase or reduce it to the correct amount, 
(b) in the case of any other penalty, the Commissioners may—
(i) if it appears to them that no penalty has been incurred, set the determination aside,
(ii) if the amount determined appears to them to be appropriate, confirm the determination,
(iii) if the amount determined appears to them to be excessive, reduce it to such other amount (including nil) as they consider appropriate, or
(iv) if the amount determined appears to them to be insufficient, increase it to such amount not exceeding the permitted maximum as they consider appropriate.

99.	The penalty in this case falls within subsection (2)(a).  I do not think that it is possible to say that the penalty under section 98A is not “required” to be of a particular amount on the basis of Human Rights arguments similar to those already advanced by Mr Grundy.  The penalties prescribed by section 98A are of a particular amount and I therefore have no power under subsection (2)(b)(iii) in this case.  As the Appellant was plainly in default in failing to deliver its return in time and the penalty for the eight months for which it is imposed is that specified in section 98A, I have no option but to confirm the determinations.  This would be my conclusion, however, even if I were not constrained by section 6 HRA.
Conclusion
100.	In the result, the appeal is dismissed and the penalty determinations are confirmed

SPECIAL COMMISSIONER
RELEASE DATE: 8 November 2007

SC 3073/2006