Spc00739

Income tax – penalties – whether penalty could be imposed on individual partner following tax litigation settlement agreement preventing amendment of partnership’s tax returns – yes – further issues arising to be determined later

THE SPECIAL COMMISSIONERS

	WILLIAM STOCKLER	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	JOHN CLARK 

Sitting in public in London on 2 December 2008

Conrad McDonnell of counsel, instructed by Stockler Brunton, for the Appellant

Akash Nawbatt of Counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	This appeal made by Mr Stockler relates to a penalty determination. The hearing on 2 December 2008 was, by agreement between the parties, listed to consider the following preliminary issue of law:
“Whether, as a matter of the construction and application of section 95 of the Taxes Management Act 1970 and in the circumstances of this case as set out in the Agreed Statement of Facts and as appears from the documents in the agreed bundle, HMRC have power to raise a penalty determination in any amount.”
2.	In this decision, I follow the parties’ convention of referring to the Respondents as “HMRC”.
The facts
3.	With minor editorial changes I set out in full the Statement of Agreed Facts, together with other relevant facts, including those which were established at the hearing. Mr Stockler did not give evidence on oath.
Statement of Agreed Facts
(1)	At all material times, the Appellant (“Mr Stockler”) was a solicitor and partner in the firm of Stockler Charity (“the Partnership”).
(2)	On 26th September 2005, HMRC notified the Partnership that it had amended the Partnership’s statements in respect of various periods of account from 1st May 1994 to 30th April 1998.
(3)	Between 31st October 2006 and 9th November 2006, the Special Commissioners heard an appeal by the Partnership against those amendments.
(4)	On 7th December 2006, the Special Commissioners decided that:
	(a)	the sums which had been deducted in computing the profits of 	the Partnership were not monies wholly and exclusively expended for 	the purpose of the Partnership’s profession within the meaning of 	section 74(1)(a) of the ICTA 1988, and
	(b) 	the insufficiency of the amount of the profits was attributable to 	the negligent conduct on the part of Mr Stockler within the meaning 	of section 30B(5) of the TMA 1970.
(5)	On 25th January 2007, the Partnership appealed against the decision dated 7th December 2006 to the Chancery Division of the High Court.
(6)	On 17th May 2007, the Partnership made an offer to HMRC pursuant to Part 36 of the Civil Procedure Rules. The offer provided that, in return for the Respondents withdrawing the amendments  of the Partnership’s Tax Return for the Tax Years 1996/1997, 1997/1998 and 1998/1999, the Partnership would make certain payments to HMRC. The offer was stated to relate to the whole of the appeal and, for the avoidance of doubt, to the matters raised in the Respondents’ Notice.
(7)	On 25th May 2007, the Solicitor to HMRC gave notice to the Partnership and the Court that HMRC accepted the Partnership’s offer dated 17th May 2007. In a letter to the Partnership of that date, the said Solicitor wrote that he was instructed to make it clear that acceptance of Part 36 Offer “is of course entirely without prejudice to any penalty determination which may follow hereafter”.
(8)	On 31st May 2007, the Partnership informed the Court that the appeal had been settled and on the same day wrote to the Solicitor to HMRC stating that the legal effect of an unconditional acceptance could not be altered  by the incorrect assertion that it was “without prejudice” to any penalty determination. The Partnership also required the withdrawal of the amendments and asked for agreement to the figures payable pursuant to the settlement.
(9)	There followed correspondence between the Partnership and HMRC about those figures. Ultimately the parties agreed that the sum payable was £122,731.77. This sum was paid on 12th June 2007.
(10)	On 27th June 2007, HMRC confirmed to the Partnership that the amendments that had been made against the 1996-97, 1997-8 and 1998-99 Self Assessment Returns had been withdrawn.
(11)	On 16th October 2007, Mrs J L Becker, an investigator employed by  HMRC, wrote to Mr Stockler personally at his home address informing him that she had on that day made a penalty determination in respect of incorrect returns of his liability to tax for the years 1996/1997, 1997/1998 and 1998/1999. Mrs Becker wrote that she had calculated the penalty as being 70% of the culpable tax and that that amounted to £53, 555.
(12)	On 31st October 2007, Mr Stockler wrote to Mrs Becker informing her that steps would be taken in the Chancery Division of the High Court to enforce the terms and effect of the settlement that had been reached under CPR Part 36 and in the meantime, in order to protect his position, requesting her to accept that letter as his appeal against both liability for the penalty and the quantum of the penalty.
(13)	On 7th November 2007, the Partnership applied to the Chancery Division of the High Court for a declaration pursuant to CPR Part 36.11(8) that HMRC had failed to honour the terms of the settlement and that in consequence of HMRC’s agreement to withdraw and its subsequent withdrawal of the amendments to the partnership returns, HMRC was precluded from relying on the amendments for any purpose, including the levying of penalties in respect of the relevant tax years. The Partnership also asked for a declaration that the payments by the Partnership pursuant to the Part 36 Offer were in full and final settlement of all liabilities to tax and penalties in respect of the relevant tax years.
(14)	The application came before Mr Justice Warren on 14th November 2007. The hearing was adjourned to permit HMRC to put in further written submissions. It did so on 27th November 2007 and on 4th December 2007 the Partnership replied.
(15)	On 13th December 2007 Mr Justice Warren declined to make the declaration sought by the Partnership and dismissed the application. He stated that he considered that this was a matter which was best determined in accordance with the appeal process which has been laid down by statute, namely by the Special Commissioners.
Other relevant facts and background
4.	The decision of the Special Commissioners referred to in the Statement of Agreed Facts was reported under the name AB (a firm) v Revenue and Customs Commissioners [2007] STC (SCD) 99; the Special Commissioners were the Presiding Special Commissioner, Stephen Oliver QC, and Dr Nuala Brice. (The latter decision did not determine the quantum of the tax due in consequence of that decision.) At a directions hearing held in advance of the substantive hearing in that case, I had accepted a submission from Mr Stockler that the substantive hearing should be in private, and made a direction to that effect. As a result, the decision produced after the substantive hearing had to be published in anonymised form. At the hearing on 2 December 2008, a similar request for anonymity in respect of the present proceedings was made by Mr McDonnell on Mr Stockler’s behalf. On this occasion, I refused the request.
5.	I did not specify the reasons for my refusal, so set them out here. My reasons were twofold. The first was that, as a result of his firm appealing to the High Court, Mr Stockler would already have accepted loss of anonymity; it would have been possible to see the firm’s name in the High Court lists, so even though the firm’s appeal was settled without a hearing, its name, and therefore his name as part of that name, was in the public domain. Before Special Commissioners’ decisions began to be reported in 1994, it was always a material consideration for a taxpayer that making an appeal to the High Court would lose the cloak of anonymity which covered all Special Commissioners’ decisions. This disadvantage remains for appeals held in private.
6.	My second reason was that the guidance on hearing appeals in public, both in terms of indications given in decisions and in terms of recommended practice, has shown that the power to direct that a hearing should be heard in private (with the probable consequence that any published decision will require to be anonymised) is to be exercised sparingly. Under regulation 15(2) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 (SI 1994/1811), the Tribunal may direct that a hearing is to take place in private if it is satisfied that this is necessary in the interests of morals, public order, national security, juveniles or for the protection of the private life of the party, or if it considers that publicity would prejudice the interests of justice. The only one of these grounds which I considered to be relevant to Mr Stockler in relation to the present proceedings was that of his private life, and whatever his concerns might have been as to the publication of financial details which might be considered relevant to his private life, his name had, as I have already indicated, already been revealed as a result of the Partnership’s appeal. I therefore did not consider that his circumstances fell within regulation 15(2).
7.	In making his appeal in respect of the penalty determination, Mr Stockler did not make an election in time for the appeal to be heard before the Special Commissioners. However, jurisdiction was ultimately accepted by the Special Commissioners.
8.	The following additional facts are taken from documents in the hearing bundle.
9.	This contained a copy of a letter from Stockler Brunton dated 17 May 2007 on behalf of the Partnership making an offer under Part 36 of the Civil Procedure Rules, and a copy of the letter from HMRC dated 25 May 2007 accepting that offer. These are together referred to below as “the Part 36 agreement”. The offer included the following provisions:
“1. The Respondents will withdraw the amendments of the Appellant’s partnership returns for the Tax Years 1996/97, 1997/98 and 1998/99.
2. The Appellant will, within 21 days of the acceptance of this offer, pay to the Respondents the aggregate amount of income tax assessable on the partners of the Appellant in consequence of the decision of the Special Commissioners dated 7th December 2006, the subject of the Appeal, less the following amounts:
. . .
3. The Appellant will within the same period pay interest at the statutory rates on the sum set out in paragraph 2 above.”
(The “Appellant” was the Partnership, and the “Respondents” were HMRC.)
10.	In the letter of acceptance, HMRC stated:
“We are aware that you have previously been in discussion with our colleagues regarding financial penalties, and we are instructed to make it clear, for the avoidance of any possible doubt, that acceptance of the Part 36 Offer is of course entirely without prejudice to any penalty determination which may follow hereafter. Penalties are not, of course, in issue in the present proceedings.”
11.	On 11 June 2007, pursuant to the Part 36 agreement, HMRC gave instructions for the withdrawal of the amendments previously made to the partnership self-assessments [ie statements under s 30B(1) TMA 1970]. HMRC confirmed to Mr Stockler that this would be done by amending the self-assessment record of the Partnership to show the original figures.
12.	Also on 11 June 2007, Mr Hathaway of HMRC’s Solicitor’s Office wrote to confirm that the figure agreed for the tax and interest due was £122,731.77, which was to be paid on 15 June. This was paid by way of a personal cheque of Mr Stockler dated 15 June 2007, enclosed with a letter from Stockler Brunton dated 12 June 2007.
13.	Following correspondence, Mr Gill of HMRC wrote to Mr Stockler on 27 June 2007:
“Stockler Brunton Solicitors
I have withdrawn the amendments that had been made against the 1996-97, 1997-98 and 1998-99 Self-assessment returns.
I trust this meets with your requirements.”
14.	The “Penalty Determination” enclosed with Mrs Becker’s letter to Mr Stockler dated 16 October 2007 stated, under “Details of the penalty”:
“The penalty arises under Section 95(1)(a) Taxes Management Act 1970 for negligently delivering an incorrect return under Section 8 of that Act for the years shown below. The amount of penalty is based on the difference specified under Section 95(2) of that Act.”
The law
15.	Before repeal by the Finance Act 2007, s 95 of the Taxes Management Act 1970 (“TMA 1970”) provided:
“95 Incorrect return or accounts for income tax or capital gains tax
(1) Where a person fraudulently or negligently—
	(a) delivers any incorrect return of a kind mentioned in section 8 or 	8A of this Act (or either of those sections as extended by section 	12 	of this Act), or
	(b) makes any incorrect return, statement or declaration in connection 	with any claim for any allowance, deduction or relief in respect of 	income tax or capital gains tax, or
	(c) submits to an inspector or the Board or any Commissioners any 	incorrect accounts in connection with the ascertainment of his 	liability to income tax or capital gains tax,
he shall be liable to a penalty not exceeding the amount of the difference specified in subsection (2) below.
(2) The difference is that between—
	(a) the amount of income tax and capital gains tax payable for the 	relevant years of assessment by the said person (including any 	amount of income tax deducted at source and not repayable), and
	(b) the amount which would have been the amount so payable if the 	return, statement, declaration or accounts as made or submitted by 	him had been correct.
(3) The relevant years of assessment for the purposes of this section are, in relation to anything delivered, made or submitted in any year of assessment, that, the next following, and any preceding year of assessment.”
Arguments for Mr Stockler
16.	Mr McDonnell explained that it was the penalty determination which was now under appeal. The appeal raised three substantive issues, the first being the preliminary issue. He described the preliminary issue as being whether as a matter of the correct interpretation of s 95 TMA 1970 it was in law possible for Mr Stockler to be liable to a penalty, in circumstances where his self-assessment had not been amended and he had not been the subject of an assessment to tax. There did not appear to have been a previous case where a penalty under s 95 had been imposed in the absence of an assessment.
17.	In summary, Mr Stockler’s case was that no tax-geared penalty was or could be due where HMRC had not first assessed Mr Stockler to tax or amended his self assessment. This was the case both as a matter of principle and, technically, because without an assessment or amendment, there would be no tax “difference” by reference to which the tax-geared penalty could be charged.
18.	Where HMRC considered that a tax return was not correct, the normal procedure was an assessment, or amendment by HMRC of the self-assessment. The assessment or amendment determined the amount of tax payable, and a tax-geared penalty could be imposed. Thus the penalty was related to the tax.
19.	The system did not allow HMRC to charge a tax-geared penalty alone, ie a “stand-alone penalty”. The reasoning was that:
(1)	The amount of tax payable was determined by the taxpayer’s own self-assessment: this was fundamental;
(2)	no tax other than the self-assessed tax became “payable” by the taxpayer unless and until HMRC either made a statutory amendment to the self-assessment (for example, by way of a closure notice under s 28(2) TMA 1970 or, perhaps more relevantly here, by amendment of a partner’s return and self-assessment under s 30B(2) TMA 1970) or raised a statutory assessment, for example a discovery assessment under s 29 TMA 1970;
(3)	If no additional tax was “payable” by the taxpayer as in (2) above, then there was no “tax difference in relation to which a tax-geared penalty could be imposed”, ie the “difference specified in sub-section (2)” mentioned in s 95(1) amounted to nil.
20.	Mr McDonnell described the system as working in a logical manner. Where HMRC considered that the taxpayer had underdeclared his tax, HMRC calculated the amount of tax due and either amended the self-assessment or raised an assessment. This action represented a formal determination as a matter of law, for all purposes of TMA 1970, of the amount of additional tax payable. In that way a legal obligation arose for the taxpayer to pay that quantum of tax, as a debt due to the Crown. These were fundamental aspects of the UK tax system; income tax and capital gains tax were assessed taxes, and the obligation to pay depended on there being an assessment.
21.	Mr McDonnell argued that it was only once the amount of tax payable had been statutorily determined that a tax geared penalty could be imposed. Where a penalty was imposed, it went hand in hand with the assessment or amendment. The amount of the penalty would always be a percentage of the amount assessed (or the amount by which the self-assessment was amended) and it could not be more than 100% of that amount.
22.	The assessment process as described included important safeguards for the taxpayer. Mr McDonnell referred to rights of appeal against assessment or an amendment made by way of closure notice, and to time limits for assessments. If HMRC were correct in their contentions on the application of the penalty in the present case, these safeguards would not apply to tax-geared penalties. He gave three examples of the effects. There would be nothing in the statute to prevent penalties from being imposed in respect of events more than 20 years ago. There would be nothing to prevent penalties from being imposed in an enquiry case even while HMRC’s enquiries were still ongoing and a closure notice had not yet been issued. There would be nothing to prevent penalties from being imposed on an amount of tax different from the amount of tax assessed or the amount agreed in an agreement under s 54 TMA 1970.
23.	Amendments to the partnership statements for the years in question had been made under s 30B TMA 1970. This section operated in a similar way to s 29 TMA 1970. However, there was a difference; a partnership statement was not itself a tax assessment. Once a partnership statement had been amended, HMRC would then amend the individual assessments of the partners under s 30B(2). It was also open to HMRC to raise a s 29 assessment on an individual partner, but this had not been done in the present case.
24.	The Partnership had appealed to the Special Commissioners against the amendments to its partnership statements. Following the dismissal of the appeal, the partnership statements for the relevant years remained as amended by HMRC. The Partnership had appealed to the High Court, raising several points of law.
25.	In seeking to reach a settlement, Mr Stockler had made an offer to Mrs Becker at the end of their meeting on 3 May 2007. The offer was that in exchange for the Partnership abandoning its appeal to the High Court, the Partnership would make a payment to HMRC equal to the tax in the agreed amount, together with statutory interest, but with no penalties being charged. Mrs Becker had not accepted that offer at the meeting, as she considered that the full amount of tax was payable and that, in addition, penalties of between 70% and 75% should be due.
26.	In making the Part 36 offer, the Partnership had intended to repeat Mr Stockler’s offer made on 7 May 2007. However, there was no express reference to penalties, as no penalty determination had been raised at that point.
27.	Mr McDonnell referred to the proper construction of s 95(2) TMA 1970. (This is considered in greater detail below.) The issue was one of statutory interpretation and the fundamental issue between the parties was what was meant by the word “payable” in s 95(2)(a) and (b). He argued that the word referred to tax which was, as a matter of law, payable in consequence of the statutory self-assessment machinery in TMA 1970. He drew attention to the use of the word “payable” in the same sense in s 59B TMA 1970, in particular at sub-s (5).
28.	It was the intended effect of s 95 TMA 1970 to charge penalties by reference to the difference in the amount of tax “payable” before and after the amendment of the self-assessment. In the present case, in the absence of any amendment to the individual taxpayer’s self-assessment, either pursuant to s 30B(2) TMA 1970 or otherwise, (and noting also that HMRC had now amended the partnership statement back to the original figures) the only amount of “tax” which was “payable” was the amount which was payable pursuant to the original self-assessment returns.
29.	The result was that the amount of tax payable by Mr Stockler was equal to the amount of tax payable which was payable on the basis of his return as originally submitted. In other words, the s 95(2)(a) amount was equal to the s 95(2)(b) amount and there was no “difference” for the purposes of the section.
30.	Mr McDonnell contended that the amount which Mr Stockler had paid to HMRC pursuant to the Part 36 Offer was not “tax”, but an agreed settlement amount paid under the terms of that offer, similar to an amount paid under a Contract Settlement. That amount had now been paid and HMRC’s amendment to the partnership statement had been withdrawn, and no statutory mechanism existed to cause any additional tax now to be payable, within the meaning of s 95(2)(a) TMA 1970, in respect of the same matters.
31.	He examined the meaning of the word “payable”. In ordinary parlance, for tax to be “payable” it must be ascertained and an obligation to pay (whether past, present or future) must have arisen. Mere chargeability or liability to pay was not the same thing.
32.	The tax legislation (in particular in the present context, TMA 1970) carefully distinguished between the amounts in which a taxpayer was “chargeable” to tax, and the amount of tax which was “payable”. HMRC’s argument depended on “payable” meaning “chargeable”, whereas on behalf of Mr Stockler the argument was that “payable” meant payable in accordance with the full statutory machinery. “Chargeable” meant chargeable to tax in consequence of all the provisions of the tax system. The assessment mechanism, in essence, converted tax which was “chargeable” into tax which was “payable”.
33.	Tax which was “payable” was always dependent on the assessments made, and any amendments to those assessments which had statutory effect. He referred in particular to s 59B(5) TMA 1970. The language of s 59B(1), (5) and (6) reinforced the position that tax was payable “as a result of” or “by virtue of” an assessment.
34.	The consequences of tax being “payable” included the propositions that a demand for it could then be issued under s 60 TMA 1970, or that HMRC could recover it in court proceedings as a debt to the Crown (s 66 TMA 1970). It would be impermissible for HMRC to issue a s 60 TMA 1970 demand for tax without a prior assessment (or amendment of an assessment). Equally, it would be impermissible for HMRC to sue a taxpayer in court for a debt without there having been an assessment, regardless of the charging provisions in the main legislation.
35.	A further consequence of the tax being “payable” on this basis was that interest and tax-geared penalties could then be imposed, by reference to the tax payable. Mr McDonnell maintained that this was a sensible approach on grounds of public policy.
36.	This approach was supported by the decision of Harman J in Khan v First East Brixton General Commissioners and IRC [1986] STC 331. Mr McDonnell referred to Harman J’s comments at 333, and argued that they fully supported Mr Stockler’s position in the present appeal.
37.	Mr McDonnell drew attention to HMRC’s “Revenue Interpretation” RI 195, issued in October 1998. This referred to the apparent mistaken belief in some quarters that amending a self-assessment or a partnership statement precluded penalty action by HMRC in relation to the incorrect figures included in the original return. Mr McDonnell described this as “a third way”, and maintained that it was consistent with his arguments.
38.	Other provisions in TMA 1970 supported the argument as to the meaning of the word “payable”. Section 101 provided that an assessment which could no longer be varied by any Commissioners on appeal, or by order of any court, was sufficient evidence for the purposes of the penalty provisions that the amounts in respect of which tax was charged in the assessment arose or were received as stated in the assessment. Section 103 TMA 1970 related to time limits for penalties. The time limit was six years after the date on which the penalty was incurred, or any later time within three years after the final determination of the amount of tax by reference to which the amount of the penalty was to be ascertained. HMRC had to argue that this was by reference to the Part 36 agreement, or they would be out of time.
39.	Section 9 TMA 1970 referred to the amount payable. This section transformed tax which was chargeable into tax which was payable. The Taxes Acts charged an individual to tax; by applying these, the amount to which a person was chargeable could be determined. Deductions would then have to be taken into account, and tax deducted at source, as well as other reliefs. It might be necessary to exercise an element of judgment to arrive at the result. A mechanism was then needed to turn this theoretical amount into an actual amount; previously, this process had been by assessment, but it was now achieved by self-assessment. Mr McDonnell argued that, without self-assessment, there was not a fixed and determined amount which was payable. In general cases, there was no mechanism other than s 9(1) TMA 1970, s 29 TMA 1970, or statutory amendments to a self-assessment, for tax to be assessed.
40.	Self-assessment gave a mechanism of payment; s 59B TMA 1970 gave an obligation to pay. Section 59B(5) took into account amendments. The main purpose of s 59B was to give the time at which tax was payable. Sub-section (5) referred to “An amount of tax which is payable or repayable as a result of the amendment or correction of a self assessment . . .” Mr McDonnell described self-assessment as a “well-oiled machine”.
41.	In relation to contract settlements, Mr McDonnell referred to HMRC’s Enforcement Manual, EM6301, and to IRC v Woollen [1992] STC 944 (CA), in particular to the comments of Nolan LJ at 949-950. Mr McDonnell relied on the whole of Nolan LJ’s judgment. In addition, he referred to HMRC’s leaflet IR160, under the heading “what happens next?” He did not seek to argue that a Part 36 agreement was a settlement covered by the terms of leaflet IR160, but it was analogous. The agreed sum was a contractual sum, not tax, in place of the statutory machinery. Where HMRC were unable to apply that statutory machinery, they could not seek a penalty under s 95 TMA 1970, as there was no “difference”.
42.	The effect of a Part 36 offer being accepted was that a contract was formed, as if a consent order, and this was a type of contract. Mr McDonnell stressed the terms of the offer, and HMRC’s acceptance. It was not possible to alter this as HMRC had sought to do by Mr Hathaway’s letter dated 25 May 2007; in any event, by then it would have been too late, as there was nothing the taxpayer could have done. Mr McDonnell questioned whether someone at HMRC might have thought that there was some doubt about penalties.
43.	The issue was whether a penalty could be charged, having regard to s 95(2) TMA 1970, where there had not been amendment of the individual partner’s assessment. Both parties were agreed that HMRC were precluded from amending the individual partners’ returns under s 30B TMA 1970 or raising an assessment under s 29 TMA 1970. Mr McDonnell considered that Warren J had been accurate in making the comment in his judgment (at [14]):
“In each case, the argument that the amount is not so “payable” turns not so much on the figures in the partnership return but on the absence of any amendment to the individual partners’ returns and the absence of any assessment (including any discovery assessment).”
44.	Mrs Becker had referred in her witness statement to leaving the amended figures on the record but not making the consequential amendments which would bring “tax into charge”. Mr McDonnell argued that the partnership statement was now “in limbo”, without teeth, and had lost any statutory force as a result of the Part 36 agreement. It was inappropriate to refer to “tax which should have been payable”. He relied on Assets Recovery Agency v M [2007] EWHC 908 (QB) at [11] and [12]. There was an obligation to pay something, for example a payment on account, but for quantified amounts an assessment was necessary.
45.	The penalty here was a tax-geared penalty. It must depend on a quantified amount of tax. This created a difficulty for HMRC under s 103 TMA 1970, as the tax had not been finally determined. At most, the proceedings before the Special Commissioners in 2006 had determined the amount of income; the appeal had been against an amendment under s 30B(1) TMA 1970. The penalty had to be calculated by reference to the amount of tax payable by the taxpayer. HMRC’s case had to rely on s 103(1)(b), and the Special Commissioners had not determined the amount of tax. The amount paid by Mr Stockler was not tax; it was a settlement amount. Mr McDonnell relied on HMRC’s own materials, and the judgment in Woollen.
46.	Mr Nawbatt had said that the amount of tax had been determined by the Part 36 agreement. However, TMA 1970 made no provision for this. The contractual settlement approach was extra-statutory; effectively this was an exercise of HMRC’s care and management powers.
47.	For all these reasons, Mr McDonnell contended that the preliminary issue should be determined on the basis that where there had been no amendment of the taxpayer’s self-assessment, in the circumstances of this case, the effect of s 95(2) TMA 1970 was that no tax-geared penalty could be imposed.
Arguments for HMRC
48.	Mr Nawbatt referred to the preliminary issue as concerning the correct construction of s 95(2) TMA 1970. In summary, HMRC’s submission was that s 95(2) was a quantification provision which provided the formula for determining the maximum penalty that might be imposed if the preconditions in s 95(1) were satisfied. If an incorrect return had been submitted, there would be a difference or deficiency which would need to be quantified. Section 95(2)(a) was concerned with the actual tax payable by the individual in the relevant tax year; s 95(2)(b) was concerned with the tax which would have been payable if the income had been as declared in the incorrect return.
49.	The key issue was what was the proper construction of the word “payable” in s 95(2)(a). For Mr Stockler, it was contended that it was the tax payable as a result of an assessment or self-assessment; however, this would require reading in after the word “payable” words such as “in the assessment or any amendment to the assessment”, or “in consequence of the statutory assessment machinery in the Taxes Management Act 1970”. Mr Nawbatt assumed that it was also Mr Stockler’s case that “payable” was limited to the balance of any such sum less that which had already been paid on account. HMRC contended that it was the tax which the taxpayer was actually liable to pay on his income for the relevant year as opposed to that which he “would” have been liable to pay on the basis of the understated income in the incorrect return. The argument for Mr Stockler was based on a failure to distinguish between tax that was payable and tax which was unpaid and collectible. The assessment procedure was a mechanism for collecting unpaid tax.
50.	Mr Nawbatt referred to Lord Browne-Wilkinson’s statement in R v IRC, ex parte Matrix-Securities [Ltd] [1994] 1 WLR 334 at 356C, [1994] STC 272 at 292: “It is the statutory function of the Revenue to collect the taxes which Parliament has legislated are to be payable.” TMA 1970 provided the mechanism for the collection of tax which the taxpayer was liable to pay. That liability was not dependent on the raising of an assessment, but existed from the moment income was earned. Tax was payable on the income actually earned.
51.	It had been argued for Mr Stockler (see paragraph 27 above) that “payable” in s 95(2)(a) referred to tax which was as a matter of law “payable in consequence of the statutory self-assessment machinery in TMA 1970”. The words in quotation marks did not appear in the statutory provision, which made no reference to the individual’s assessment. There was a good reason for this; s 95 pre-dated the introduction of self-assessment, and this was an important consideration in construing the word “payable” in s 95.
52.	Mr McDonnell had referred to the process of amendment of a taxpayer’s self-assessment prior to making a penalty determination as “resulting” in the sum of tax being “payable” which was not payable before the self-assessment was amended. Mr Nawbatt referred to the rejection of a similar argument by Pitchers J in The Director of Assets Recovery Agency v M [2007] EWHC 908. Pitchers J had accepted the Director’s argument that there was a legal obligation to account for and pay tax during the following tax year, pursuant to ss 7 and 8 TMA 1970. Mr Nawbatt’s contention was that such tax was payable irrespective of whether there had or had not been an assessment.
53.	Mr Nawbatt argued that this view was supported by the PAYE scheme, under which tax was deductible and payable without any assessment. This was also the position for taxation at source of interest on bank accounts, and for the liability to pay on account in accordance with s 59(2) TMA 1970.
54.	The position was also reflected in the interest charged on unpaid tax. A taxpayer was not charged interest from the date of the amendment to an assessment, but from the relevant date for payment of the tax. Mr Nawbatt argued that this was significant because interest could not be charged on a sum which was not payable. Mr Stockler had not pursued his earlier argument with Mrs Becker that interest was only due from the date of the amendment.
55.	Mr Nawbatt referred to Mr McDonnell’s argument at paragraph 19(2) above. Mr Nawbatt contended that this was incorrect. Where an enquiry was opened and a loss of tax was discovered, HMRC could either enter into a contract settlement with the taxpayer or make an amendment. HMRC normally only made an assessment where it had not been possible to reach agreement with the taxpayer. Where agreement was reached the tax remained payable and was collected through the contract agreement. In either case the tax payable did not change. The assessment or amendment, or contract agreement, was simply the collection mechanism; it did not affect the quantum of the tax payable. If the assessment was deficient, the tax remained payable, albeit not yet assessed.
56.	In effect, the argument for Mr Stockler was seeking to introduce a further precondition to the making of a penalty. Section 95(1) set out the preconditions. Section 95(2) simply provided the calculation formula for quantifying the maximum penalty available. In the present case, it had been accepted that the preconditions in s 95(1) were satisfied, in that there had been the negligent submission of an incorrect partnership return. Despite this, it was submitted for Mr Stockler that the calculation formula provided that no penalty was payable. If this was correct, it would mean that in the majority of cases, where no amendment was made because of the entering into of a settlement, no penalty would be payable.
57.	The Part 36 agreement entered into by the parties was the equivalent of the contract settlement which HMRC normally entered into with taxpayers instead of making a formal amendment to their return. HMRC did not accept the assertion made on behalf of Mr Stockler that the amount which he paid to HMRC pursuant to the Part 36 agreement was not “tax”. The Part 36 offer was an offer to pay the tax due and payable. Mr Stockler, in making the offer and paying the tax due, must have accepted that the tax remained due and payable notwithstanding the requirement that the amendment be “withdrawn”. This was reflected by the quantification of the tax payable which was set out in HMRC’s letter dated 8 June 2007. HMRC could have raised a discovery assessment against Mr Stockler, and would have done so had Mr Stockler not agreed within the terms of the Part 36 offer to pay the tax and interest arising on the partnership. Mr Nawbatt asserted that the whole of the tax was due from Mr Stockler under the terms of the partnership agreement; this was not accepted by Mr McDonnell, being a matter relating to quantum to be resolved later.
58.	Mr McDonnell had relied on s 59B TMA 1970 as reinforcing the position that income tax was payable “as a result of” or “by virtue of” an assessment. Mr Nawbatt indicated that s 59B(1) was not the legislative provision which made tax “payable”. Section 59B was an administrative provision which at sub-s (4) set out the date on which the tax would be payable. He referred to the requirements for making returns, and the penalties for not doing so. The legislation which made tax payable on trading income was contained in the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”).
59.	He argued that Mr McDonnell’s statement that tax “payable” was always dependent on the assessments made, and any assessments to those assessments which had statutory effect, was also incorrect. It confused the collection mechanism with the underlying, pre-existing obligation to pay tax.
60.	The word “payable” was used in different contexts in s 59B(1) and (6) TMA 1970 on the one hand and in s 95 TMA 1970 on the other. Section 59B was concerned with the timing of payments, while s 95 was concerned with quantification of the maximum penalty to which the taxpayer had rendered himself liable following the (fraudulent or) negligent delivery of an incorrect return. In a similar way, the case of Khan was concerned with the time when tax should have been paid by the taxpayer.
61.	It had been stated on Mr Stockler’s behalf that, because there had been no amendment to the self-assessment, the s 95(2)(a) amount (ie the amount of tax “payable” by him for the relevant tax years) was equal to the tax which had been assessed in his original self-assessment returns. This was contradicted by his payment of the additional tax and interest of £122,731.77 as part of the Part 36 settlement agreement.
62.	Mr McDonnell had stated that the effect of s 95 TMA 1970 was to charge penalties by reference to the difference in the amount of tax “payable” “before and after the amendment of the self-assessment”. This argument was incorrect. The latter quoted words were not contained in s 95. Further, HMRC would be precluded from making a penalty determination in any case where settlement or agreement was reached before the making of any amendment.
63.	The penalty was charged by reference to the tax underpayment. That underpayment was measured by the difference between the tax which was actually or properly payable for the year of assessment and the tax which was declared in the original return to be payable. The tax which was properly payable could not be affected by what did or did not happen after the year of assessment; this was shown by Khan. Further, if the argument for Mr Stockler was correct, in any case where the taxpayer delayed payment of the proper tax payable by him until just before HMRC were about to issue an amendment, HMRC would be precluded from making a penalty determination, or presumably from charging interest, because of the absence of an amendment.
64.	The assessment mechanism was there to determine the quantum of tax that was properly payable in the absence of agreement between HMRC and the taxpayer as to the quantum. Where there was such agreement, no such amendment was necessary. In the present case the quantum of the tax properly payable had been agreed between the parties.
65.	Thus s 95(2)(a) did not refer to the tax payable in the assessment or any amendment to the assessment. It was concerned with the tax “payable” in respect of the relevant years of assessment calculated by reference to the total taxable income earned; where, as in the present case, the preconditions in s 95(1) were satisfied, this total taxable income would necessarily not be the same as the income or profits returned in the original self-assessment.
Discussion and conclusions
66.	Although there are three issues raised in the appeal, two of them are concerned with quantum. The preliminary issue is whether it was possible for HMRC to raise the penalty determination in circumstance where no amendments were made to the partnership statements. This issue was heard first, on the basis that if Mr Stockler was successful in establishing that it was not open to HMRC to raise the penalty determination, it would not be necessary to consider the other issues. Further hearing dates have been reserved to allow for the possibility that Mr Stockler might not succeed in relation to this preliminary issue.
67.	As there is a risk of confusing Mr Stockler’s position as a partner with his position as an individual taxpayer, I think it appropriate to follow through the steps taken and relate them to these respective roles.
68.	The earlier appeal to the Special Commissioners was by the Partnership. In other words, it was brought by Mr Stockler together with the other individuals who were partners at the relevant times. The Special Commissioners’ decision was a decision in principle, and did not quantify the tax assessable on the Partnership. The Partnership appealed to the High Court against that decision. Negotiations continued, and as the date for the hearing approached, Mr Stockler on behalf of the Partnership sought to arrive at a settlement rather than proceeding with the appeal hearing. The negotiations were successful in achieving a settlement before the hearing was due to take place.
69.	Under the terms of the settlement, achieved by the Part 36 agreement, the Partnership agreed “to pay to [HMRC] the aggregate amount of income tax assessable on the partners of the Appellant [ie the Partnership] in consequence of the decision of . . . ” [for full text see paragraph [9] above]. HMRC agreed to withdraw the amendments of the Partnership’s “partnership returns” for the relevant years.
70.	Following the settlement, further discussions continued in order to arrive at the amount of tax assessable on the Partnership as a result of the Special Commissioners’ decision. According to the letter from Mr Hathaway of HMRC dated 11 June 2007, the amount had been agreed between Mrs Becker and Mr Stockler on that date. Mr Stockler’s personal cheque, post-dated 15 June 2007, was sent by him on behalf of the Partnership by letter dated 12 June 2007.
71.	The Part 36 offer letter written by the Partnership referred to HMRC “withdrawing” the amendments of the Partnership’s partnership returns [ie partnership statements]. However, it appears from Mrs Becker’s witness statement that this was not possible in the Partnership’s circumstances. It could only be done where an appeal was upheld in favour of the taxpayer and the original return was determined to be correct. Further, if the original return was reinstated as valid, but the taxpayer had paid the agreed or determined liability, this would show as a credit in HMRC’s records with no corresponding liability. The administrative procedure adopted was to leave the amended figures on the record, but not to make the consequential amendments which would bring tax into charge, and to make a note against the record referring to the settlement agreement. Mr Stockler’s individual tax return had not been amended, as otherwise HMRC’s records would have shown that both the sum due under the Part 36 agreement and the additional tax due in respect of his return were due for collection. Mrs Becker made it clear that no tax would be demanded other than that due under the Part 36 agreement.
72.	Although the result as explained by Mrs Becker is that the partnership statements were, technically, still “amended”, I accept that I should deal with the matter on the basis that for practical purposes the amendments should be regarded as withdrawn. Mrs Becker made clear in her witness statement that she had not notified Mr Stockler of this procedural matter, as she did not believe it to have any effect on the substance of the agreement.
73.	In HMRC’s letter dated 31 May 2007 accepting the Partnership’s Part 36 offer, Mr Hathaway indicated that “acceptance of the Part 36 offer is of course entirely without prejudice to any penalty determination which may follow hereafter. Penalties are not, of course, in issue in the present proceedings.” This broad language left open the possibilities that penalties might be sought against “each relevant partner” under s 95A TMA 1970, or against any of the partners individually under s 95 TMA 1970.
74.	Under s 12AB TMA 1970, a partnership statement is a required part of a partnership return within s 12AA TMA 1970. The latter refers to HMRC’s power to request a return; this is “for the purpose of facilitating the establishment of . . . the amount in which each partner chargeable to income tax for any year of assessment is so chargeable and the amount payable by way of income tax by each such partner”. Section 95A is a penalty provision concerned with fraud or negligence in connection with a partnership return. If HMRC had considered it appropriate, they could have sought penalties under this section; it was open to them to do so against all the “relevant partners”, ie all those who had been partners in the Partnership at any time during the respective periods covered by the returns, but only in respect of any difference between the tax payable by each such partner and the tax shown in the incorrect returns as attributable to that partner.
75.	HMRC did not follow this course. Mrs Becker indicated in her witness statement her belief that the correct section under which to charge a penalty was s 95 rather than s 95A. The reason was that the penalty related to Mr Stockler’s own return, and he had accepted the personal liability for the tax. No amendment had been made to the individual partners’ returns pursuant to s 30B(2) TMA 1970, as HMRC had “withdrawn” from this course of action following the Part 36 agreement. Mrs Becker believed that HMRC could, as an alternative, have charged a penalty under s 95A, because the partnership return [ie, the returns for the relevant periods] was negligently incorrect when made and the tax consequences all “adhered” to Mr Stockler, who was the “relevant partner” for the purposes of s 95A(2).
76.	The latter element of Mrs Becker’s views concerns a matter of quantum, which is not part of the preliminary issue under consideration in this decision. In any event, HMRC did not proceed under s 95A.
77.	Instead, they determined that a penalty should be imposed under s 95 TMA 1970. This is concerned with incorrect returns. For individuals, the provision requiring the making of a return is s 8 TMA 1970. In the case of an individual who is a partner in a firm, adjustments for loss of tax resulting from fraudulent or negligent conduct by the representative partner can be made by amendment pursuant to s 30B(2) TMA 1970. However, HMRC had been precluded from doing this by the Part 36 agreement, as Mrs Becker explained.
78.	Liability to a penalty under s 95 TMA 1970 depends on the return being “incorrect”, the precondition in this case being that the person in question fraudulently or negligently delivers an incorrect return of the type falling within s 8 TMA 1970. The grounds for HMRC treating Mr Stockler’s individual returns as incorrect were that they were made on the basis of the partnership income figures derived from the Partnership’s returns and statements, and that as a result of the Special Commissioners’ decision these statements had been shown to be incorrect by reason of the negligent conduct of the representative partner. (I should emphasise that Mr Stockler’s individual personal returns were not included in the evidence put before me for the purposes of deciding the preliminary issue.) The allegation against Mr Stockler is that, on this basis, the submission of his individual returns was negligent rather than fraudulent. As his returns reflected the income and gains from the Partnership, it is clear that the precondition in s 95(1)(a) was satisfied.
79.	Mr Stockler had intended that the Part 36 offer should have the result mentioned by him to Mrs Becker at the meeting on 3 May 2007, that no penalties should be charged. In response to Mr Hathaway’s letter dated 25 May 2007, the Partnership’s letter dated 31 May 2007 (written by Mr Stockler on the Partnership’s behalf) argued that HMRC was incorrect in asserting that their acceptance of the Part 36 offer was without prejudice to any penalty determination. The Partnership contended that the purpose and effect of the withdrawal of the amendments to the partnership return [by this the Partnership must have been referring to all the returns] was to ensure that there could be no question of reliance on such amendments for any purpose, whether of penalties or otherwise. Mr Stockler referred to ss 30B and 95A TMA 1970, but not to s 95.
80.	Although it appears to me understandable that a firm might seek such assurance in respect of penalties, clear and express reference would have been necessary to ensure that any such statement extended both to penalties on the partner or partners in that capacity under s 95A TMA 1970 and to penalties under s 95 TMA 1970 on the partner or partners in their capacity as individual taxpayers; it is noteworthy that the Partnership’s letter dated 31 May 2007 did not mention s 95. However, Mr Hathaway made it clear that in HMRC’s view the Part 36 agreement did not extend to penalties, as they were not in issue in the proceedings to which that agreement related. I accept that this view was correct; Mr McDonnell did not seek to argue otherwise, and stated in his skeleton argument that: “There was, however, no express reference to penalties, since no penalty determination had even been raised at that point.”
81.	Thus, despite Mr Stockler’s intention, the Part 36 agreement did not prevent HMRC from seeking to impose the penalty under s 95 TMA 1970. The debate is whether the conditions laid down in that section are fulfilled; that in s 95(1) has been. Section 95(1) refers to the “difference” between the amounts in s 95(2)(a) and  s 95(2)(b). Mr Nawbatt submitted that where an incorrect return had been submitted, it would follow that there would be such a difference or deficiency. This brings me back to the central question of the meaning of the word “payable” in s 95(2)(a) TMA 1970.
82.	The word is used in a special sense in s 95(2), as it includes tax deducted at source and not repayable; by definition this will already have been paid and therefore cannot be “payable” in any conventional sense of that word. Clearly, s 95(2) could not simply refer to tax which had been “paid”, as circumstances might well arise where it had been established that tax ought to have been paid by the person in question, but had not actually been paid. The objective is to calculate any penalty by reference to that person’s liability to tax, whatever amount may or may not in fact have been paid, and however much may remain to be paid. The word “payable” is used in the sense of “paid or payable”, and is extended to include non-repayable tax deducted at source.
83.	Mr Nawbatt argued that the liability to pay existed from the moment that the income was earned; this arose under the provisions such as ITTOIA 2005 (or, more relevantly in the present case, the Income and Corporation Taxes Act 1988). In support of his argument, he relied on the judgment of Pitchers J in Assets Recovery Agency v M. I do not accept the view that the liability arises under what I would describe as the charging legislation. This appears to me to confuse chargeability to tax with liability to pay the tax. Pitchers J described the Agency’s argument as being that there was an existing cause of action, there being a legal obligation to pay tax on income earned, and therefore a duty to account for and pay tax during the following year, such duty arising under ss 7 and 8 TMA 1970. In my view, this is not the same as saying that the tax was “payable”. Pitchers J said at [12]:
“In my judgment, at this stage there is an existing cause of action in respect of unpaid tax. The exact amount has at this stage not been quantified. That is the purpose of section 29 . . .”
He was referring to s 29 TMA 1970, relating to “discovery” assessments. After setting this out, he continued:
“[13]. The liability to pay that quantified amount under section 29 arises at the earliest 30 days later but, in my judgment, the cause of action has already arisen.”
84.	The latter comment makes clear that the liability to pay does not arise at the time when the income was earned. It will not be known how much a trader or a person carrying on a profession has earned until the taxable profits for the relevant period are calculated, taking into account both income and proper deductions in computing those profits. As Mr McDonnell argued, a process of ascertaining the tax chargeable on those profits is then required.
85.	Normally that process is self-assessment. In some cases a different process is required, such as a discovery assessment under s 29 TMA 1970. Whichever method is appropriate, it fixes the tax chargeable on the profits, subject to any further process amending the amount of tax chargeable.
86.	The next stage is to establish the amount which the person in question is liable to pay. In the majority of cases involving professional partnerships dealt with through self-assessment, it is likely that the individual partners will already have made payments on account in accordance with s 59A TMA 1970. The tax payable will differ from that chargeable, as at least a proportion of the latter will have been covered by the payments on account and any tax deducted at source. Under s 59B TMA 1970, the difference between the tax contained in the person’s self-assessment and the payments on account made in respect of the year in question is payable at the time specified, usually by the 31 January following the year of assessment. Clearly, therefore, the word “payable” in s 59B TMA 1970 has a different meaning from that in s 95. Section 59B is addressing the timing of the liability, and only relates to the balance which remains to be paid. Section 95 is looking at the whole of the tax liability, whether or not already paid or accounted for, and thus timing is not in issue.
87.	Similar arguments apply to the comparison between s 9 TMA 1970 (in particular, s 9(1)(b)) and s 95. Section 9(1)(b) refers to “the amount payable by him by way of income tax” as “the difference between the amount in which he is assessed to income tax under [s 9(1)(a)] and the aggregate amount of any income tax deducted at source and any tax credits . . .”
88.	Mr McDonnell argued that the word “payable” in s 95(2)(a) TMA 1970 referred to tax which was, as a matter of law, payable in consequence of the statutory self-assessment machinery in TMA 1970. He further contended that the word “payable” was used in the same sense in s 59B, and relied in particular on s 59B(5). For the reasons just given, I do not accept that the sense is the same in both sections.
89.	Further, I do not accept that self-assessment is the only way of arriving at “the amount of income tax and capital gains tax payable for the relevant years of assessment by” the person in question within s 95(2)(a) TMA 1970. I accept Mr Nawbatt’s submission on this point that the amount which the taxpayer is actually required to pay can be arrived at by way of a contract settlement or some other agreement with similar effect, as well as Mr Nawbatt’s contention that the reason for the absence of any reference to the individual’s assessment was that s 95 pre-dated the introduction of self-assessment. Section 95(2)(a) is looking at the tax properly “payable” on the basis of the facts as eventually established; it does not require this process to be carried out by way of an assessment. Mr McDonnell referred to s 101 TMA 1970, which provides that an assessment which can no longer be varied is sufficient evidence for the purposes of the penalty provisions that the amounts arose or were received as stated in the assessment. I do not consider that this implies an exclusive method of establishing such amounts, or that an assessment is necessarily required in order to establish what tax is “payable”.
90.	In addition, the reason for s 95 not referring to any form of assessment (whether self-assessment or otherwise) seems to me to be that what is intended to be under scrutiny for the purposes of s 95(2) is the overall liability to income tax and capital gains tax ultimately determined for the particular years in question, irrespective of the method used for the purpose of arriving at that liability. (I accept that there may be cases where a penalty is imposed on the basis of figures which do not prove to be the ultimate liability, which is why I refer to what appears to be the intention.) I do not consider the method of collection of the tax, or the method of arriving at the liability for the year in question, to be relevant to the question whether the tax is “payable” within s 95(2).
91.	I am reinforced in the latter view by practical considerations. If, as I understand to happen fairly frequently, a contract settlement is arrived at between a taxpayer and HMRC, the tax liability is established without amendment being made to that taxpayer’s self-assessment. I accept that such settlements usually cover interest and penalties in addition to the tax, so it might be assumed that establishing liability for the purposes of s 95 is irrelevant. However, if the argument were to be accepted that an amendment to the taxpayer’s self-assessment was essential, this could lead to some form of challenge possibly being made in a wide range of contract settlement cases, perhaps even preventing some settlements from being reached.
92.	Another consideration is that in the case of a contract settlement the determination of the penalty element needs to be based on the amount of tax shown as due under the settlement, and not on any figures previously under review either by way of assessment or self-assessment. In many cases the amount of tax agreed to be due under a contract settlement will be less than the tax previously being sought by HMRC. It would not be appropriate either to relate the penalty element to what was previously considered to be “chargeable”, or to relate it to any amount corresponding to some amendment or assessment previously proposed by HMRC.
93.	Further, the above view produces what appears to me to be a sensible result in the context of the Part 36 agreement. The Partnership’s offer was to “pay to [HMRC] the aggregate amount of income tax assessable on the partners of the [Partnership] in consequence of the decision of the Special Commissioners . . .” For Mr Stockler, it was argued that the amount paid by means of his personal cheque to HMRC pursuant to the Part 36 agreement reached between the Partnership and HMRC was not “tax”, but an agreed settlement amount. Leaving aside for the present the question of enforcing such agreements and the nature of what is being enforced, in practical terms a payment to HMRC pursuant to an agreement in such circumstances must be of something falling within HMRC’s “collection and management” functions in respect of direct tax. Even if a payment to HMRC is not specifically labelled, it must be tax, interest or a penalty, or two or more of these. The specific description in the case of the Partnership’s Part 36 offer put beyond doubt that it was “tax”. The subsequent quantification of the amount due was, for the purposes of s 103(1)(b) TMA 1970 the “final determination” of the amount of tax by reference to which the amount of the penalty was to be ascertained.
94.	Mr McDonnell referred to IRC v Woollen. This was a case relating to enforcement of a contractual settlement between the Revenue on the one hand and Mr Woollen and three companies on the other. The three companies were put into receivership and most of the amount due under the settlement remained unpaid. Mr Woollen argued that the Revenue should have made certain preferential claims against the companies; these would have reduced the amount for which he was liable under the agreement. The Court of Appeal held that where a settlement agreement was entered into, the Revenue had a new cause of action, namely a cause of action for the sums due under the agreement in accordance with its terms. Those sums had lost their identity as tax, and the only remedy available to the Revenue was to recover them by an action in debt. This meant that the Revenue had no power to rank as a preferential creditor in respect of the sums due from the companies.
95.	I interpret Woollen as relating to the Revenue’s [now HMRC’s] powers of collection and enforcement. (Under s 5 of the Commissioners for Revenue and Customs Act 2005, these collection and management powers in respect of direct tax have been transferred to HMRC.) I do not think that the Court of Appeal in Woollen was intending to treat sums due under a contract settlement between a taxpayer and HMRC as being for all purposes something other than “tax”. Nolan LJ referred  ([1992] STC 944 at 950-951) to what was being “collected”, and to “claim”:
“Thus here again, as it seems to me, what is being said is that there is a distinction—narrow it may be but crucial in principle—between what the Revenue collect under the contract and what they might otherwise be entitled to collect under the statute.”
He continued at 951:
“By the same token the sums due to the Revenue from the companies after the settlement agreement had been made were, in my judgment and could only be properly regarded, as sums due in discharge of a contractual liability and not sums in respect of any part of which a preferential claim could be made on the grounds that they were tax.”
96.	The issue in Woollen was clearly that of the nature of the Revenue’s claims, and whether they retained their preferential treatment when they arose under contract settlements rather than being made pursuant to assessments. Whatever the means of collection and enforcement, and whatever limits on HMRC’s powers for those purposes, the liability to HMRC must remain one in respect of “tax”; given HMRC’s collection and management functions, what other explanation would there be for the liability arising?
97.	Thus the tax “payable” by Mr Stockler for the relevant years included an amount of tax referable to the adjustment of the Partnership’s tax liabilities, such adjustment having been achieved by the agreement of the amount of tax due from the Partnership following the conclusion of the Part 36 agreement. There was according a “difference” between the tax “payable” by Mr Stockler and the tax which would have been payable if his personal returns for those years had been correct as submitted.
98.	I therefore determine the preliminary issue as follows. As a matter of the construction and application of s 95 TMA 1970 and in the circumstances of this case as set out in the Agreed Statement of Facts and as appears from the documents in the agreed bundle, HMRC do have power to raise a penalty determination.
99.	As a result of my decision on the preliminary issue, it will be necessary to consider the other issues relating to the quantum of the tax attributable to Mr Stockler on the basis of which the penalty was determined, and the percentage of penalty appropriate in the circumstances. The further hearing dates already referred to will be required for the purpose of considering these other two issues.

JOHN CLARK

SPECIAL COMMISSIONER
RELEASE DATE: 20 February 2009

SC/3122/2008