Analysis
In June 2010, Michael Wood admitted to under-declarations of income tax for the years 2002-03 to 2007-08 amounting to £743,424 and made a payment of tax of £352,983. This was made with a view to taking advantage of an HMRC disclosure opportunity for medical professionals called the ‘Tax Health Plan’, with a fixed tax geared penalty of 10% of the amount of tax under-declared. HMRC argued that the disclosure fell within the Tax Health Plan and opened a Code of Practice 9 investigation into his affairs. Michael Wood agreed to provide a disclosure report (the disclosure report) into his affairs for the previous 20 years. The disclosure report was due to be provided in September 2011.
In the absence of the disclosure report, HMRC made on 14 August 2012 discovery assessments pursuant to s29 TMA for the tax years 1992-93 to 2005-06 totaling £1.3m in terms of tax due. HMRC stated that they were issuing the assessments going back to 1992/93 as they believed that Mr Wood had deliberately evaded making a full disclosure of his income for the years in question. Accordingly, they had relied on the extended time limit for making a discovery assessment provided by s36 TMA which, as discussed below, permits an assessment to be made in a case involving a loss of income tax brought about deliberately by the taxpayer to be made no more than 20 years after the end of the year of assessment to which it relates.
On 12 September 2012, Mr Wood, through his advisers, appealed to HMRC. HMRC carried out a formal review, and upheld the decision to issue the discovery assessments. On 22 April 2013, Mr Wood appealed to the FTT. Further appeals were brought by Mr Wood’s advisers against the issue of penalties by HMRC totalling over £950,000 for the years assessed upon the grounds that Mr Wood had been ‘either neglectful or fraudulent’ in submitting incomplete or incorrect tax returns for the years in respect of which the discovery assessment had been made.
Mr Wood died on 22 May 2013. HMRC cancelled the penalties on 19 September 2013 on the ground that Mr Wood would not have a right to a fair trial under Art 6 of the ECHR because of his untimely death. The appellants’ advisers wrote to HMRC in September 2013 arguing that the same was true in respect of the assessments. On 31 May 2016, the disclosure report was delivered to HMRC. It stated that there was a small amount of additional tax to pay as a result of various technical matters, rather than any issue of non-disclosure.
The FTT released its decision on 12 June 2015. It dismissed the Appellant’s argument based on Art 6 on the basis that the criteria in Engel v Netherlands [1977] 1 EHRR 647 were not fulfilled and the disputed assessments under the extended time limits conferred by s36 TMA did not constitute a taxpayer being ‘charged with a criminal offence’ within the meaning of Art 6. The FTT also decided, having considered the overriding objective of the FTT under r2 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, to deal with cases fairly and justly, that it would not be fair and just to ‘set aside’ the disputed assessments at the current state of the proceedings. The FTT concluded that until the exact nature of the basis of the assessments was clear, the FTT could not say whether the appellant would be unduly adversely prejudiced by being required to continue the proceedings. The appellant appealed the Art 6 issue (but did not appeal the FTT’s decision on r2).
Held:
1) Although HMRC stated in its letter of 19 September 2013 that the penalties were discharged because Mr Wood would not have the right to a fair trial because of his death, the correct legal basis was that it was a fundamental rule of criminal law that criminal liability does not survive the accused’s death and inheritance of the guilt by his personal representative was not compatible with the presumption of innocence required by Art 6(2). The question of whether s36 (1A)(a) was penal in nature was to be determined by reference to the features of that provision alone. The key issue was whether the provision could be regarded as imposing a punishment to deter offending by those to whom it was directed.
2) Section 36(1A)(a) did not have that character or nature. A better analogy could be drawn with s32 Limitation Act 1980 where the nature was to provide for an extended limitation where the action was based upon a defendant’s alleged fraud or deliberate concealment.
3) The reasoning of O’Rorke was in point. The provision under consideration in that case was held to be one that simply enabled HMRC, upon proof of fraud or neglect on the part of an officer, to recover from him that which he or she could and should have procured his company to pay. Likewise, s36 (1A)(a) is simply a provision which enabled HMRC to recover from the taxpayer the correct amount of tax that he should have paid, provided HMRC can satisfy one of the conditions to its application, namely that it can demonstrate a loss of tax caused deliberately by the taxpayer.
4) Section 36 could not be characterised as an instance of the use of state power to condemn or punish an individual for wrongdoing. It was a mechanism to enable that may be due to be assessed. It did not involve any formal charge, conviction or penalty.
5) The precondition of ‘criminal conduct’ in the case of Khan did not make the assessment process criminal in nature.
6) The passages of the Consultation Paper did not assist. Section 36 (1A)(a) clearly operated as an incentive for a taxpayer to submit his tax returns in a timely fashion and the extended time limit might act as a deterrence against non-compliance with that obligation, but that kind of deterrence could not be construed as a punishment or coercion of the type that the authorities demonstrate is necessary to make a provision penal in nature.
7) The provisions of s36 (1A)(a) TMA did not satisfy any of the Engel criteria. The provision was not penal in nature and therefore did not engage Art 6(1).
JUDGMENT MORGAN J/JUDGE TIMOTHY HERRINGTON Introduction [1] This is an appeal against a decision of the First-tier Tribunal (FTT) (Judge Kempster) released on 12 June 2015 (the ‘decision’). [2] By the decision the FTT determined the following preliminary issue: ‘Whether (and, if so, to what extent) the assessments against the late Michael Wood made under …Continue reading "Wood v HMRC [2016] UKUT 346 (TCC)"