The penalties for failing to provide information to HMRC were reduced to reflect the amount of tax at stake, and because there was no deliberate concealment by the taxpayer.
The decision highlights that there is a clear distinction to be drawn between the most spectacular levels of neglectful non-compliance and the murky world of deliberate concealment.
FA 2008, schedule 36, gave HMRC the power to issue information notices, and introduced various penalties for failure to comply with those notices. An information notice requires a person to provide information which is reasonably required for the purpose of checking his tax position.
Where the taxpayer fails to comply, and HMRC has reason to believe that the tax liability is significantly underpaid because of this failure, it can ask the Upper Tribunal (UT) to impose a penalty under FA 2009, Sch 36, para 50. However, the UT may then impose any level of penalty it deems appropriate, having regard to the likely amount of underpaid tax.
Romie Tager QC
Tager is a successful barrister; he appears to be somewhat less successful at self assessment. He was routinely late in filing his tax returns and answering questions from HMRC. It was his habit to make up for this by making substantial tax payments on account, which were normally more than sufficient to cover any final tax liability which became due.
Tager appeared before the tax tribunals in 2008, then again in 2014, and in both instances he gave undertakings that he would provide HMRC with full information by an agreed date; but he failed to deliver. Finally, HMRC applied to the UT for a penalty under FA 2009, Sch 36, para 50 in respect of the following estimated amounts of tax:
Income tax from Tager: £80,549
IHT due from the estate of his late father: £1,171,020.
The judge was rightly appalled by Tager’s lavish non-compliance, and agreed that a penalty was in order. However, since this was, to his knowledge, the first such case to be heard on a paragraph 50 penalty, he was very conscious that he had no precedents with which to work.
HMRC suggested to the UT that “there is a proper comparison to be drawn between paragraph 50 penalties and those imposed for deliberate concealment since the mischief targeted by them is materially the same, that is the intentional or, at least, prolonged withholding from HMRC of the information they need in order to assess the correct amount of tax.”
The judge allowed himself to be persuaded by this approach, and imposed a penalty based upon 100% of HMRC’s current opinion of the outstanding liabilities to income tax and IHT; a total of £1,246,020 which was later reduced to £1,075,210.
This huge penalty finally spurred Tager into action, and he provided sufficient information to enable HMRC to agree that the income tax liability was £1,250 and the IHT due was £195,471.
Court of Appeal
Lord Justice Henderson agreed with the UT that “Parliament has deliberately decided against providing for a fixed or mechanical relationship between the amount of the tax unpaid and the amount of the penalty”.
That being said, from a practical viewpoint it does make sense to start with a figure which represents the best estimate of the tax due and then to apply some percentage to that figure. That approach was not obviously wrong in law, and neither side objected to it.
However, was it the correct starting figure to use? The UT was wrong simply to accept HMRC’s “necessarily speculative” figures without applying some discount to reflect their uncertainty. The statute requires the tribunal to take its own view of the tax at stake, not merely to accept one party’s position.
Moreover, the judge was wrong to equate Tager’s non-compliance with deliberate concealment.
“The concept of deliberate concealment clearly denotes a course of conduct which will usually, if not invariably, be dishonest. The definition of deliberate and concealed… refers to a case where the person in question ‘deliberately withholds the information and makes arrangements to conceal the fact that the information has been withheld’. But it has never been part of HMRC's case that Tager was guilty of conduct of that nature… An allegation of deliberate concealment would have been akin to an allegation of fraud or dishonesty, and as such would have had to be distinctly pleaded, and established by evidence.”
The Court concluded that the correct approach was to avoid drawing comparisons with other penalty regimes and to substitute a figure which “yields a result which is proportionate to the scale and nature of the taxpayer's default”. It thus imposed round sum amounts of £20,000 for failure to comply with the income tax notices, and £200,000 for the failures to comply with the IHT notice.
This has been a long drawn-out episode of compliance failure, rendered all the more serious owing to Tager’s profession as a leading barrister and the sheer epic scale of his neglect of responsibility.
However, no matter how uncooperative he may have been with HMRC, it was wrong to characterise his behaviour as deliberate concealment.
As was made clear by HMRC when the concept of deliberate concealment was being introduced by FA 2009, it relates to behaviour closely akin to fraud. Its use should therefore be limited to situations where HMRC can legitimately adduce evidence of dishonesty.