Pawlowski (Collector of Taxes) v Dunnington

A taxpayer sued for tax may raise a public law defence challenging the legality of directions underlying the assessment. The availability of judicial review does not make it the exclusive remedy where the taxpayer is defending recovery proceedings. The court should consider practical consequences, but administrative convenience and the summary nature of tax collection proceedings do not displace the ordinary right to defend an unfounded claim. The principle in Wandsworth LBC v Winder applies even where the relationship between the parties is statutory rather than contractual. Actual knowledge is required where regulations impose liability on an employee who knowingly received emoluments after the employer wilfully failed to deduct PAYE; constructive knowledge is insufficient. The appeal was allowed because the county court had applied the wrong test, but the matter was remitted for rehearing on the public law defence.

The Collector of Taxes sued the respondent in the Wigan County Court under section 66 of the Taxes Management Act 1970 to recover tax arising from directions made under regulations 42(3) and 49(5) of the Income Tax (Employments) Regulations 1993. The directions transferred liability for unpaid PAYE from the company to the respondent, its director.

The county court dismissed the claim after effectively rehearing whether the respondent knew of the failure to deduct PAYE. The Collector accepted that approach was wrong, but argued that any challenge to the legality of the directions had to be made by judicial review. The central issue was whether the respondent could advance that public law challenge as a defence to tax recovery proceedings.

1. Appeal allowed and rehearing ordered. The county court had approached the issue as a rehearing of the merits and had required proof that the respondent actually knew of the company’s failure to deduct PAYE. That was impermissible. The statutory question was whether the Board could properly form the required opinion.
2. Actual knowledge was required by regulations 42(3) and 49(5). The word “knowing” did not mean that the employee ought to have known or should have been suspicious. The Board could not rely solely on the respondent’s status as a director or on an assumption that a director must know of the company’s PAYE obligations. This followed R v Inland Revenue Commissioners ex parte Chisholm [1981] 2 AllER 602.
3. The respondent was entitled to raise the legality of the Board’s directions by way of defence. The Court of Appeal applied the reasoning in Wandsworth LBC v Winder [1985] AC 461. A defendant is exercising the ordinary right to resist a claim, and the existence of judicial review does not ordinarily make that procedure exclusive.
4. The absence of a contractual relationship between the Revenue and the taxpayer made no material difference. The respondent had conditional rights to resist payment. The practical disadvantages identified by the Revenue, including the summary nature of collection procedures and possible effects on the employer’s liability, did not justify excluding the defence.
5. Inland Revenue Commissioners v Aken [1990] 1 WLR 1374 was distinguishable because statutory appeal machinery existed for the assessments in that case. The court observed that the Revenue could avoid the present difficulty by providing a right of appeal against directions.
6. The matter was remitted to the county court for rehearing on whether the public law defence succeeded. No order for costs was made below; the respondent received half his costs of the appeal. Leave to appeal was refused.

• Court of Appeal (Civil Division) [1999] EWCA Civ 3020: appeal allowed. The county court’s decision was set aside and the matter remitted for rehearing on the public law defence.
• Wigan County Court: claim dismissed after treating the issue as a rehearing of the Board’s decision; that approach was held to be wrong.