Stockler Charity (a firm) v Revenue and Customs

Acceptance of a Part 36 offer does not, without clear contractual language, determine the statutory consequences of withdrawing tax-return amendments. Whether a penalty remains available under sections 95(2) and 95A(2) of the Taxes Management Act 1970 depends on the proper construction of those provisions, particularly the meaning of “payable”. That issue should ordinarily be determined through the statutory tax-appeal process. The High Court should pre-empt the Commissioners only in a clear case. A taxpayer’s subjective purpose, or an alleged objective purpose of settlement, cannot convert an agreement to withdraw amendments into an agreement not to raise penalties where the accepted offer contains no such term.

The applicant firm had appealed to the High Court against the Special Commissioners’ dismissal of its challenge to amendments to partnership tax returns. It offered under CPR Part 36 to settle the appeal by paying specified tax and interest, in return for HMRC withdrawing the amendments and paying the appeal costs. HMRC accepted without qualification in its notice, but stated in the covering letter that acceptance was without prejudice to any later penalty determination.

HMRC withdrew the amendments in practice but later issued a penalty determination against the representative partner under section 95 of the Taxes Management Act 1970. The firm sought a declaration that the Part 36 settlement precluded the penalty. The central issues were the effect of the settlement and the meaning of “payable” in sections 95(2) and 95A(2).

1. Application dismissed. The accepted Part 36 offer required HMRC to withdraw the amendments. It did not expressly provide that HMRC would abandon any power to make a penalty determination.
2. The applicant’s argument confused the purpose and effect of the agreement. Even if the applicant intended withdrawal to eliminate any penalty, the legal consequence depended on the construction of sections 95(2) and 95A(2) of the Taxes Management Act 1970, not on the parties’ purpose. The covering letter also expressly reserved HMRC’s position on penalties.
3. The court accepted, for present purposes, the submission that paragraph (b) concerned the tax which would have been payable if the original returns had been correct. HMRC’s later acceptance of that construction removed that issue from contention.
4. The meaning of “payable” in paragraph (a) remained substantially arguable. Tax paid under a settlement might be treated differently from tax quantified by assessment, and the court was not satisfied that the applicant’s construction was clearly correct. The discussion of The Director of the Assets Agency v M [2007] EWHC 908 did not resolve the point.
5. The statutory scheme provided for an appeal against the penalty determination to the Special Commissioners, and that appeal had been commenced. It would generally subvert the statutory allocation of functions for the High Court to decide at first instance an issue properly within the Commissioners’ jurisdiction, except in the clearest case. No such case was established.

• Special Commissioners: dismissed the firm’s appeal against amendments to its partnership tax returns in a decision dated 7 December 2006.
• High Court (Chancery Division): the firm appealed to the High Court and sought declaratory relief concerning the Part 36 settlement. The application was dismissed.