Stockler v HM Revenue and Customs

For calculating the cap on a penalty for an incorrect return, a binding settlement may establish the amount of tax payable even though the settlement creates a contractual debt and the relevant assessment has been withdrawn. The settlement’s legal character for recovery purposes does not prevent the agreed amount from being used in the statutory comparison. Omitting an express penalty term does not, without more, remove HMRC’s statutory power to impose a penalty.

The appellant, a solicitor and representative partner, challenged a penalty determination raised by HMRC after the partnership settled earlier tax litigation. The partnership had made a Part 36 offer to pay the aggregate amount of income tax assessable on the partners following the Special Commissioners’ decision, together with statutory interest and costs. HMRC accepted the offer and withdrew the amendments to the partnership returns, but no consequential amendments were made to the individual partners’ returns. The Special Commissioner and the High Court dismissed the challenge: [2009] EWHC 2306 (Ch). The central issue was whether the agreed sum could count as tax payable for calculating the maximum penalty under section 95 of the Taxes Management Act 1970, notwithstanding that it was recoverable only as a contractual debt.

By a majority, the appeal was dismissed. Mummery LJ and Sir Mark Waller held that HMRC retained power to raise the penalty determination under section 95 of the Taxes Management Act 1970. Lloyd LJ dissented.

1. Statutory purpose and structure. Section 95 creates liability to a penalty where a person fraudulently or negligently makes an incorrect return. Section 95(2) calculates the ceiling by comparing the tax payable on the actual basis with the tax that would have been payable if the return had been correct. An operative assessment is not required before that comparison can be made.
2. Effect of the settlement. The Part 36 settlement did not expressly include or exclude penalties. Its omission of a penalty term did not prevent HMRC from exercising the statutory power. The agreed sum represented the aggregate amount of tax and statutory interest payable for the relevant years. Although recovery proceeded as a contractual debt after the amendments were withdrawn, that cause of action did not determine the sum’s relevance to the separate penalty calculation.
3. IRC v Woollen. The majority accepted the correctness of the decision that settlement sums were contractual debts rather than assessed income tax for preferential-creditor purposes. However, that context-specific conclusion did not govern the different question under section 95. The decision was not a direct authority requiring the agreed sum to be excluded from the penalty-cap calculation: [1992] STC 944.
4. Dissent. Lloyd LJ would have allowed the appeal. He considered that, following IRC v Nuttall and IRC v Woollen, the agreed sum was a contractual debt and not tax. Because the relevant amendments had been withdrawn and no individual assessment could be made, he would have held that the sum could not count under section 95(2)(a), leaving a maximum penalty of nil.

The appeal was dismissed.

1. Court of Appeal (Civil Division): Appeal dismissed by a majority. Mummery LJ and Sir Mark Waller agreed with the decisions below; Lloyd LJ would have allowed the appeal.
2. High Court, Chancery Division: Sir John Lindsay dismissed the appeal from the Special Commissioner: [2009] EWHC 2306 (Ch).
3. Special Commissioners: Mr John Clark held that HMRC had power to raise the penalty determination. The decision is identified as Spc00739.
4. High Court, Chancery Division: Warren J refused an application to prevent HMRC from levying penalties, holding that the proper course was an appeal to the Special Commissioners: [2007] EWHC 2967 (Ch).