Beadle v HM Revenue and Customs

A person facing enforcement action may generally challenge the validity of an antecedent public law decision by way of defence. That right may, however, be excluded by the clear and necessary implication of the governing statutory scheme, construed as a whole and in light of its context and purpose.

The partner payment notice regime under the Finance Act 2014 excludes collateral challenges to a notice during penalty or enforcement proceedings. The First-tier Tribunal therefore has no jurisdiction to determine a notice’s public law validity on a penalty appeal. A taxpayer’s belief that the notice is unlawful, even if reasonable and based on professional advice, does not constitute a reasonable excuse for withholding the required interim payment or a special circumstance warranting reduction of the penalty.

The appellant participated through a limited liability partnership in film investment arrangements which were treated as disclosed tax avoidance arrangements. After the partnership’s claimed trading loss was reduced to nil, HMRC issued the appellant with a partner payment notice requiring approximately £100,000. He made representations to HMRC but neither paid by the extended deadline nor sought judicial review. HMRC imposed a five per cent penalty, after which he paid the sum demanded.

The First-tier Tribunal held that it lacked jurisdiction, on the penalty appeal, to determine the validity of the underlying notice. It also rejected the appellant’s reasonable-excuse and special-circumstances arguments. The Upper Tribunal dismissed appeals from both decisions in [2019] UKUT 0101 (TCC).

The central issue before the Court of Appeal was whether the appellant could challenge the notice collaterally in his penalty appeal and, if not, whether his actual or perceived grounds for disputing the notice could nevertheless constitute a reasonable excuse or special circumstances.

1. The appeal was dismissed unanimously. The First-tier Tribunal and Upper Tribunal correctly concluded that the validity of the partner payment notice could not be challenged in the penalty appeal.

2. Where a public body brings enforcement proceedings, the rule of law and fairness generally permit the defendant to challenge the validity of the enforcement decision or an antecedent administrative decision on public law grounds. That principle does not apply where the relevant statutory scheme circumscribes the available methods of challenge. Exclusion need not be expressed in particular words. It may follow by clear and necessary implication when the scheme is construed as a whole, having regard to its context, purpose and the nature of the rights affected.

3. The Finance Act 2014 partner payment notice scheme excluded collateral challenges at the penalty and enforcement stages. Its purpose was to remove the cash-flow advantage enjoyed by participants in disputed avoidance arrangements pending final determination of the underlying tax liability. Permitting a taxpayer to retain the disputed sum while pursuing a collateral challenge through penalty proceedings would subvert that purpose and create, in substance, an appeal against the notice which Parliament had deliberately omitted.

4. A partner payment notice is an interim measure. It determines who holds the disputed sum pending resolution of the underlying tax dispute, rather than determining the tax ultimately due. Full appeal rights remain available in respect of the partnership’s underlying tax liability. A recipient may also make representations to HMRC under Schedule 32, paragraph 5, and may challenge HMRC’s decision by judicial review. These routes provide a clear and ample opportunity to contest the notice.

5. The First-tier Tribunal also made no error concerning reasonable excuse or special circumstances. A reasonable taxpayer who disputes a partner payment notice must make the interim payment and pursue the available challenge separately. A belief that the notice or underlying liability is unlawful, even if reasonable and based on professional advice, neither excuses non-payment nor constitutes a special circumstance warranting reduction of the penalty. If the substantive challenge succeeds, the taxpayer is entitled to repayment through the statutory arrangements.

• Court of Appeal (Civil Division): In [2020] EWCA Civ 562, unanimously dismissed the taxpayer’s appeal and affirmed that the First-tier Tribunal lacked jurisdiction to entertain the collateral challenge.

• Upper Tribunal: In [2019] UKUT 0101 (TCC), dismissed appeals from both First-tier Tribunal decisions. It held that the statutory scheme excluded a collateral challenge by necessary implication and upheld the rejection of reasonable excuse and special circumstances.

• First-tier Tribunal: Judge Jonathan Richards held that the tribunal lacked jurisdiction in the penalty appeal to determine the validity of the underlying partner payment notice. Judge Rupert Jones subsequently dismissed the substantive penalty appeal, rejecting reasonable excuse and special circumstances.