Tribunal quashes HMRC appeal to charge £14m tax penalty

Tribunal quashes HMRC appeal to charge £14m tax penalty

Jun 7, 2024

In a blow for HMRC, the Upper Tribunal has struck out a demand to issue a multimillion pound penalty to a taxpayer over failure to comply with information notice

In this case, HMRC asked the Upper Tribunal to impose a tax-related penalty of £14,031,851.01 on Paul Baxendale-Walker under paragraph 50 of Schedule 36 of Finance Act 2008 (FA 2008) for failure to comply with an information notice request about his tax affairs.

The release of the judgment was delayed by nearly a year since the original hearing in July 2023 until Judge Mark Baldwin agreed to anonymise the name of the HMRC officer involved.

Schedule 36 gives HMRC powers to gather information for the purposes of checking a person’s tax position, including issuing information notices and imposing penalties for failure to comply.

Under the rules, an HMRC officer can issue a penalty if they have reason to believe that, as a result of the failure or obstruction, the amount of tax that the person has paid, or is likely to pay, is significantly less than it would otherwise have been.

Baxendale-Walker applied to strike out HMRC’s penalty application on the basis that the statutory pre-conditions for the imposition of such a penalty were not satisfied.

HMRC sent out the first information notice on 14 January 2022 to Baxendale-Walker and his accountants, Thomson Elphick Ltd, giving 60 days to provide the requested details. An extension was agreed until 29 March 2022 following a request by solicitors Morr & Co LLP.

When the solicitors asked for a further extension of two weeks on 28 March, HMRC refused this and issued a paragraph 39 penalty notice to Baxendale-Walker the following day on 29 March 2022.

On 5 May 2022 HMRC notified Baxendale-Walker of daily penalties of £1,350 under para 40 of Schedule 36. On 8 June 2022 further daily penalties of £1,800 were levied.

At the tribunal, Baxendale-Walker argued that a para 50 penalty could not be imposed by HMRC as there was an outstanding para 39 penalty under appeal, stating that ‘the requirement of paragraph 50(1)(a) will not be satisfied until the appeal against the paragraph 39 penalty has been concluded’.

HMRC rejected this argument, stating that ‘that the reference to a person who “becomes liable” to a paragraph 39 penalty, in paragraph 50(1)(a), must mean simply that liability has arisen due to non-compliance with an information notice, not that any consequent appeal has been determined. Any other construction would render the statutory scheme of penalties unworkable’.

Baxendale-Walker’s lawyer David Bedenham of Devereux Chambers refuted this, arguing that HMRC’s interpretation that paragraph 50(1)(a) is satisfied even where there is an extant appeal against the paragraph 39 penalty, ‘has the potential to cause procedural chaos and palpable unfairness’.

On the issue of the issuance of parallel penalties under para 39 and para 50, Judge Baldwin said: ‘Without doubt, parliament cannot have intended a person to be subjected to a paragraph 50 penalty whilst there was real doubt about whether one of the conditions to liability had been met… it is hard to see how imposing a paragraph 50 penalty could be appropriate before any live questions around the paragraph 39 liability had been finally determined.’

After the Judge questioned the reasonableness of HMRC issuing both penalty procedures,  HMRC’s lawyer, Howard Watkinson, also of Devereux Chambers, told the Upper Tribunal that if ‘a taxpayer is trying to delay complying with an information notice by appealing against a paragraph 39 penalty, “marking his card” by applying for a paragraph 50 penalty would serve to remind the taxpayer of the importance of complying with the information notice and the consequences of not doing so’.

HMRC then cited 2005 legislation to highlight the tax authority’s extensive powers to agree or impose a different period of time for compliance with a notice, stating that ‘section 9 of the Commissioners for Revenue and Customs Act 2005 (CRCA 2005) gives them this power.

‘It provides: “(1) The Commissioners may do anything which they think — (a) necessary or expedient in connection with the exercise of their functions, or (b) incidental or conducive to the exercise of their functions”.

This timing argument was rejected by the tribunal, with the Judge stating: ‘Paragraph 44 does not provide that HMRC may agree or impose a different time for compliance than the one in the notice.

‘I do not consider that it is implicit in paragraph 44 [of Schedule 36] that HMRC can extend time for compliance; quite the contrary, the time for compliance remains fixed in the notice, but HMRC can waive their right to impose a penalty. If section 9 CRCA 2005 gives HMRC the power they assert, paragraph 44 would be redundant.’

HMRC’s processes came under criticism, with the Judge noting that ‘the problem for HMRC here is that the officer wrote to Baxendale-Walker before the end of the time for Baxendale-Walker to comply with the information notice and told them that he was charging a penalty’.

This meant that ‘the assessment was made before the liability arose’.

The Judge added that ‘the information notice as served must be exactly the same as the information notice approved by the tribunal, that would be a further reason why HMRC’s application would have to fail’.

In conclusion, he ruled: ‘Notwithstanding Mr Baxendale-Walker’s clear failure to comply with the information notice, the only conclusion open to me is that HMRC’s application for a paragraph 50 penalty has no reasonable prospect of success.’