A special commissioner decided that penalties properly charged for the late filing of returns were not excessive and not disproportionate so as to infringe the taxpayer's human rights.

Facts

The taxpayer, having been late in filing its tax returns for the two preceding periods, was 21 months late in filing its tax return for the period ending 30 June 2000 and nine months late in filing its return for the following period ending 30 June 2001. As a result it incurred fixed penalties of £1,000 for the late filing of those third and fourth returns. No appeal was made against the smaller penalties incurred in the earlier two years. The taxpayer had no taxable profits in the two periods for which the £1,000 penalties were imposed. The taxpayer conceded that the penalties had been properly charged under the terms of the Taxes Management Act 1970 and the Finance Act 1998. It conceded that the domestic tax legislation prescribed fixed penalties of £1,000 for the late filing of the two returns, and that it had no reasonable excuse for the delay in filing either of the two returns within TMA 1970, s. 118(2).

The taxpayer contended that the penalties breached the taxpayer's rights under art. 1 of the First Protocol to the European Convention on Human Rights (ECHR). The Revenue contended that the penalty structure of TMA 1970 and FA 1998 were consistent with the terms of the ECHR.

The taxpayer argued that fixed penalties impacted more onerously on small companies with modest assets than on large profitable companies, and in particular they impacted disproportionately when imposed on companies with no tax liabilities, so that the implicit principle of requiring penalties to be proportionate was breached; the fixed penalty in the present case was excessive to compensate the tax collecting authority for its loss, since there had been no loss as the taxpayer had no tax liability for either of the periods in contention; and that it was unfair that companies that continued in existence had to pay penalties for late filings, etc., when companies that were struck off the Register of Companies would escape without paying their penalties. The Revenue contended, inter alia, that, although the imposition of the fixed penalties on the taxpayer deprived it of some of its property, that could be justified if it was in the public interest, and subject to the conditions imposed by law. The central question was one of proportionality, requiring any interference with the protected rights to achieve a fair balance between the demands of the general interest of the community and the requirements of the protection of the individual's rights.

Issue

Whether the penalties would have been wrongly charged as a matter of UK law if the commissioner had concluded that the penalties were charged in accordance with the UK tax statutes, but that they nevertheless infringed the taxpayer's human rights; and whether the commissioner had any jurisdiction to give any remedy if he reached the conclusion that the penalties charged breached the taxpayer's human rights.

Decision

The special commissioner (Howard M Nowlan) (dismissing the appeal) said that the decisive point was what had to be balanced in judging whether the deprivation of property survived the ‘proportionality’ test. It was not enough merely to suggest, as the taxpayer did, that a fixed penalty impacted more adversely on a taxpayer with fewer assets than on one with more assets. The factors that had to be balanced were whether the deprivation of property was justified because it was effected under legislation that was in the public interest and that was required for the collection of taxation and penalties. The Revenue had amply demonstrated that some form of modest fixed penalties were a sensible and required feature of the taxation system; the penalties were extremely modest; there were several safeguards to deal with postal delays, and reasonable excuse; and the penalties only rose from figures of £100 and £200 to still very modest figures of £500 and £1,000 for companies which could fairly be described as ‘persistent offenders’.

If the imposition of fixed penalties infringed a taxpayer's Convention rights, then that act of imposing the penalties would be unlawful unless the Revenue could establish both that ‘they could not have acted differently’, and that they could not have ‘interpreted the tax legislation in such a way as to avoid the incompatibility between the domestic tax legislation and the Convention rights’. The existence of the Board's unfettered discretion under s. 102 to mitigate or remit a penalty plainly meant that an imposition of penalties that infringed a taxpayer's human rights under the Convention would be ‘unlawful’.

That consequence enabled the general or special commissioners to set aside an unlawful penalty under the Human Rights Act 1988. The effect of s. 6 of the Act was that the Revenue should have remitted any such penalty under TMA 1970, s. 102 in order to avoid the incompatibility between the fixed penalty and the taxpayer's human rights, and it therefore seemed appropriate to say that the penalty had not properly been incurred or that its amount was incorrect within s. 100B(2)(a).

The commissioner had considered all the matters debated at the hearing as to whether the penalties in this case did or did not infringe the taxpayer's human rights. The conclusion was that they did not and the appeal was therefore dismissed.

Where human rights were infringed, it was the discretion under TMA 1970, s. 102 that resulted in the imposition of the penalties becoming unlawful, which then brought the matter back within the jurisdiction of the general and special commissioners. Where a taxpayer wished to contend that the Board had wrongly failed to exercise its discretion to remit penalties without there being any suggestion that the taxpayer's human rights had been breached, it followed that the matter of discretion was not one on which the general or special commissioners could comment, and the taxpayer could only seek redress by applying for judicial review.

(2007) Sp C 588.
Decision released 27 January 2007.