PENALTY – daily penalties for non-compliance with section 20 TMA notice – penalties confirmed with costs and penalty for non-compliance with the Tribunal’s Directions

THE SPECIAL COMMISSIONERS

	RJ MORRIS AND MJ MORRIS	Appellants

	- and -

	ANN ROBERTS	Respondent

		Special Commissioner:	DR JOHN F AVERY JONES CBE

Sitting in public in London on 25 March 2004

Fred Philpott, counsel, instructed by Howell & Co for the Appellant

Sam Grodzinski, counsel, instructed by the Solicitor of Inland Revenue for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	This is an appeal by Mr and Mrs R J Morris against two sets of daily penalties for failure to comply with Notice under section 20 of the Taxes Management Act 1970 of £5,250 imposed on each Appellant on 31 October 2002 and £13,260 imposed on each Appellant on 9 June 2003.  The Appellants were represented by Mr Fred Philpott and the Inspector by Mr Sam Grodzinsaki.
2.	I find the following facts:
(1)	Since starting an investigation into the Appellants’ 1997/98 tax returns in March 1999, Special Compliance Office, Birmingham has been investigating the liability to tax of a capital gain made by the Appellants in October 1997 of £20.3m.
(2)	The Appellants’ tax returns for 1997/98 claimed that they were non-resident and not ordinarily resident but no claim was made about residence under a tax treaty.  The Inspector doubted this and obtained details of mobile telephone and credit card use which suggested that Mr Morris was in the UK for 212 days in 1996/97 and 126 days in 1997/98 (up to 29 October 1997), and Mrs Morris 196 days in 1996/97 (from 22 July 1996) and 173 days in 1997/98 (up to 18 October 1997).
(3)	At a meeting on 20 February 2002 the Appellants’ advisers claimed that they were non-resident (I shall use this expression to include not ordinarily resident) but even if they were, they were dual residents and the effect of the UK-Spain tax treaty was that the capital gain was taxable in Spain only.
(4)	On 11 April 2002 the Inspector applied to the Birmingham Central General Commissioners for consent to issue a Notice on the Appellants under section 20 of the Taxes Management Act 1970.  The summary of reasons pursuant to section 20(8E) stated:
“The reason for applying for consent is that I believe the particulars and documents detailed in the Notice may contain information that will help establish whether or not you were resident in the United Kingdom for tax purposes in the years 1996/97 and 1997/98.  Whether or not you were resident in the United Kingdom for tax purposes will help to determine the extent of your liabilities (if any) to Income Tax and Capital Gains Tax during those years.”
(5)	In summary, the section 20 Notice required particulars of the days spent in the UK from 6 April 1996 to 5 April 1998 including the dates of arrival and departure, the purpose of the visit and the address of the accommodation used.  In addition it required the production of all underlying paperwork used to compile the schedule of visits, and for the same period business and private diaries, statements of all accounts with any financial institution, itemised telephone bills and a copy of their passports.
(6)	The only information given about the Appellants’ days in the UK consists of a letter from the Appellants’ solicitors Messrs Howell & Co of 28 October 1999 answering a request for details of 71 days spent in the UK with a list with totals 69 days but does not give dates of arrival and departure as requested.  On 15 May 2000 they stated that the schedule previously provided was incorrect and promising another after visiting the Appellants in Spain.  On 23 July 2001 they stated in a letter to the Inspector that they had “perused and considered literally thousands of documents with a view to finding corroboration of our clients’ movements” and had compiled a draft schedule of dates.  In a letter of 15 August 2003 they also refer to much of the evidence for the preparation of the schedule being live evidence from independent witnesses.  None of this has been produced.
(7)	At a meeting on 5 July 2002 the Appellants’ representative enclosed a letter from a Spanish lawyer stating that residence in Spain for tax purposes was established by 183 days presence in Spain (excluding sporadic absences) or centre of activities or economic interests in Spain, and stating that the Appellants were resident in Spain under the 183 day rule.
(8)	At a meeting of the General Commissioners on 17 July 2002 the Appellant’s advisers conceded that he was resident in the UK as a matter of internal law (I shall use this expression as a shorthand to mean under UK tax law excluding the tax treaty) for 1996/97 and 1997/98 but again stated that the tax treaty gave taxing rights to Spain. The General Commissioners issued a penalty of £300 for not complying with the notice.
(9)	 The Appellant appealed to the High Court but on 6 May 2003 entered into a consent order dismissing the appeal.  The validity of the section 20 was therefore established.
(10)	On 31 October 2002 pursuant to section 100 of the Taxes Management Act 1970 the Inspector imposed penalties of £50 per day from 18 July 2002 to 30 October 2002, a total of £5,250 on each Appellant for failure to comply with the section 20 Notice.
(11)	In his witness statement Mr Lewis, the Inspector, stated that he still wanted the information required by the section 20 Notice which he considered could be relevant to the Appellants’ tax liability.  In particular residence in the UK was not a mater of concession but of fact and law; that there was insufficient evidence of residence in Spain for tax purposes; and he had insufficient information to establish residence under the tax treaty, in particular whether they had a permanent home available in the UK.  Mr Philpott did not seek to cross-examine Mr Lewis and I accept all his evidence.
(12)	On 4 April 2003 a certificate from the Spanish tax authority was produced which in translation says:
“The Tax Authorities of Spain certify that to the best of their knowledge [the Appellant] is a resident of Spain.  According to our provincial database and the files held by this authority, income tax returns for the tax years 1997, 1998, 1999, 2000 and 2001 are on record as having been filed.
Mr Lewis’ witness statement states that the Spanish tax authority has informed him that the tax return for 1998 was filed as a non-resident of Spain, and the documents produced show that they did not consider the Appellants to be resident in the period 1996 to 1999.
(13)	On 9 June 2003 the Inspector imposed further penalties of each Appellant at £60 per day for the period 31 October 2002 to 8 June 2003, a total of £13,260 on each Appellant for failure to comply with the section 20 Notice.
(14)	The present position is that the section 20 Notice has still not been complied with; no claim for relief under the tax treaty has been made, and no assessment made in respect of the capital gain.
3.	Section 20 of the Taxes Management Act 1970 provides:
“(1) Subject to this section, an inspector may by notice in writing require a person—
(a)	to deliver to him such documents as are in the person’s possession or power and as (in the inspector’s reasonable opinion) contain, or may contain, information relevant to
(i)	any tax liability to which the person is or may be subject, or
(ii)	the amount of any such liability, or
(b)	to furnish to him such particulars as the inspector may reasonably require as being relevant to, or to the amount of, any such liability….”
Section 100B(2)(b) provides:
 “…on any appeal against the determination of a penalty under section 100 above section 50(6) to (8) shall not apply but…
(c)	in the case of any other penalty, the Commissioners may—
(i)	if it appears to them that no penalty has been incurred, set the determination aside,
(ii)	if the amount determined appears to them to be appropriate, confirm the determination,
(iii)	if the amount determined appears to them to be excessive, reduce it to such other amount (including nil) as they consider appropriate, or
(iv)	if the amount determined appears to them to be insufficient, increase it to such amount not exceeding the permitted maximum as they consider appropriate.
I should also mention, without needing to set it out, that the UK-Spain tax treaty (SI 1976 No.1919) has a dual residence article in normal form of the OECD Model Tax Convention under which an individual’s dual residence (under each state’s internal law) is resolved in favour of one state for the purposes of the treaty under a series of tests, commonly called the tie-breaker, the first of which is “he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him.”  The effect is that while the individual remains a dual resident, for any tax treaty purpose he is a resident only of the state resolved by the tie-breaker.  The tax treaty is part of UK tax law by virtue of section 788 of the Taxes Act 1988 but any relief must be claimed by the taxpayer.
4.	Section 20 is an information power enabling the inspector to obtain information in order to decide whether tax is payable.  Not surprisingly there is a low threshold: documents as (in the inspector’s reasonable opinion) contain, or may contain, information relevant to the person’s tax liability, and particulars as the inspector may reasonably require as being relevant to the person’s tax liability.  The question for me is whether at the time of imposing each of the daily penalties the particulars and documents required by the Notice, are such as in the Inspector’s reasonable opinion, contain, or may contain, information relevant to the Appellants’ tax liability to which the Appellant is or may be subject, and the particulars required are such as the inspector may reasonably require as being relevant to the Appellant’s tax liability.
5.	Mr Philpott for the Appellants contends that as the Appellants have conceded that they are resident in internal law the documents and particulars are no longer relevant.  The letter explaining the reasons for issuing the section 20 Notice state that the documents and particulars are for the purpose of determining “whether or not you were resident in the United Kingdom for tax purposes in the years 1996/97 and 1997/98,” which in the context means residence in internal law, a matter which the Appellants concede.  Accordingly the penalty cannot stand.
6.	Mr Grodzinski for the Inspector contends that the documents and information were at the time of the issue of each of the daily penalties reasonably required by the inspector to determine the Appellants’ residence both under internal law and under the tax treaty.  In particular Mr Lewis’s witness statement states the reason for asking questions about accommodation was to establish whether the Appellant had a permanent home available to him for the purpose of applying the tax treaty.  He points to the presumption of regularity applying to the Inspector’s acts, see R v IRC ex p. TC Coombs & Co [1991] AC 283, R v IRC ex p. Archon Shipping Corp [1998] STC 1151, and R v IRC ex p. Taylor (No.2) [1989] 3 All ER 353.
Reasons for the decision
7.	It seems to me that Mr Philpott’s contention that the section 20 Notice is designed solely to obtain information for determining the Appellants’ residence in internal law, which residence is now conceded, is wrong on two grounds.  First, that the inspector is entitled, perhaps bound, to determine residence as a mater of fact and law regardless of any concession by the Appellants.  Secondly, on its face the section 20 Notice plainly also asks for information relevant to the “permanent home available to him” tie-breaker test.  The questions about accommodation cannot since 1993/94 (see section 336(3) of the Taxes Act 1988) be relevant to residence under internal law and are plainly relevant to determining whether the Appellants have a permanent home available to them in the UK, as Mr Lewis explains in evidence that I accept.  Since residence in Spain is also in doubt the days spent in the UK may be useful to determine whether the Appellants really are dual residents and hence whether the tie-breaker will apply.  There is no need to apply the presumption of regularity; the reasonableness of the Inspector’s opinion of the relevance of the documents and particulars is clear.  A fair reading of the letter stating the reasons for applying for the section 20 Notice was that the Inspector wanted to determine the extent of the Appellants’ tax liabilities for which he needed to establish whether they were resident in the UK for tax purposes.  I do not accept Mr Philpott’s contention that residence in the letter means residence in internal law solely; the Inspector was not interested in residence in the abstract but needs to determine whatever residence status affects the tax liability which will include the tax treaty assuming that the relief is claimed.  Even if I had thought that the information was directed to residence under internal law, the information is still required to determine such residence as a matter of law.  The highest that Mr Philpott can put his case is therefore that the focus of the Notice may have changed since 17 July 2002 to the internal law residence being less important and the tax treaty test more important, but both are still relevant.  I should add that there seems to be no problem about answering the questions in the light of Messrs Howell & Co’s statements about the amount of work they have already done in preparing the answer.  
8.	The only factual difference between the Inspector’s knowledge at the time of imposing the two sets of penalties is that by the time of the second the certificate from the Spanish tax authority had been produced.  In my view the Inspector was justified in considering that the certificate was useless.  It says that the Appellant is resident (in the present) which is not relevant, and that tax returns are held for the relevant years, which the tax authority has informed the Inspector were filed as non-residents of Spain.  It follows that there are no different considerations affecting the two sets of penalties.
9.	Accordingly I consider that the documents and information required by the section 20 Notice are within the scope of section 20 in that it requires documents which in the Inspector’s reasonable opinion may contain information relevant to the Appellants’ tax liability and particulars that the Inspector reasonably requires as being relevant to their tax liability when considered at the time of the issue of each of the daily penalty notices.  Despite Mr Philpott contending that the penalty should be mitigated I do not see any grounds for any mitigation of the penalties.  They should be seen in the light of the possible tax liability of about £7m.  Accordingly I consider that the penalties are appropriate and I dismiss the appeal and determine the penalties in the amounts issued.
10.	Standing back, I draw attention to this being a case where the Appellants made a capital gain of about £20m in 1997/98 on which the tax, if it is payable is about £7m.  Questions which the Inspector first asked in March 1999 when opening the enquiry and subsequently contained in the section 20 Notice issued in April 2002, the validity of which was conceded by the Appellants by abandoning their appeal to the High Court against the original penalty, designed to determine whether the Appellants were resident, are still unanswered.  If, as seems possible, residence will need to be determined by the application of the tie-breaker in the tax treaty, that claim has still not been made by the Appellants.  Surely the time has come to determine whether tax is payable.
11.	Mr Grodzinski invited me to impose a penalty under Regulation 24 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 for the Appellants’ failure to comply with Directions issued by the Tribunal on 27 October 2003 and 4 March 2004.  The first Directions provided for various steps to be taken by the parties between 31 October 2003 and the appeal which was to be set down on the first available date after 1 January 2004.  The Directions included that the Appellants would serve and indexed bundle of documents by 31 October 2003, and would serve a draft statement of facts and issues in dispute by 14 November 2003.  The Tribunal issued these understanding that they were agreed but Messrs Howell & Co wrote on 14 November 2003 stating that they were not agreed, but failed to make any representations for changes despite letters from the Tribunal of 19 November 2003, 8 December 2003, and 6 January 2004, until 25 February 2004 when they proposed revised Directions to which the Respondent objected.  The Tribunal issued further Directions on 4 March 2004 in place of the original ones setting out steps to be taken before the hearing on 25 March including serving an indexed bundle of documents by 3 March 2004 (which although this is before the date of issue of the Direction was the date contained in the Appellants’ draft of revised directions) and a statement of facts and issues by 5 March 2004.  The Appellants ignored every direction.  The Respondent provided a bundle of documents.  What is particularly inconvenient, both to the Respondent and the Tribunal, is that the Appellants never set out th eissues in dispute.  As long ago as 29 April 2003 Howell & Co stated in a letter to the Inspector that if they continued with these appeals they would provide detailed grounds of appeal.  The first Directions required a statement of the issues in dispute by 14 November 2003 and the second Directions by 5 March 2004.  A question for determination was provided by Messrs Howell & Co on 25 February 2004 but it is completely different from the case put forward at the hearing.  In consequence Mr Grodzinski’s skeleton dated 23 March 2004 contained statement such as the following: “It is thus impossible at present to discern with any certainly what their [the Appellants’] case is, in particular given the several occasions on which, in the past, they have changed their position in correspondence as to why there was no need to comply with the Notices by providing the information sought therein….  In the circumstances, the present Skeleton Argument cannot deal in detail with arguments that have yet to be made….  The Respondent will endeavour to address any further argument from the Appellants at the hearing.”  The first time the Appellants’ case was disclosed was in Mr Philpott’s skeleton about the day before the hearing.  The Special Commissioners try hard to avoid this sort of problem by issuing Directions in almost every case.  In the light of the Appellants’ total non-compliance with the Directions I award a penalty of £500.
12.	Mr Grodzinski asked for costs.  He contended that the Appellants had used the proceeding as a delaying device.  Mr Philpott constended that although thee had been a failure to comply with the Tribunal’s Directions this had not increased the costs.  Part of his change of position had been as a result of reading Mr Lewis’s witness statement and Mr Grodzinski’s skeleton and the Appellants should not be penalised in costs by accepting part of the Inspector’s arguments.  Mr Grodzinski replied that there was nothing new to the Appellants in the skeleton and witness statement.  
13.	My power to award costs against a party is limited by rule 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 to cases where the Tribunal “is of the opinion that the party has acted wholly unreasonably in connection with the hearing in question.”  I consider that, in particular by not stating in advance until Mr Philpott’s skeleton the basis their case, Messrs Howell & Co having promised this in April 2003, and by not complying with the Tribunal’s Directions for the preparation of the case, the Appellants have acted wholly unreasonably in connection with the hearing, resulting in Mr Grodzinski not being able to deal with the Appellant’s case in his skeleton and having to include matters in his skeleton that were subsequently found not to be in dispute.  The issue is not that Mr Philpott changed his arguments after reading Mr Grodzinski’s sleleton but that he did not disclose the nature of his case before Mr Grodzinski’s skeleton.  Accordingly I award the Inspector the costs of and incidental to the hearing of these proceedings, the amount to be determined in accordance with Regulation 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994.
14.	In summary (1) I confirm the penalties in the sums of £5,250 plus £13,260 on each of the Appellants, (2) I award a penalty of £500 against the Appellants for failure to comply with the Tribunal’s Directions, and (3) I award the Respondents the costs of and incidental to the hearing. 

J F AVERY JONES

SPECIAL COMMISSIONER

SC 3102-3/03

Authorities referred to in skeletons and not referred to in the decision:
R v IRC ex p. Ulster Bank (1997) 69 TC 211
Kempton v Special Commissioners and IRC [1992] STC 823