PML: Beware Agreements to Settle an Appeal

The Court of Appeal recently considered the importance of decisions underlying a penalty issued to a taxpayer by the Revenue in R (oao PML Accounting Limited) -v- The Commissioners for HM Revenue and Customs [2018] EWCA Civ 2231.

PML Accounting Ltd (“PML”), is a managed service company provider offering financial services to small companies, including preparation of accounts and financial records, PAYE and VAT registration, tax computation, and tax returns for contractors and consultants.

PML were issued by HMRC with an information notice under Schedule 36, para. 1 to the Finance Act 2008. The notice required PML to provide to HMRC documentation for a sample of its clients, purportedly so that HMRC could check if PML’s clients were managed service companies (“MSC”) and whether PML was an MSC provider.

PML appealed, but only against the time they had been given by HMRC to comply with the notice and the appeal was eventually compromised because HMRC agreed to extend the time.

When the information requested was eventually provided HMRC concluded that it was incomplete and issued daily penalty notices.  This led to a second appeal, this time against the penalty notices.  At this appeal the FTT concluded that the original information notices had been invalid because it did not relate to the tax position of PML, but to that of its clients.  The FTT held that there could therefore be no penalties. In an additional finding the FTT held that HMRC were in possession of documents and information to which they were not entitled i.e. the material that had been provided in response to the information notice and stated that HMRC should return them to PML, noting that it had no power to require HMRC to do so.  HMRC did not seek permission to appeal this decision.

HMRC later returned all the material provided by PML pursuant to the information notice, but retained work product that had derived from it. PML brought judicial review proceedings claiming that HMRC were required to delete or destroy the work product and to undertake not to use it for any future purpose, which HMRC had refused to do.

HMRC defended the claim on the basis that the FTT in the penalties appeal had no jurisdiction to consider the validity of the information notice. The High Court (Sir Ross Cranston) agreed and dismissed the claim for judicial review, finding that it was not improper for HMRC to retain the work product and that the original agreement to an extension of time between PML and HMRC to comply with the information notice amounted to an agreement that the notice was valid, s.54 Taxes management Act 1970 applied. PML appealed to the Court of Appeal.

Dismissing the appeal the Court of Appeal (Longmore LJ, Henderson LJ, Jackson LJ) held:

1. Schedule 36 did not envisage two separate appeals on the validity of the notice, there could only be one appeal. The original appeal against the time to comply with the notice, did not include a challenge to the validity of the notice and the agreement to extend time brought the appeal to an end.  He did state that a taxpayer was not precluded from seeking to amend its appeal to include another ground, either under the statutory 30 days or under the relevant late appeal provisions (Henderson LJ dissenting).
2. The validity of the notice had been determined by the s.54 agreement. It was a deemed determination of the issue and operated as either an estoppel per rem judicatem or an issue estoppel precluding any further challenge to the validity of the notice (Henderson LJ dissenting).
3. HMRC had been entitled to argue that the tribunal had no jurisdiction to determine the validity of the notice. There was no estoppel in the judicial review proceedings because those proceedings were an entirely different set of proceedings, with different parties, because the Crown took the place of PML in the exercise of its supervisory power

The following lessons can perhaps be learned:

1. Care must be taken before mounting any appeal to identify the precise notice or decision that is being challenged. In the current case any point in respect of the actual validity of the notice was missed.
2. If an appeal is compromised by way of an agreement between the parties, the appeal is brought to an end, the notice is deemed to be valid, thereby precluding any future appeal.
3. Lord Justice Henderson, dissenting, found it would an ‘extremely harsh regime’ if at the very early stage of appealing against an information notice a taxpayer was compelled to raise all possible grounds of appeal. The door may not be entirely closed on future appeals made on this basis. 

Jonathan Kinnear QC leads the tax group at 2 Hare Court and is regularly instructed on the most complex revenue cases involving indirect tax disputes. Laura Stephenson similarly accepts instructions in respect of indirect tax disputes involving matters of VAT.