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OUTER HOUSE, COURT OF SESSION
[2006] CSOH 123
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OPINION OF LADY PATON
in the cause
THE ADVOCATE
GENERAL
FOR SCOTLAND
Pursuer;
against
DENNIS HENRY
MONTGOMERY
Defender:
________________
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Pursuer:
Artis, Advocate; H.M. Milne, Solicitor (Scotland) H.M.
Revenue and Customs
Defender: P.J.D. Simpson, Advocate; Turcan Connell
8 August 2006
Introduction
[1] In
this action the Advocate General for Scotland on behalf of the Commissioners
for Her Majesty's Revenue and Customs ("the Revenue") seeks payment from a
taxpayer of (1) income tax of £305,455.63; (2) interest thereon of £271,669.24;
(3) surcharges of £14,023.12; and (4) interest thereon of £417.77.
[2] During
a debate on 26 and 27 April 2006, the Revenue sought decree de plano in respect of all four sums,
failing which, all sums except interest of £271,669.24 as second concluded for
(which would go to proof). The defender
opposed decree de plano, arguing that a proof before answer at
large was required. The defender also
argued that the claims for surcharges and interest thereon were irrelevant and
should be excluded from probation.
Income tax for years 1988-89 to 1995-96
[3] The
defender is an American citizen. He
lives in Appin, Argyll. During the 1980s
and 1990s, he worked for a company called Inexco Limited ("Inexco"). As Inexco was incorporated in the Channel Islands, it was not obliged to
operate the "Pay As You Earn" (PAYE) system in respect of income tax in terms
of the Income Tax (Employments) Regulations 1973 and 1993. Accordingly the defender received payments
from Inexco without any deduction in respect of income tax.
[4] The
Revenue issued several assessments relating to the defender for the years
1983-84 to 1995-96. The assessments were
alternative - either Schedule D (self employed) or Schedule E
(employed). The defender appealed the
assessments. By a determination dated 6 July 2004, the General Commissioners for the Division of
Edinburgh North held that the pursuer had not made Schedule D profits, but had
received Schedule E emoluments during the tax years 1988-89 to 1995-96. The General Commissioners determined the
income tax due as follows:
" Income
tax
Emoluments Amount
paid remaining payable
Year and Benefits Amount due to account and unpaid
1988/89 £ 88,333.00 £30,781.64 £23,499.32 £ 7,282.32
1989/90 £108,834.00 £34,531.67 £ 7.48 £
34,524.19
1990/91 £114,982.00 £35,952.55 - £ 35,952.55
1991/92 £120,000.00 £42,381.81 - £ 42,381.81
1992/93 £125,000.00 £44,180.44 - £ 44,180.44
1993/94 £130,000.00 £44,925.33 - £ 44,925.33
1994/95 £135,000.00 £47,205.09 - £ 47,205.09
1995/96 £140,000.00 £49,003.90 - £ 49,003.90
£305,455.63"
The total of £305,455.63 is the sum first concluded
for.
[5] The
defender appealed to the Court of Session.
A case was accordingly stated, and a hearing arranged for December
2005. The defender then abandoned his
stated case.
Payments to account, and
attribution of those payments
[6] The
defender avers in Answer 2 that he has made certain payments to account:
"Explained and averred that
the defender has made the following payments to the pursuer in respect of the
tax liabilities to which the present proceedings relate:
Date Amount
(£)
20th
May 1999 100.63
20th
October 1999 100.39
24th
November 1999 50,000.00
15th
March 2000 100.36
16th
October 2000 100.00
20th
July 2001 100.00
28th
August 2001 102.42
20th
March 2002 3,626.04
27th
September 2002 212.90
30th
January 2003 18,440.02
27th
August 2003 20,000.00
2nd
October 2003 20,000.00
29th
October 2003 20,000.00
27th
November 2003 5,000.00
Accordingly, the defender
has paid £137,882.76 to the pursuer in respect of the amounts sought by the
pursuer in these proceedings. These sums
fall to be deducted from the amount first concluded for. As hereinafter condescended upon, the payment
of these sums also requires the amount of interest and surcharges sued for to
be decreased."
[7] In
Article 2 of Condescendence, the Revenue admits that the defender has made
payments totalling £137,882.76. The
Revenue explains that those payments have been:
"taken into account in
calculating the defender's liability to the pursuer as follows: (1) to discharge the defender's liability for
fixed penalties and interest thereon for the years 1997/98, 1998/99, 1999/00
and 2000/01, the total liability being £816.70, payments made in May and
October 1999 totalling £201.02, the payments in March and October 2000 totalling
£200.36, the payments in July and August 2001 totalling £202.42, and the
payment in September 2002 of £212.90; (2) of the payment of £50,000 in
November 1999, (a) £23,499.32 has been allocated to the defender's
Schedule E liability for 1988/89 as set out in Article 2, (b) £1,500.68
has been allocated to the interest on said assessment for the period to 31
January 2001, and (c) £25,000 has been allocated against the tax liabilities of
the defender's spouse, as requested by the defender and as agreed by him at a
meeting attended by the defender, his accountant and Officers of Revenue and
Customs on 3 March 2005; (3) against self-assessment liabilities for the years
1996/97 to 2002/03, payments in March 2002, January 2003, August 2003, early
October 2003, late October 2003 (part) and November 2003 (part) totalling
£71,144.45; and (4) against surcharges and interest thereon for the years
1996/97 to 2000/01, part of the payments in late October 2003 and
November 2003 totalling £15,921.61.
A Schedule of Payments setting out the payments and allocations is
produced, referred to for its terms which are held as incorporated herein."
[8] In
Answer 2 as unamended, the defender does not admit those averments. In particular, he does not admit that he
requested that £25,000 be allocated against his wife's tax liabilities, and
that he agreed such an allocation at a meeting attended by himself, his
accountant and officers of Revenue and Customs on 3
March 2005. His response, as pled, is "Quoad ultra denied."
[9] A Schedule
of Payments number 6/17 of process (incorporated by reference in the pleadings)
gives further detail of the payments to account and their allocation. Paragraph 3 of the schedule notes:
"3. The
payment of £50,000 on 24 November 1999 has been credited as follows:
Assessment for 1988/89 £23,499.32 (see Cond 2)
Interest thereon to 31 January 2001 1,500.68
Against Mrs Montgomery's liability 25,000.00
£50,000.00"
Issues in dispute
[10] Counsel
for the defender accepted that certain sums in respect of income tax and
interest were due and owing by the defender to the Revenue. However, the following points were taken:
1.
The Revenue had wrongly allocated payments totalling
£71,144.45 against the self-assessment liabilities outlined in sub-paragraph
(3) in paragraph [7] above, as those self-assessment liabilities were currently
the subject of dispute in an appeal before the General Commissioners. The £71,144.45 accordingly fell to be
deducted from the income tax said to be due (i.e. £305,455.63, the sum first concluded
for).
2.
The Revenue, through its Compliance Officer, Steve Armitt,
had agreed to reimburse the defender with £20,000 in respect of the costs of an
abortive hearing before the General Commissioners in June 2003. That £20,000 accordingly fell to be deducted
from the income tax said to be due (£305,455.63, the sum first concluded for).
3.
The above deductions (of £71,144.45 and £20,000) would have
the effect of decreasing any interest on the income tax due (the sum second
concluded for, namely £271,669.24) and any surcharges and interest thereon (the
third and fourth conclusions).
4.
In any event, the Revenue was not entitled to impose any
surcharges for the reasons set forth in the defender's submissions in
paragraphs [50] to [55] below.
Accordingly the third conclusion for payment of £14,023.12 and
supporting averments should be excluded from probation.
5.
It followed from the above that the Revenue was not
entitled to impose any interest in respect of unpaid surcharges. Accordingly the fourth conclusion for payment
of £417.77 and supporting averments should be excluded from probation.
Statutory provisions
Income tax due
[11] Section
56(9) of the Taxes Management Act 1970 provides:
"Where a party to an appeal
against an assessment has required a case to be stated under regulation 20(1)
of the General Commissioners Regulations, then notwithstanding that the case
has been required to be stated or is pending before the High Court, tax shall
be paid in accordance with the determination of the Commissioners who have been
required to state the case."
[12] Section
56C(1) of that Act provides:
"Regulations made under
section 56B [about the practice and procedure to be followed in connection with
appeals before the Commissioners] may include provision for -
(a) the award by the Special
Commissioners of the costs of, or incidental to, appeal hearings before them,
(b) the recovery of costs so
awarded, and
(c) appeals against such awards
..."
[13] Section
70(1) of that Act provides:
"Where tax is in arrear, a
certificate of the inspector or any other officer of the Board that tax has
been charged and is due, together with a certificate of the collector that
payment of the tax has not been made to him, or, to the best of his knowledge
and belief, to any other collector, or to any person acting on his behalf or on
behalf of another collector, shall be sufficient evidence that the sum
mentioned in the certificate is unpaid and is due to the Crown; and any
document purporting to be such a certificate as is mentioned in this subsection
shall be deemed to be such a certificate until the contrary is proved."
Interest on income tax due
[14] Section
86 of the Taxes Management Act 1970 provides:
"(1) The following, namely -
(a) any amount on account of
income tax which becomes due and payable in accordance with section 59A(2) of
this Act, and
(b) any income tax ... which
becomes due and payable in accordance with section 55 or 59B of this Act,
shall carry interest at the
rate applicable under section 178 of the Finance Act 1989 from the relevant
date until payment ..."
Surcharges and interest
thereon
[15] Section
59C of the Taxes Management Act 1970 provides:
"(1) This section applies in
relation to any income tax ... which has become payable by a person (the
taxpayer) in accordance with section 55 or 59B of this Act.
(2) Where any of the tax
remains unpaid on the day following the expiry of 28 days from the due
date, the taxpayer shall be liable to a surcharge equal to 5 per cent of the
unpaid tax.
(3) Where any of the tax
remains unpaid on the day following the expiry of 6 months from the due
date, the taxpayer shall be liable to a further surcharge equal to 5 per cent
of the unpaid tax ...
(5) An officer of the Board
may impose a surcharge under subsection (2) or (3) above, and notice of
the imposition of such a surcharge -
(a) shall be served on the taxpayer, and
(b) shall state the day on which it is issued and
the time within which an appeal against the imposition of the surcharge may be
brought.
(6) A surcharge imposed
under subsection (2) or (3) above shall carry interest at the rate applicable
under section 178 of the Finance Act 1989 from the end of the period of 30 days
beginning with the day on which the surcharge is imposed until payment ..."
[16] Section
109 of the Finance Act 1995 provides:
"(2) [Section 59C of the
Taxes Management Act 1970 (surcharges on unpaid income tax ...)] shall apply in
relation to any income tax ... which -
(a) is charged by an assessment
made on or after 6 April 1998; and
(b) is for the year 1995-96 or
an earlier year of assessment,
as it applies in relation to
any income tax ... which becomes payable in accordance with section 55 or 59B of
that Act and is for the year 1996-97 or a subsequent year of assessment."
[17] Section
70(2) of the Taxes Management Act 1970 provides:
"A certificate of a
collector -
(a) that a penalty is payable ... that a surcharge
is payable ... or that interest is payable [under certain provisions], and
(b) that payment of the penalty, surcharge or
interest has not been made to him or, to the best of his knowledge and belief,
to any other collector or to any person acting on his behalf or on behalf of
another collector,
shall be
sufficient evidence that the sum mentioned in the certificate is unpaid and is
due to the Crown, and any document purporting to be such a certificate as is
mentioned in this subsection shall be deemed to be such a certificate unless
the contrary is proved."
Submissions for the Revenue
[18] Counsel
for the Revenue invited the court to sustain the pursuer's seventh plea-in-law,
namely:
"7. The defender's averments in answer being
irrelevant et separatim being lacking
in specification, decree de plano should be pronounced."
First conclusion: income tax
due
[19] The sum
of £305,455.63 remained unpaid.
Notwithstanding the stated case to the Court of Session, the sum
required to be paid: section 56(9) of the Taxes Management Act 1970. Certificates dated 11 April 2005 (numbers 6/1
to 6/8 of process) provided sufficient evidence of (a) the tax charged and
due; and (b) the tax unpaid and due in
terms of section 70 of the 1970 Act. The
Revenue admitted that the defender had made payments totalling
£137,882.76. But the payments had been
allocated to debts owed by the defender to the Revenue, as set out in the
Schedule of Payments number 6/17 of process, leaving the sum of £305,455.63
still due and payable in full. The
Revenue denied the existence of any alleged agreement about reimbursement of
£20,000. Neither the payments to account
totalling £137,882.76, nor the alleged agreement relating to £20,000, required
the leading of evidence in a proof before answer.
[20] In
relation to the payments to account, the defender had no averments challenging
the certificates numbers 6/1 to 6/8 of process.
There was no suggestion that they contained any error. There were no averments that the sums due had
been paid. Counsel submitted that, in
the absence of any challenge to the authenticity of the certificates issued in
terms of section 70, the certificates were sufficient evidence of the sums due
and outstanding at the date of the certificate.
Reference was made to section 70 and Inland
Revenue Commissioners v Findlay
McClure & Co., 1986 S.L.T. 417, and The
Advocate General for Scotland v R.G.
Shepherd (10 July 2001, Lord McCluskey, unreported).
[21] Turning
to the question of the alleged agreement relating to reimbursement of expenses
of £20,000 following upon an abortive hearing before the General Commissioners,
counsel for the Revenue referred to McBryde, Contract (2nd ed.)
paragraphs 25-40 and 25-41. There were
no averments of a liquid or ascertained debt.
The averments were insufficiently specific to enable the defender to
seek set-off. In any event, the
averments relating to the £20,000 were irrelevant: (i) It was for the defender
to bring the circumstances of the alleged agreement into the framework of
powers available to an officer of the Revenue, as it was highly unusual for
such an officer to take upon himself what was in effect a waiver of tax due by
reaching such an agreement. The
defender, on his averments, had not done so.
(ii) The General Commissioners had no power to make an order for costs
or expenses. The Special Commissioners
had such a power: section 56C of the Taxes Management Act 1970. But there was no equivalent provision for the
General Commissioners. In such
circumstances, it would be extraordinary for an officer of the Revenue to
purport to reach such an agreement about reimbursement of expenses, and greater
specification in the pleadings was required.
(iii) The current action was an action by the Crown, and it was
incompetent to seek to set off a sum of £20,000 against a liability to
tax: section 35(2)(b) of the Crown
Proceedings Act 1947, as substituted by section 50 of that Act. The Scotland Act 1998 had not affected
section 35(2)(b).
Second conclusion: interest
on income tax due
[22] The sum
sued for in the second conclusion represented interest at statutory rates due
on the principal sums in terms of section 86 of the Taxes Management Act
1970. A date (13 April 2005) had been chosen as the cut-off date, up to which the
interest calculations had been made.
Interest at the statutory rates from 13
April 2005 was sought in the first conclusion, thus avoiding any possibility of
double-counting. The principal sum due
(totalling £305,455.63) was sufficiently proved by the certificates dated 11 April 2005, numbers 6/1 to 6/8 of process. The interest followed logically, and was
calculated as set out in a Schedule detailing the interest charges, number 6/16
of process.
[23] Counsel
conceded that no certificates had been lodged in process to vouch the interest due. Although section 70(2) of the Taxes
Management Act 1970 provided that a certificate of a collector would be
sufficient evidence of interest being unpaid and due, it was not the practice
to lodge certificates of interest in legal proceedings where certificates had
been lodged vouching the principal sum due.
The view was taken that if the fact that the principal sum was due and
payable was proved by a certificate in terms of section 70, the calculation of
interest due thereon was in effect a mechanical exercise.
[24] The
defender's answer to the second conclusion was that interest ceased to accrue
as relevant payments were made (Answer 3).
That was not disputed. However,
the Revenue's position was that the taxpayer's payments had been received and
allocated, all as set out in the Schedule of Payments number 6/17 of
process. Full credit had therefore been
given for the payments received. Counsel
accepted that there were minor discrepancies between the interest averred to be
due in the summons, and the interest shown to be due in the Schedule detailing
the interest charges number 6/16 of process.
Wherever a discrepancy arose, counsel wished to adhere to the figures
stated in the summons. The defender had
not challenged the calculations relating to interest.
Third conclusion: surcharges
[25] Counsel
referred to section 59C of the Taxes Management Act 1970. Where tax remained unpaid for 28 days, the
taxpayer was liable to a surcharge of 5 per cent of the unpaid tax. Where tax remained unpaid for six months, a
further surcharge of 5 per cent was imposed, making a surcharge of 10 per
cent in total. In terms of section
70(2), the surcharges due were certified in certificates numbers 6/9 to 6/15 of
process.
[26] In
Answer 4, the defender contended that the officer of the Revenue
"had no power under section
59C of the Taxes Management Act 1970 to impose on the defender a surcharge in
respect of unpaid tax for years 1989-90 to 1995-96. Section 59C ... was enacted by the Finance Act
1994. It was brought into effect
initially only as respects the year 1996-97 and subsequent years. Reference is made to sections 194 and 199 of
the Finance Act 1994. The surcharges are
in respect of unpaid tax for earlier tax years, namely 1989‑90 to
1995-96. Section 109(2) of the Finance
Act 1995 extended the effect of section 59C of the Taxes Management Act 1970 so
that a surcharge could be imposed in relation to unpaid tax in respect of prior
years where the assessment making the [charge] to tax in question was made on
or after 6 April 1998. In the
present case, the assessments on the defender were all made on 6 February 1996. The assessments were issued by H.M. Inspector
of Taxes, London Provincial 32, Allocation Group A, East Kilbride, Glasgow. Accordingly, the surcharges purported to be
imposed in exercise of the power conferred by section 59C of the Taxes
Management Act 1970 were ultra vires of
the pursuer's officer acting pursuant to that provision ..."
There was a further argument: if the principal sums of
income tax due were overstated, then the surcharges were also over-stated.
[27] The
Revenue's position was simple. The
assessments relied upon (and appealed to the General Commissioners) were issued
on 13 August 2003. Accordingly those assessments had been made
after 6 April 1998. It was
irrelevant that earlier assessments might have been issued, as those earlier
assessments were not founded upon by the Revenue. Section 109(2)(a) of the Finance Act 1995
provided that section 59C "shall apply in relation to any income tax ... which -
(a) is charged [italics added] by an
assessment made on or after 6 April 1998; and (b) is for the year 1995-96 or an earlier
year of assessment". Any assessments of
an earlier date than those issued on 13 August
2003
had been superseded by the ruling of the General Commissioners, and by the
assessments issued on 13 August 2003. Reference was made to Lord Advocate v McKenna, 1989
S.L.T. 460 (I.H.), dicta at pages 464L
to 465B. Those dicta applied a fortiori in
the present case, where the 1996 assessment had plainly been superseded (rather
than being an alternative assessment).
In any event, the 1996 assessment was not the subject of the present
action. The assessment issued on 13 August 2003 was not dependent upon the prior assessment.
[28] The
defender's further argument - that the principal sums (on the basis of which
the surcharges were calculated) were over-stated and therefore the surcharges
were overstated - had no merit. The
principal sums due were not open to criticism, having been properly certified
in terms of section 70. The surcharges
were properly calculated on the basis of those principal sums. The surcharges were themselves certified as
due in terms of section 70(2), for unlike interest (which arose ex lege), surcharges were imposed at the
discretion of the Revenue: hence the
certificates, which provided "sufficient evidence" that the surcharges were due
and payable in terms of section 70(2).
Also the certificates were dated 11 April
2005,
and so came after the payments made by the taxpayer and quoted in paragraph [6]
above.
Fourth conclusion: interest
on surcharges
[29] As the
surcharges were competently imposed, interest ran on those surcharges. No relevant defence was made out in the
pleadings.
Final submission
[30] Counsel
invited the court to repel the defender's pleas-in-law, to sustain the
Revenue's seventh plea-in-law, and to pronounce decree de plano in terms of the first, second, third and fourth conclusions,
with expenses.
[31] If the court was concerned that there were no section 70
certificates lodged to vouch the interest due in terms of the second
conclusion, decree should be granted in terms of the first, third and fourth
conclusions, with expenses, and a proof before answer allowed in relation to
the second conclusion.
Submissions for the defender
[32] Counsel
for the defender submitted that decree de
plano should be refused; the defender's first plea-in-law should be
sustained (thus excluding the third and fourth conclusions and supporting
averments from probation); and quoad
ultra a proof before answer should be allowed.
[33] Certain
points were not in dispute, namely:
1.
The authenticity of the certificates issued in terms of section
70 were not disputed, insofar as they showed principal sums or surcharges.
2.
Insofar as the certificates issued by the inspector (as
opposed to the collector) stated the defender's liability for a certain number
of years, that matter was not in dispute.
3.
The only point taken in relation to claims for interest was
the objection taken to the principal amounts:
accordingly there was no challenge to the calculations in the computer
printout number 6/16 of process.
[34] The
three points upon which the defender relied were: (i) the allocation of the
payments to account; (ii) the agreement about £20,000 in respect of expenses
arising from the abortive hearing; and (iii) the competency of imposing
surcharges in terms of section 109.
Late Minute of Amendment
[35] Before
developing his argument, counsel for the defender tendered a late Minute of
Amendment. The Minute was opposed. In the course of argument, counsel for the
defender advised the court that the General Commissioners had granted the
defender's application to postpone his liability to pay tax in respect of some
of the years referred to in the Minute of Amendment. Counsel for the Revenue for his part advised
the court that in response to the late Minute of Amendment, the relevant
Inspector of Taxes had been contacted.
However, the necessary tax records could not be accessed in the time
available. Accordingly it had proved
impossible for the Revenue to ascertain any facts relevant to the Minute of
Amendment. I indicated that the debate
could be adjourned to allow the Revenue time to make the necessary
inquiries. After consideration, however,
counsel stated that the Revenue would prefer to continue with the diet of
debate, and that no adjournment was required.
[36] Ultimately,
I allowed the defender to amend the Record in terms of Minute of Amendment
number 16 of process and Answers for the Revenue number 17 of process. I found the defender liable to the Revenue in
the expenses occasioned by the amendment.
[37] The
late Minute of Amendment number 16 of process added the following averments to
the end of Answer 2:
"With reference to the
pursuer's averments in response, explained and averred that the defender's tax
liabilities for years 1996-97 to 2002-03 are presently being disputed between
the parties before the General Commissioners.
In those circumstances the pursuer was not entitled to allocate any part
of the payments to account made by the defender in March 2002, January 2003,
August 2003, early October 2003, late October 2003 and November 2003 against
those tax liabilities. The payments
should have been allocated first against the liabilities sued for in the
present action."
[38] The
Revenue's Answers number 17 of process were in the following terms:
[After the words "are held
as incorporated herein" quoted in paragraph [7] above] "Admitted that the defender's tax liabilities
for years 1996-97 to 2002‑03 are presently being disputed between the
parties before the General Commissioners, under explanation that: a) that
dispute has no bearing on the defender's liability to tax for the years 1988-89
to 1995-96; b) the present action proceeds on the basis of the determination of
that liability for those years by the General Commissioners in the defender's
appeal against the assessments dated 13 August 2003, all as condescended upon
above; c) the sums brought out by that determination fell due and payable on
the determination of the appeal in accordance with section 55(9) of the Taxes
Management Act 1970 and in accordance with section 56(9) of that Act required
to be paid notwithstanding the requirement of the defender for the General
Commissioners to state a case to the Court of Session; d) the determination was
issued on or about 6 July 2004; e) notice of the revised tax payable in
accordance with the determination was given by way of amended assessments dated
4 August 2004; f) the amount of income tax brought out by the determination
became payable in accordance with section 55(9) and 59B(6) of the 1970 Act on
the day following the end of the period of thirty days beginning with the day
on which the notice of assessment is given, namely 3 September 2004. Reference is made to the said certificates
issued under section 70 of the Taxes Management Act 1970 as sufficient evidence
of the defender's tax liabilities for the years in relation to which this
action seeks payment.
[At the end of Article 2 of
Condescendence] Reference is made to the
Schedule of Payments for the allocation of payments received and in particular
to the allocation of payments to account of self-assessment liabilities averred
by the defender to have been made in March 2002 and January, August, October
and November 2003. The sums paid in
satisfaction of self-assessment liabilities were allocated to those in date
order. At the time of allocation the
defender had no liability to pay the sums presently concluded for, which are
the sums brought out by the General Commissioners' determination. The payments made on account were on account
of self-assessment liabilities. Payments
of such liabilities are normally made by the taxpayer using the payslip
provided by the Inland Revenue for the purpose and by which the payments are
ascribed to the liability brought out by the taxpayer's self‑assessment
and at the times specified in section 59A of the 1970 Act. The sums paid by the defender were not paid
according to that procedure, as is evident from the dates of payment. Any dispute in relation to his liabilities
concerns the additional tax following the self-assessment. That dispute has no bearing on the defender's
liability for the sums paid by him in satisfaction of his self-assessment. In any event, on the hypothesis of fact
advanced by the defender that the pursuer made that allocation he was entitled
to do so. A copy of the case stated by the
General Commissioners for the opinion of the Court of Session is produced and
referred to for its terms which are hereby held as repeated herein for the sake
of brevity."
[39] Counsel
for the defender then developed his submissions:
The principal amount of tax
[40] There
were two points: (i) the allocation of payments to account, and (ii) the
agreement to reimburse in respect of expenses (£20,000). Counsel accepted that even if he succeeded on
both points, a large amount of tax was due to the Revenue, about which there
was no defence. However the two points
were enough to prevent the grant of decree de
plano. The court could not work out
any alternative interest figure ex
proprio motu. A proof before answer
would be required.
The allocation of payments
to account
[41] Counsel
submitted that some of the taxpayer's payments to account had been allocated in
an unreasonable manner. For example, the
£71,144.45 set against the self-assessment liabilities for the years 1996-97 to
2002-03 (referred to in paragraph (3) of Article 2 of Condescendence)
should have been allocated so as to
reduce the defender's liability of £305,455.63 (to the sum of £234,311.18
or thereabouts). In relation to the four
categories of allocation set out in Article 2 of Condescendence at pages 8 and
9 of the Record (quoted in paragraph [7] above), counsel stated in the course
of his submissions that category (1) was not challenged; category (2)(a), (b), and (c) were not
challenged - (c) being:
"£25,000 has been allocated
against the tax liabilities of the defender's spouse, as requested by the
defender and as agreed by him at a meeting attended by the defender, his
accountant, and officers of the Revenue and Customs on 3 March 2005".
Category (3) was disputed, for the reasons given in
the Minute of Amendment number 16 of process, namely that the defender's
tax liabilities for years 1996-97 to 2002-03 were being disputed between the
parties before the General Commissioners, and in those circumstances the
pursuer was not entitled to allocate any part of the payments to account made
in March 2002, January 2003, August 2003, early October 2003, late October
2003 and November 2003 against those tax liabilities. The payments should have been allocated first
against the tax liabilities sued for in the present action. Category (4) was dependent upon category (3),
and was therefore also disputed.
[42] Counsel
contended that the general rule when payments were made to the creditor by a
debtor who owed a number of debts was that (in the absence of any agreement or
expressed intention otherwise), payments should be allocated to the earliest
debts due. Reference was made to
McBryde, Contract (2nd ed.) paragraph 24‑34. If the debtor did not specify an appropriate
liability, then the creditor could decide how to appropriate the payment. If the creditor made no appropriation, then
there was an automatic application in order of dates.
[43] It was
accepted that the defender's pleadings did not specify how or why payments
should have been allocated in any particular way. It could not be said that there had been
specific requests by the defender in relation to payments in category (3). Counsel also confirmed that he had been
unable to find any authority precisely in point on the issue. He submitted that his argument was akin to a Wednesbury unreasonableness point. It was clear that the tax liabilities being
pursued by the Revenue in the present action were old; the liabilities
currently being disputed before the General Commissioners were relatively
recent and were the subject of appeal; in such circumstances, it was unfair or Wednesbury unreasonable for the Revenue
to decide to allocate the payments to account in satisfaction of those more
recent and unresolved tax liabilities.
[44] Counsel
agreed that, in the event that the General Commissioners found in favour of the
taxpayer and reduced the self-assessment liabilities in some way, the Revenue
would no doubt re-allocate the payments to other tax liabilities. The taxpayer would nevertheless have been
prejudiced. Timing was often a key
feature in tax matters. A taxpayer might
be able to cope with an enforceable decree for a principal sum of about
£230,000, but not with an enforceable decree for a principal sum of about
£305,000.
[45] In relation
to section 70 of the Taxes Management Act 1970, counsel submitted that section
70 provided that the certificates would be "sufficient" evidence, but not
"conclusive" evidence. Thus, if the
pursuer sought payment, made averments, and produced certificates, and the
defender did nothing, then the pursuer's evidence would be accepted, and the
pursuer would achieve payment. However
if the defender made out a defence, offering averments and evidence, the court
had to consider all the evidence before reaching a view about the facts.
[46] Thus
the section 70 certificates were "sufficient" evidence of the existence of
liabilities to pay: but if the defender indicated that he had other evidence
showing that different liabilities were due, or that payment had already been
made, then all the evidence had to be considered by the court, and the court
had to reach a decision on the basis of all the evidence. Accordingly the defender did not attack the
certificates themselves, but offered to prove that payments had been made. The purpose of the certificates was to
relieve the Revenue of the burden of proving specific amounts of income and
expenditure on which the claim to tax was based. The certificates also relieved the Revenue of
the burden of proving a negative (the negative being non-payment). But the certificates did not mean that, if a
taxpayer offered to prove that he had paid the sums, his evidence would
necessarily be disregarded as a matter of law, simply because section 70
certificates were in existence.
[47] Counsel
submitted that there was no need to have the certificates reduced. The certificates were simply pieces of
evidence (unlike a Will, which was the basis of the substantive right which a
party sought to enforce). The
certificates were more akin to an affidavit, for example by someone explaining
that a Will had been lost. The court
could disregard the affidavit without having to reduce it. Likewise the section 70 certificates did not
affect the substantive liability of the taxpayer to pay tax. Such certificates could not increase or reduce
the tax liability: they were simply evidence of what the liability was. If a taxpayer could prove that the liability
was not as stated, it was not necessary to reduce the certificates.
[48] Counsel
sought to distinguish Inland Revenue
Commissioners v Findlay McClure &
Co., cit. sup. In that case, the
third party was unable to produce any evidence contradicting the Revenue's
position. That was not the defender's
position in the present case. Contrary
averments and evidence were offered (in contrast with the court's observations
in Findlay McClure & Co. at page
418F et seq.) Counsel reiterated that all
that the certificates amounted to was "evidence". If there was evidence to the contrary, the
court had to weigh all the evidence, including the certificates and the other
evidence, and reach a decision on the facts.
The £20,000
[49] Similarly
the averments relating to the agreement about £20,000 reimbursement for the
expenses of an abortive hearing constituted "contrary averments", contradicting
the Revenue's position. The averments
were sufficiently specific. The sum was
specified as £20,000; the place, time, manner, and persons involved in the
agreement were specified. The Revenue
had fair notice, and could, for example, precognosce Steve Armitt (the Revenue
officer averred to have made the agreement).
Turning to the Crown Proceedings Act 1947, counsel accepted that it was
not permissible to claim a deduction by way of set-off or counterclaim. The defender's pleadings were not perhaps
wholly clear: the defender's position was that there was an agreement that
£20,000 would be allocated towards tax liabilities.
Surcharges and interest
[50] Counsel's
contention was that none of the surcharges had been competently imposed. The surcharges had been purportedly imposed
in terms of section 109(2) of the Finance Act 1995. The defender's position was that where income
tax had been charged by an assessment made before 6
April 1998, then if an assessment to income tax were made on or after that date,
that superseded the earlier assessment, and it was not competent to impose a
surcharge on income tax in the subsequent assessment. The defender did not therefore accept the
statutory construction advanced by the Revenue.
There was no authority, precedent, or guidance one way or the other.
[51] The
defender's argument depended upon the terms of section 109(2). The key words in section 109(2) were "is
charged by an assessment". The effect of
those words was that surcharges could be imposed where an assessment was made after 6 April
1998. If income tax had already been charged by an
assessment before 6 April 1998, then an assessment made after 6
April 1998 was not one by which that income tax was charged for the purposes of
section 109(2).
[52] Section
109 created an exception to the general rule that statutes could not have
retrospective effect. What Parliament
had done when it enacted section 109 was to allow a degree of retrospective
effect but to provide a particular date (the earliest date) for that effect to
occur. The plain meaning of the statute
was that where income tax had already been charged by an assessment before the
relevant date, Parliament's intention was that the income tax should not be
liable to surcharge. Otherwise there was
no point in specifying 6 April 1998 as the earliest date.
[53] If,
contrary to the defender's submissions, the Revenue's position was correct,
then even if income tax had already been charged, there was nothing to stop the
Revenue circumventing the rule relating to 6 April 1998 by simply issuing a new
identical assessment at a later date. If
the earlier assessment was for a larger amount, then equally it was contended
that the income tax charged by the subsequent assessment had already been
charged by the earlier assessment. If
the earlier assessment was for a smaller amount, the later assessment charged
to tax the income which had not earlier been charged. Thus the proper construction of section
109(2) was that income tax was not charged by an assessment if it had already
been charged by a previous assessment.
In other words, section 109(2)(a) should be read as if the word "first"
appeared before the word "charged".
[54] In Lord Advocate v McKenna, 1989 S.L.T. 460, there were two completely different
calculations, leading to alternative assessments. The Revenue had power to issue alternative
assessments, or a subsequent assessment superseding an earlier assessment: but
in the latter case, the subsequent assessment was not the one by which income
tax was charged for the purposes of section 109. To hold otherwise would defeat Parliament's
clear intention to impose a time-limit.
Parliament must have intended that income tax charged prior to 6 April 1998 was not to be liable to surcharges. If Parliament's intention had been different,
the section would have been worded differently.
It would be unfair and contrary to Parliament's intention to increase the
penalties to which a taxpayer was subject.
If the Revenue were right in their contention, the whole purpose of the
statute would be thwarted.
[55] Section
59C of the Taxes Management Act 1970 made no difference in the present
case. When section 59C was enacted, it
was part of the general self‑assessment regime. Parliament clearly intended that there would
be no surcharges at all in relation to earlier tax years. As a matter of fairness, when Parliament
decided to extend the provision in section 59C to earlier years, the intention
was that income tax already charged for those years should not be liable to
surcharges.
[56] Counsel concluded by inviting the court to refuse decree de plano, to sustain the defender's plea
to the relevancy of Articles 4 and 5 of Condescendence and the third and fourth
conclusions and to exclude those parts of the Record from probation, and quoad ultra to allow a proof before
answer on the first and second conclusions and the remaining articles of
condescendence.
Final reply for the Revenue
Allocation of payments to
account
[57] There
was no dispute that payments to account had been made towards the tax
liability. The question at issue was
their attribution. In relation to the
self-assessment system, counsel submitted that any dispute currently before the
Commissioners could not relate to payments to account made by the taxpayer in
respect of his self-assessed liabilities - because the taxpayer himself had
made those assessments. Any dispute must
be related to additional liability sought to be imposed by the Revenue. Moreover, the tax liabilities to which the
current Court of Session action related were based upon the General
Commissioners' determination dated 6 July 2004. Accordingly, when the Revenue made
allocations of the payments to account made by the defender in March 2002,
August 2003, early October 2003, late October 2003, and November 2003, the tax
liabilities arising from the determination dated 6 July 2004 did not
exist. Accordingly the averments
introduced by Minute of Amendment number 16 were irrelevant. The Revenue were entitled to ascribe payments
to account to those self-assessment liabilities.
[58] In any
event, nowhere in the defender's pleadings was there any suggestion that the
defender had sought to instruct the Revenue about the allocation of payments to
account. In the absence of ascription by
the defender, the creditor was entitled to allocate payments as he thought fit:
cf. Wallace and McNeil, Banking Law (10th ed.), at pages 18-20. The rule in Clayton's Case had no application where the creditor ascribed the
payments to debts. The creditor could
ascribe payments to recent debts rather than to long-standing debts. The creditor could ascribe a payment to a
surcharge to avoid the accrual of another surcharge. The creditor could ascribe a payment to an
unsecured debt, leaving a secured debt unpaid.
In short, the creditor could apply the payments in a manner which best
suited him (rather than the debtor): Bell's Principles, page 264,
paragraph 563. The rule in Clayton's Case applied only where no
special appropriation was made. That was
not the case here. The creditor had made
an appropriation. The true question was
the intention of the parties: Macdonald, Fraser & Co v Cairns's Exr., 1932 S.C. 699.
Wednesbury unreasonableness
[59] The
defender had failed to make out a case of Wednesbury
unreasonableness.
Section 70 certificates
[60] Counsel
for the Revenue submitted that for the defender to succeed, the section 70
certificates would have to be reduced.
However, the defender had not sought to have his plea of reduction ope exceptionis sustained. That plea ought to be formally repelled. The defender had no averments entitling him
to prove that income tax of £305,455.63 was not due. The defender did not challenge the Schedule
of Payments. The section 70 certificates
certified that £305,455.63 was due. So
as a matter of evidence, the defender had no basis to advance contrary
evidence. If he did have such evidence,
he should make the appropriate averments and seek to have the section 70
certificates reduced.
The £20,000
[61] The
Revenue's submissions focused on relevancy rather than specification. Reference was again made to section 35(2)(b)
of the Crown Proceedings Act 1947.
Section 109 of the Finance
Act 1995
[62] In relation to section 109, the defender's position was absurd,
not the Revenue's. On the defender's
approach, a taxpayer who failed to pay tax in a year prior to 1995-96, and who
was assessed to tax prior to 6 April
1998, would be forever free of surcharge. Parliament had not intended such a result. The whole purpose of introducing a surcharge
was to impose a significant penalty on those who did not pay their tax
timeously. The defender invited the
court to adopt a plain reading of the statute.
A plain reading could not involve the insertion into the statute of a
word such as "first". On a plain reading
of section 109, a surcharge could be imposed on any assessment provided the
assessment post-dated 6 April 1998. Otherwise a taxpayer could leave the tax
unpaid without being subjected to any pressure of a surcharge.
Discussion
Requirements for decree de plano
[63] As
Sheriff N.M.P. Morrison Q.C. notes in his commentary on the Rules of the Court
of Session, paragraph 21.2.1:
"Formerly it was difficult
to prevent a defender with no obvious defence delaying decree against him by
putting the pursuer to his proof ... the pursuer could seek decree de plano at procedure roll where
skeletal defences were irrelevant (Ellon
Castle Estates Ltd v Macdonald, 1975
S.L.T. (Notes) 66; Foxley v Dunn, 1978 S.L.T. (Notes) 35), but
these means were inadequate ... [hence the need for summary decree procedure] ...
The distinction
between the tests for summary decree and ... a procedure roll debate was
explained by Lord Johnston in First
Fidelity Bank, N.A. v Hudson, 1995 G.W.D. 28-1499, unreported. In the latter, the court is required to focus
on relevancy; in the former, although relevancy arguments are permissible, the
court is only required to be satisfied that there is an issue to try at all ..."
[64] Accordingly,
before granting decree de plano for any sum sought, I have
to be satisfied that the defender's averments in answer to the sum sought are
irrelevant.
The allocation of payments
to account
[65] The
defender avers that he made certain payments to account during the period 20 May 1999 to 27 November 2003, all as set out in
paragraph [6] above. The defender does
not aver that he specifically instructed the Revenue to ascribe those payments
to particular debts. The Revenue's
averments relating to the allocation of the payments to account include the
following:
" ... 2(c) £25,000 has been
allocated against the tax liabilities of the defender's spouse, as requested by
the defender and as agreed by him at a meeting attended by the defender, his
accountant and Officers of Revenue and Customs on 3 March 2005 ..."
That averment is not admitted by the defender in his
Answer 2, but is met with the general denial "Quoad ultra denied." Indeed
the defender specifically avers in Answer 2 that he made the relevant payments
to account "in respect of the tax
liabilities to which the present proceedings relate [italics added]". The present proceedings relate to the
defender's tax liabilities, not to any liabilities of the defender's spouse.
[66] Thus
while during the procedure roll debate no issue was taken with the Revenue's
averment relating to category (c) quoted above, and while counsel for the
defender stated in the course of his submissions that category (c) was not
challenged, the written pleadings as they stand reveal an apparent dispute as
to whether the sum of £25,000 (from the defender's payments to account
totalling £137,882.76) was indeed allocated on
the defender's personal instruction to the defender's wife's tax
liabilities, and was therefore properly so allocated. In other words, whether intentionally or not,
the defender's written pleadings in effect challenge the propriety of at least
one allocation in the Schedule of Payments (the £25,000 referred to in
paragraph 3 of the schedule, quoted in paragraph [9] above). The defender's late amendment (Minute of
Amendment number 16 of process) did not alter that situation.
[67] If the
sum of £25,000 was not properly allocated on the defender's instructions, then
the sum first concluded for might require to be reduced. In this context, I agree with the defender's
counsel's submissions relating to the section 70 certificates. The certificates are "sufficient" evidence,
but are not necessarily "conclusive" evidence.
If a defender offers contradictory averments and evidence, the court
must take that evidence into account. No
such contrary evidence was offered in Inland
Revenue Commissioners v Findlay McClure & Co., 1986 S.L.T. 417, and the case can be distinguished on that
basis. In relation to the question
whether in such circumstances the defender should seek the reduction of section
70 certificates, it is my view that the wording of section 70(1) suggests that
no reduction is required. Section 70(1)
ends with the words "any document purporting to be such a certificate as is mentioned
in this subsection shall be deemed to be such a certificate until the contrary is proved [italics
added]". There is no mention of a
requirement to have the certificate reduced.
A fortiori it seems to me that
there would be no need for reduction of the certificate where the defender
simply sought to show that the figures contained in the certificate were
inaccurate.
[68] A
decree de plano (a fortiori a decree de plano for a substantial sum of
money) must be based upon the written pleadings, and not merely upon unrecorded
verbal statements. The justification for
a decree de plano is that the written defences are irrelevant, no
matter what might be said in the course of submissions. In the present case, the defences as they
stand (including the general denial in response to the Revenue's averments
about category (c)), cannot in my view be characterised as wholly
irrelevant. In such circumstances, it is
not possible for the court to grant decree de
plano for the sum first concluded for, namely £305,455.63.
[69] In any
event, the Revenue avers a further allocation of payments as follows:
"(3) against self-assessment
liabilities for the years 1996/97 to 2002/03, payments in March 2002, January
2003, August 2003, early October 2003, late October 2003 (part) and November
2003 (part) totalling £71,144.45."
The defender's response to those averments is
contained in his late Minute of Amendment number 16 of process, as follows:
" ... explained and averred
that the defender's tax liabilities for years 1996/97 to 2002/03 are presently
being disputed between the parties before the General Commissioners. In those circumstances the pursuer was not
entitled to allocate any part of the payments to account made by the defender
in March 2002, January 2002, August 2003, early October 2003, late October 2003
and November 2003 against those tax liabilities. The payments should have been allocated first
against the liabilities sued for in the present action."
[70] In the
course of the debate, counsel for the Revenue advised that, as a result of the
late amendment, there had been insufficient time available to the Revenue to
ascertain precise facts and figures relating to the dispute before the General
Commissioners. The Revenue nevertheless
wished the diet of debate to proceed, rather than to delay matters while the
Revenue obtained further information.
Counsel also submitted that (i) any dispute before the General
Commissioners by definition could not involve the defender's self-assessment
liabilities, as the defender himself had made those assessments; and (ii) the
tax liabilities with which the present case is concerned did not come into
being until the General Commissioners' determination of 6 July 2004: accordingly
the payments to account detailed in the Minute of Amendment number 16 of
process could not have been set against those tax liabilities.
[71] It
seems to me that there may be circumstances in which a taxpayer ultimately
seeks to dispute self-assessment liabilities even if calculated by
himself. Moreover while the General
Commissioners' determination was dated 6 July 2004, there were pre-existing
tax liabilities relating to the years 1983-84 to 1995-96. Bell's Principles, paragraph
563, states that there is an "equitable limitation" in that payments to account
should not be "ascribed to a disputed debt".
It is in my view at least arguable that the defender is entitled to an
inquiry into the facts concerning the tax liabilities currently in dispute
before the Commissioners. Depending on
the facts elicited, it may be that there is some merit in his argument that
payments within the Revenue's category (3) were not correctly allocated. For this reason also I would be reluctant to
grant decree de plano as first concluded for.
The £20,000
[72] As it
is not possible for the court to grant decree de plano standing the present state of the pleadings (see paragraphs
[63] to [71] above), it is not strictly necessary to resolve the issues
relating to the £20,000. Purely obiter, the agreement founded upon by
the defender appears to me to be an attempt to set off a debt said to be owed
by the Revenue to the taxpayer against debts owed by the taxpayer to the
Revenue. Such an attempt is prohibited
by section 35(2)(b) of the Crown Proceedings Act 1947. In the context of the collection of taxes
due, it is easy to understand such a prohibition as the collection of taxes due
and owing to the Revenue should not be obstructed by disputes about other
matters. I would therefore regard the defender's
averments relating to an agreement to reimburse expenses of £20,000 in respect
of an abortive hearing as irrelevant.
Surcharges and interest: section
109
[73] As it
is not possible for the court to grant decree de plano in respect of the principal income tax due in terms of the
first conclusion, for the reasons set out in paragraphs [63] to [71] above, it
follows that the court cannot grant decree de
plano in respect of the second, third, or fourth conclusions, each of which
are dependent upon the sum contained in the decree in respect of the first
conclusion.
[74] Obiter, it is my view that on a proper
construction of section 109, a surcharge may be imposed in respect of any
assessment issued by the Revenue after 6 April 1998 - whether or not an
assessment relating to all or some of the tax had previously been issued. I do not accept the defender's contention
that section 109(2) should be construed as if the word "first" appeared before
the word "assessment". To adopt such a
construction would be to re-write the legislation. The plain meaning of section 109(2) as
advanced by counsel for the Revenue has the effect that tax liabilities which
have remained outstanding and unpaid for a number of years may attract a
surcharge in the event of continuing non-payment. Such a meaning seems entirely logical and
justifiable.
Conclusion
[75] For the
reasons given above, I am not prepared to grant decree de plano on the basis of the pleadings as they stand. Nor am I prepared to exclude from probation
the claims for surcharge and interest thereon.
Decision
[76] I shall
allow a proof before answer, all pleas standing. I reserve any question of expenses insofar as
not already dealt with.
