Can the Tax Tribunal allow appeals against (for example) penalties on the basis that HMRC have acted unfairly, in a heavy-handed manner, or have misled the taxpayer?

Regrettably the answer is – generally not.

Most practitioners and/or their clients will have experienced unfairness on the part of HMRC at some point in their careers. Common areas are:

• Filing a day or so late;
• Incorrect coding notices leading to unnecessary tax underpayments;
• Inaccurate telephone advice;
• The P35 penalty debacle (delaying issuing penalty notices until penalties were at least £500);
• Refusing to apply an Extra Statutory concession.

If only, you may say, HMRC applied the same standards to their own behaviour as they expect from taxpayers. I couldn’t possibly comment.

The first thing to appreciate is the role of HMRC. Their remit is quite simple. Under S6(2) CEMA 1979 “[HMRC] shall …… be charged with the duty of collecting and accounting for, and otherwise managing, the revenues of customs and excise.” In other words, if the tax is due according to the legislation, they will collect it. Even in the taxpayer charter they say they will “make decisions in accordance with the law and published guidance”. As we will see later on that is not quite correct.

Secondly the First Tier Tribunal was given limited powers when it was set up. It is what is called “a creature of statute” and can only act within the powers given it under the Tribunals Courts and Enforcement Act 2007.

Note that my first sentence mentioned the Tax Tribunal. This does not mean that HMRC can never be brought to account for behaving unfairly or unreasonably but it does generally mean that the Tribunal system is not the forum in which this can be litigated. Actions alleging unreasonable behaviour by a public body generally come under the doctrine of Judicial Review (JR). This is normally the preserve of the High Court and above although the Upper Tribunal does occasionally hear JR cases when they have been delegated from the High Court.

So arguing fairness in front of a Tribunal is generally a waste of time.

Where then can we look for any chinks of light in this area?

The Human Rights Act 1998

The Human Rights Act 1998 incorporates into domestic law the rights and liberties enshrined in the European Convention on Human Rights, a treaty to which the United Kingdom is signatory but which until 2000 had no application in domestic law. Among other things the Convention says:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

And the Human Rights Act says:

So far as it is possible to do so, primary legislation and subordinate legislation must be read and given effect in a way which is compatible with the Convention rights.…”

It is unlawful for a public authority to act in a way which is incompatible with a Convention right. (public authorities includes courts and tribunals).

A court or tribunal determining a question which has arisen in connection with a Convention right must take into account any—

(a) judgment, decision, declaration or advisory opinion of the European Court of Human Rights,

Taking each of these points in turn:

Peaceful enjoyment of possessions

It is clear that this is not an absolute right because otherwise states would never be able to raise money by taxation. However it is clear from the case law that public bodies must act in a proportionate way in devising tax law. The concept of proportionality is implicitly involved with Human Rights arguments as courts need to look at whether a statutory measure is reasonably required to meet the relevant policy objective (see para 68 onwards of Wilson and others v. Secretary of State for Trade and Industry [2003] UKHL 40. This was a non-tax case incidentally. This is further echoed in International Transport Roth GmbH Para 26 [2002] EWCA Civ 158 (also a non-tax case) “Those being the most critical features of this case, it seems to me that ultimately one single question arises for determination by the Court: is the scheme not merely harsh but plainly unfair so that, however effectively that unfairness may assist in achieving the social goal, it simply cannot be permitted?”

In Enersys (see below) it was stated “Although [the appellant] relied on some specifically Human Rights Convention-related authorities, neither party argued that there was any material difference between Community law and Convention concepts in this respect.” 

The Upper Tribunal looked at proportionality in the recent VAT case Total Technology (Engineering) Ltd 2012 UKUT 418. Interestingly, the judge there commented “As far as remedies are concerned, where there is a disproportionate interference with a person’s convention rights, he must be provided with an adequate remedy by which he can vindicate those rights in the face of that interference.

So it is clear that proportionality is firmly embedded as an EU concept when dealing with both Convention questions and VAT appeals.

Compatibility with Convention rights

If legislation is unclear, it should be construed in line with the principles enshrined within the convention. If, on the other hand, the legislation is clear, it can only be “re-written” if it is clearly incompatible with Convention rights and if it is possible to do so without mangling the original terms and meaning of the legislation. Given that legislation on things like penalties is normally fairly unambiguous and that the scheme of the penalty regime as a whole (as with the default surcharge regime in Total Technology) was held not to be incompatible with Convention rights, there is generally little or no wriggle room for Tribunals to re-write the legislation.

Unlawful acts

The HR Act says “It is unlawful for a public authority to act in a way which is incompatible with a Convention right. (public authorities includes courts and tribunals). So on the face of it a Tax Tribunal cannot make a decision which is not compatible with a convention right e.g. proportionality. But, at the same time, its powers are restricted by TCEA 2007 and it can only act within those powers. Therefore a Tribunal, even in the most blatant cases of disproportionality, must apply the legislation and effectively ignore the HR Act. This is permitted under the HR Act as it is not unlawful for a Tribunal to act in accordance with an Act of Parliament.

The High Court would be acting unlawfully if it did not grant a remedy under Judicial review for unreasonable conduct by HMRC. However, neither the court nor a tribunal could be regarded as acting unlawfully if “as the result of one or more provisions of primary legislation, the authority could not have acted differently” 

Taking account of ECHR decisions

It is clear thatany court or tribunal has to have regard to ECHR cases and judgements (and by implications principles expressed in those decisions) when considering cases with a HR element to them. But presumably, the tax Tribunal, having taken it into account, must ignore it if the legislation is clear.

So, in a nutshell, (ignoring the possibility of JR powers being delegated to the UT from the High Court), tribunals can:

• Find that a penalty is disproportionate – general principle of EU jurisprudence;
• Interpret legislation in accordance with the Convention where it is either unclear or clearly incompatible with convention rights (and then only if it is possible to do so) S3(1) HR Act;
• Ignore incompatible secondary legislation (such as Statutory Instruments) S3(2)(c);
• Make decisions using ECHR decisions not just domestic law as a guide S2(1)(a).

However, although a Tribunal can make a finding of fact that a penalty is disproportionate, the UT in Bosher [2013] UKUT 0579 took the view that the tribunal can’t do anything else. They said that the taxpayer did have an adequate remedy which consisted of a) HMRC powers to mitigate the penalty and, failing that,  b) Judicial Review proceedings in the High Court regarding the amount of any such mitigation and whether it was reasonable or not. What this case did not need to address was the question of what would happen if the matter under appeal was such that JR was not relevant.

So any remedy would have to lie in the High Court. If HMRC have a power to mitigate penalties (as they have with e.g. CIS penalties) any failure to mitigate adequately could be the subject of a JR application to the High Court. In an extreme case, the High Court could make a declaration that the legislation is incompatible with the Convention. This would hopefully be addressed in due course by amending legislation.

Proportionality in VAT cases 

Some readers may be wondering why the First Tier Tribunal in Enersys Holdings UK Ltd was able to accept the taxpayer’s appeal against a default surcharge on the grounds that it was disproportionate but the equivalent tribunal in Bosher (CIS penalty) and Hok (P35 penalty appeal) was not able to do so.

You might be forgiven for thinking that there is some similarity between the following hierarchies:

ECHR		TFEU
HR Act 1998		VAT Directive
UK tax law		UK VAT law

The reason for the difference may be that Enersys related to VAT. VAT is an EU-wide tax governed by a specific European Directive. The current Directive is COUNCIL DIRECTIVE 2006/112/EC. EU Directives are directly effective in the UK. These Directives are binding on UK courts and UK legislation has to correspond to the principles in the Directive (though there is discretion as to how a national government achieves the aims contained in it).

On proportionality, under Article 5 of the Treaty on European Union the institutions of the Union shall apply the principle of proportionality as laid down in the Protocol on the application of the principles of subsidiarity and proportionality. Put simply, VAT measures laid down by the EU in Directives or by member states in national legislation implementing Directives must be proportionate to achieving the aim it seeks. This was confirmed in the EU case Garage Molenheide where it was stated:

The principle of proportionality is applicable to national measures which … are adopted by a member state in the exercise of its powers relating to VAT, since, if those measures go further than necessary in order to attain their objective, they would undermine the principles of the common system of VAT and in particular the rules governing deductions which constitute an essential component of that system.

Therefore, in short, where VAT is concerned, the EU principle of proportionality applies and, because National Courts are specifically subject to EU jurisprudence in areas of VAT, they must apply the principle in deciding cases involving proportionality.

So why is the position different with non-VAT cases?

The short answer is that, unlike VAT, the EU has no ability to influence national legislation. With VAT, all UK legislation must conform to the VAT directive and must adhere to EU principles (including proportionality).

However, with non-VAT cases, as we have seen above, the principle of proportionality still applies. This is because it is implicit in the ECHR, which has been given direct effect by the HR Act 1998. Therefore it is not clear why in Hok para 37 the UT said “Before moving on to consider whether there is any other route by which it might acquire additional jurisdiction we should add for completeness that, since the requirement imposed on employers to submit year-end returns is a product only of United Kingdom law, the concept of proportionality as it is understood in European Union law, with which we deal in our decision in Revenue and Customs Commissioners v Total Technology Ltd, to be released shortly after this decision, does not arise.” Hok did not even mention the HR Act.

This seems to completely ignore the fact that proportionality is enshrined in EU jurisprudence and the HR Act specifically states that courts have to have regard to these judgements and principles when considering HR issues.

Note also that in Graham Arnold Blackburn TC02913 Judge Mosedale in Para 72 envisaged that she might have had to consider the principle of proportionality had the appellants not succeeded under S3 and S6 HR Act. This implies that the judge there thought that Tribunals do have jurisdiction to consider proportionality in direct tax cases.

Possible remedies

What are the remedies where there has been a breach of a person’s convention rights?

Tribunals and higher courts

They can all:

• Read and interpret legislation to try and make it compliant with the HR act (reading in and reading down) but only where the legislation is not clear and any adaptation “goes with the grain of the legislation”.
• Quash subordinate legislation (e.g. Statutory Instruments).
• Make decisions which take account of ECHR principles (maybe). 

Higher courts can in addition:

• Make a declaration of incompatibility.
• Exercise JR powers where relevant.
• Award damages in the case of financial loss.

So in the context of our hypothetical £500 P35 penalty, unless a tribunal does have the ability to make decisions on proportionality, all a taxpayer has to do is spend thousands of pounds pursuing an action in the High Court or similar to try and establish that the penalty in his case is disproportionate. If so he must then hope that damages will be awarded (which may or may not be the case). Courts are unlikely to re-interpret the legislation (as it’s pretty clear) and it will not always be disproportionate (e.g. for an employer with 50 employees £500 is probably a drop in the ocean) so it would be difficult for a court to make a declaration of incompatibility. In any event, under S4(6)(a) it “does not affect the validity, continuing operation or enforcement of the provision in respect of which it is given” so it is debateable whether any action for damages would succeed as the legislation would be deemed to be still in force. Also, who would be liable to pay the damages? HMRC has acted within the law so, although they are a public body, they are blameless as is the poor tribunal which shrugs its shoulders and points you to the royal Courts of Justice. Under S6(3) public body is widely defined “but does not include either House of Parliament”.

Things are arguably easier where there is some HMRC discretion involved as the UT can just tell the taxpayer to apply for JR if HMRC does not mitigate sufficiently. 

All in all, the Human Rights Act is a bity of a toothless tiger where legislation (as opposed to acts of public authorities applying legislation) is concerned. As potential legislation has to be reviewed to make sure it is HR compliant, presumably the Act doesn’t envisage that this will be a problem – hence the emphasis on public bodies and their actions.

The reason I say the act is more effective where complaints against public bodies are concerned is that under S7(1)(b) any person complaining about the acts of a public body can “rely on the Convention right or rights concerned in any legal proceedings”. There is therefore a direct link between the Convention, the HR Act and the ability to enforce convention rights in any proceedings. Given that many matters will start off in some sort of Tribunal, that will be the forum in which the arguments are first aired. Also the remedies are far more wide-ranging and effective. The court can decide anything with in its power or make any just or appropriate decisions such as awarding damages, quashing an unlawful decision, releasing a defendant or quashing a conviction and ordering a public authority not to take a particular course of action.

As a final point of interest, should a taxpayer have the misfortune to have goods or vehicles seized by the forces of law and order when bringing dutiable goods into the country, the First Tier Tribunal has some very specific JR powers contained in s16 (4) of the Finance Act 1994. If they consider that the decision not to restore items has not been properly taken, they can bat it back for re-consideration. However on a practical (but hopefully only theoretical) point, it would be far better to firstly challenge the seizure in condemnation proceedings before the Magistrates Court. Most people do not take this route because of potential costs. But if this route isn’t taken, it is not possible to challenge the seizure as unlawful later on i.e. the goods/car are deemed to have been lawfully seized. You have been warned.