MR JUSTICE ARNOLD :
Introduction
- This is an appeal by Antonio Vieira against an order of Deputy Registrar Mullen dated 21 November 2016 dismissing Mr Vieira's application to set aside a statutory demand dated 25 July 2016 ("the second statutory demand") which was served on Mr Vieira by the Commissioners for Her Majesty's Revenue and Customs ("HMRC") on 16 August 2016. The second statutory demand claimed that Mr Vieira owed HMRC a total of £180,757.90 in respect of income tax, VAT, surcharges, late payment penalties and interest for the period from 6 April 2002 to 25 July 2016. Mr Vieira disputes that he owed any more than £2,113, a sum he has subsequently paid. On 30 September 2016 Mr Vieira filed a notice of appeal seeking permission to appeal out of time against the assessments made by HMRC to the First-tier Tribunal (Tax Chamber) ("the FTT"). That appeal is presently pending before the FTT.
- The central issue on the appeal is the correct interpretation and application, in circumstances such as these, of paragraph 13.3.3 of the Practice Direction – Insolvency Proceedings ("the Practice Direction"), which states:
"Where the debt claimed in the statutory demand is based on a judgment, order, liability order, costs certificate, tax assessment or decision of a tribunal, the court will not at this stage inquire into the validity of the debt nor, as a general rule, will it adjourn the application to await the result of an application to set aside the judgment, order decision [sic], costs certificate or any appeal."
Factual background
- The factual background to the matter is somewhat involved. Given some of the arguments raised on the appeal, it is necessary to set it out in detail.
- Mr Vieira is of Portuguese origin, and his evidence is that he does not speak, read or write English well. Mr Vieira is a mini-cab driver, and he carries on business as a sole trader. His evidence is that he has always relied on his accountants to prepare his accounts and deal with his tax affairs, and that he now considers that the firms who previously advised him failed to do so in a satisfactory manner.
- In about July 2010 HMRC opened an investigation into Mr Vieira's tax affairs. At that time Mr Vieira was not registered for VAT and was resident at 3 Oldfield House, West Drive, London SW16 1RT. Susan Bush and Ken Daniels from HMRC's Local Compliance office in Croydon met Mr Vieira on 5 August 2010 and met Mr Vieira and his then accountant, Rizwan Azed, on 18 March 2011 and 10 October 2011 to discuss matters. HMRC's note of the meeting on 10 October 2011 reproduces word for word HMRC's note of the meeting on 18 March 2011. Nevertheless, it is clear that the officers were concerned that Mr Vieira had underdeclared his turnover and profits from the business. Two particular aspects of this concern related to income and expenses which had been put through Mr Vieira's personal bank account rather than his business bank account and hires which Mr Vieira had accepted, but which had been carried out by other drivers.
- On 13 February 2012 Mrs Bush wrote to Mr Vieira giving him notice of compulsory registration for VAT with effect from 1 July 2010. The pro forma application for registration completed by Mrs Bush gave the address of Mr Vieira's business as 3 Oldfield House. Although the letter stated that Mr Vieira could ask for a review or appeal within 30 days, he did not do so. On 30 March 2012 Mrs Bush wrote to Mr Vieira notifying him that he was liable to a penalty and needed to provide VAT returns for the period 1 July 2010 to 31 July 2012.
- On 17 May 2012 Mr Vieira rented out 3 Oldfield House and moved to 15 Finch Drive, Feltham TW14 0DL.
- On 28 January 2013 Mr Azed filed Mr Vieira's tax return for the tax year ending 5 April 2012 showing his address as 15 Finch Drive together with his accounts for the year ending 31 March 2012 showing his then address of 3 Oldfield House. The accounts showed turnover of £33,287, payments to other drivers of £13,146 and profit for the year of £10,337. Mr Vieira's accounts for the preceding and following years showed similar figures.
- On 20 September 2013 HMRC posted a statutory demand dated 13 August 2013 ("the first statutory demand") through the letterbox at 3 Oldfield House. The first statutory demand claimed that Mr Vieira owed HMRC a total of £33,046.44 in respect of income tax, VAT, surcharges and late payment penalties for the period from 6 April 2009 to 13 August 2013. On 1 November 2013 an order was made for substituted service of the first statutory demand by post.
- On 27 November 2013 HMRC presented a petition to the Central London County Court for a bankruptcy order against Mr Vieira based on the first statutory demand giving his address as 3 Oldfield House. On 10 December 2013 HMRC tried unsuccessfully to serve the petition on Mr Vieira at that address. On 2 January 2014 an order was made for substituted service of the petition by post and the hearing of the petition was adjourned from 14 January to 11 March 2014. On 30 January 2014 the petition was served on Mr Vieira by post to 3 Oldfield House.
- In the meantime, there had been correspondence between Mr Azed and HMRC. On 12 December 2012 Mrs A. Charles of HMRC's Debt Management Enforcement and Insolvency Service in Worthing wrote to Mr Azed, in reply to a letter dated 11 December 2013 which is not in evidence, informing Mr Azed that the first statutory demand had been served on 20 September 2013 and that the petition was out for service. The letter also pointed out that Mr Vieira's VAT returns from February 2012 were outstanding. On 16 December 2013 Mr Azed replied saying that Mr Vieira did not believe that his turnover was over the VAT threshold at any time having regard to HMRC Notice 700/25 since he acted as an agent and asking for a meeting to discuss the matter. On 20 December 2013 Mr Daniels, now at HMRC's Local Compliance office in Glasgow, wrote to Mr Azed pointing out that HMRC had concluded that Mr Vieira acted as principal, that there had been no appeal against Mr Vieira's VAT registration, that the time limit had expired long ago and that he did not see any point in a meeting. On 30 December 2013 Mrs Charles wrote to Mr Azed saying that HMRC would seek a bankruptcy order unless the petition debt was paid in full. She did not, however, send Mr Azed copies of either the first statutory demand or the petition.
- On 28 February 2014 Mr Vieira suffered a heart attack and was hospitalised for seven days, after which he was advised to rest at home for a period.
- On 11 March 2014 DJ Lambert made a bankruptcy order in the absence of Mr Vieira.
- Also on 11 March 2014 M. Symons of HMRC's Local Compliance office in Bootle sent Mr Vieira eight notices of further assessment in respect of his income tax for the years ended 5 April 2003 to 5 April 2010 inclusive claiming various additional amounts of tax totalling £97,293.50. Each notice was sent to 15 Finch Drive. Each notice stated that a copy of the relevant calculation was enclosed, but no such calculations are in evidence. Each notice stated that Mr Vieira could ask for a review or appeal within 30 days. Copies of the notices were sent to Mr Azed.
- On 12 March 2014 Mr or Ms Symons sent Mr Vieira a closure notice in respect of his self-assessment tax return for the year ended 5 April 2011 claiming an additional £12,762.26. The notice does not specify how this sum was calculated, although it refers to a letter dated 5 February 2014 which is not in evidence. Again, the notice was sent to 15 Finch Drive. Again, the notice stated that Mr Vieira could ask for a review or appeal within 30 days. Again, a copy of the notice was sent to Mr Azed.
- On 26 March 2014 Mr Vieira, his wife and Mr Azed met representatives of Turpin Baker Armstrong ("TBA"), a firm of licensed insolvency practitioners, to discuss the possibility of an individual voluntary arrangement. On 28 March 2014 routine enquiries by TBA revealed that a bankruptcy order had been made against Mr Vieira. On 4 April 2014 Mr Vieira visited 3 Oldfield House and found correspondence including the first statutory demand and the petition. On 5 May 2014 Mr Vieira and Mr Azed attended a meeting with the Official Receiver. On 27 June 2014 TBA sent proposals for an IVA to all Mr Vieira's known creditors. There were six other creditors in addition to HMRC. Mr Vieira's liability to HMRC was estimated at £130,340.13 out of a total due to creditors of £207,036.80.
- On 18 July 2014 Mr Azed sent HMRC VAT returns for Mr Vieira for the period from 1 July 2010 to 28 February 2013. Mr Vieira's evidence is that he signed these returns on Mr Azed's advice and that he does not know where Mr Azed obtained the figures from.
- On 29 July 2014 there was a meeting of Mr Vieira's creditors at which his proposals for an IVA were rejected due to the opposition of HMRC. On 22 August 2014 James Patchett of TBA was appointed as Mr Vieira's Trustee in Bankruptcy. On 11 September 2014 HMRC lodged a proof of debt with Mr Patchett in the total sum of £140,049.51, but this did not take into account the information contained in the VAT returns filed on 18 July 2014.
- Sometime in September 2014 Mr Vieira instructed solicitors and appointed Fisher Phillips as his accountants in place of Mr Azed.
- On 30 January 2015 Mr Vieira applied to annul the bankruptcy order made on 11 March 2014 on the ground that he had not been properly served with the first statutory demand or the petition. He also disputed that the petition debt was due. On the same date Fisher Phillips wrote to HMRC's Insolvency Claims Handling Unit stating that Mr Vieira disputed that his turnover was over the VAT threshold, which also affected his income tax assessments. Fisher Phillips asked which department of HMRC they should liaise with about the matter.
- HMRC's evidence on the present application is that HMRC did not receive Fisher Phillips' letter dated 30 January 2015. A copy of this letter was also exhibited to Mr Vieira's witness statement of the same date in support of his annulment application, however. Despite this, there was no reply to this letter from HMRC.
- Mr Vieira's application was opposed by HMRC, who relied upon a witness statement made by Kim Saunders of HMRC's Debt Management, Enforcement and Insolvency Service in Worthing on 4 June 2015. Ms Saunders admitted, however, that HMRC's records showed that Mr Vieira's home address was 15 Finch Drive. On 21 June 2015 Mr Vieira made a witness statement in reply to Ms Saunders' witness statement in which he stated, among other things, that "my accountant is in the process of appealing the VAT issue" and that there had been no reply to the letter dated 30 January 2015. On 23 June 2015 DJ Mills sitting in the County Court at Croydon annulled the bankruptcy order on the ground that the statutory demand and petition had not been properly served on Mr Vieira.
- On 30 November 2015 Mr J. Wragg of HMRC's Debt Management and Banking office (which uses the non-geographic postcode BX5 5AB) wrote to Mr Vieira at 3 Oldfield House demanding payment of overdue VAT (based partly upon Mr Vieira's returns and partly upon assessments made by HMRC) and surcharges for the period from 1 July 2010 to 30 November 2015 in the total sum of £21,098.72. It appears probable that the reason why Mr Wragg sent this letter to 3 Oldfield House despite the judgment of DJ Mills was that 3 Oldfield House continued to be Mr Vieira's registered business address for VAT, despite HMRC's awareness that Mr Vieira was resident at 15 Finch Drive and despite the fact that Mr or Ms Symons had sent the March 2014 assessments to 15 Finch Drive.
- It appears that on 1 December 2015 someone from HMRC's Debt Management, Enforcement and Insolvency Service in Worthing (probably Mrs Charles) wrote to Mr Vieira, but this letter is not in evidence. On 11 December 2015 Fisher Phillips replied to that letter noting that they had had no reply to their letter dated 30 January 2015, stating that Mr Vieira wished to appeal against both the VAT and the self-assessed tax sums said to be due on the ground that his turnover was below the VAT threshold, asking for their letters to be passed to the appropriate VAT officer and asking HMRC to suspend collection of the liability for three months to allow for negotiations. On 18 December 2015 Fisher Phillips wrote to Mrs Charles noting that they had not had a reply to their letter dated 11 December 2015 and that Mr Vieira had received the letter from Mr Wragg dated 30 November 2015 and enclosing a copy of their reply. On the same date Fisher Phillips wrote to Mr Wragg saying that they had been corresponding with Mrs Charles and asking him to liaise with her since it was difficult for them to correspond with multiple offices.
- There was no reply by HMRC to any of Fisher Phillips' letters dated 11 and 18 December 2015 until 11 February 2016 when Mrs Charles replied to the letter to her dated 18 December 2015. She said that she had asked both the self-assessment department and the VAT office to carry out a final review of Mr Vieira's tax affairs. She noted that the matter had been going on for some considerable time and that following the reviews, "should there be a debt deemed legally due and payable, [HMRC] will be looking for payment in full within a very short timescale." The letter stated that the amount outstanding was £177,014.86, as shown in a statement enclosed with the letter, but the statement is not in evidence.
- Mr Vieira's hearsay evidence is that the letter dated 11 February 2016 was not received by Fisher Phillips until a copy of it was exhibited to HMRC's evidence on the present application.
- On 8 June 2016 Miss G. Price of HMRC's Debt Management, Enforcement and Insolvency Service in Worthing wrote to Fisher Phillips. After the bald statement "£122488.91 plus interest", she said that HMRC did not have a "64-8" (i.e. a form completed by Mr Vieira authorising Fisher Phillips to act on his behalf). She went on:
"Please can you forward additional information to S Bush ... and explain all payments into business and personal bank accounts, plus information pertaining to work carried out by other drivers.
If such information is available HMRC may be able to review the case, however your client is out of time for an appeal or review and this would only be a concession. We would not enter into a meeting at this stage.
If nothing has been received by 6 July 2016 and I have not been advised to delay action, a statutory demand will be served on your client."
- Mr Vieira's hearsay evidence is that this letter was not received by Fisher Phillips until a copy of it was faxed to them on 22 July 2016 following a telephone conversation between a representative of Fisher Phillips and a representative of HMRC. There is no evidence as to what was said during that telephone conversation.
- On 25 July 2016 Fisher Phillips wrote to Mrs Bush referring to the annulment of the bankruptcy order and the correspondence in December 2015. I note that the letter did not state that Miss Price's letter dated 8 June 2016 was not received until 22 July 2016. On the contrary, it stated that "no response was received from Debt Management until last month". The letter concluded by asking Mrs Bush to confirm that she was the person dealing with the matter "so that we can establish a proper method of reviewing the points at issue so that the position can be resolved".
- The second statutory demand was signed on behalf of Mrs Charles on 25 July 2016. Of the £180,747.90 claimed, £157,683.18 related to self-assessment (i.e. income tax) and £23,064.72 to VAT.
- Mrs Bush, now of HMRC's Individual and Small Business Compliance Office in Newcastle, replied to Fisher Phillips' letter dated 25 July 2015 on 3 August 2016 saying that the letter had been forward to her "as the original decision maker on the VAT enquiry". She again asked for the authority form to be provided. She went on:
"In the interim please advise your client that he is allowed 30 days from the date of the assessment or penalty to appeal. As we received your appeal after the 30-day limit, this is a late appeal.
The law says that when you appeal to [HMRC], you must do so within the time limit. We may accept a later appeal if you had a reasonable excuse for not appealing within the time limit and you appealed as soon as you could after the reasonable excuse ended.
The law does not say what a reasonable excuse is. [HMRC's] view is that a reasonable excuse is normally an unexpected or unusual event, either unforeseen or beyond your control, that prevented you from sending an appeal within the time limit. We consider each case on its own facts.
Your client has not given any reason for this late appeal, neither has he given his reasons why he asks for a review.
If he requires HMRC to consider a late request for an internal review by an officer not previously involved in this matter he must write to me by 3 September 2016 giving details of his reasons for not applying at the correct and his grounds for a review."
She then explained the procedure for making a late appeal to the FTT.
- On 8 August 2016 Fisher Phillips replied enclosing the authority form which had been requested. Otherwise, no response was provided to the questions raised by Mrs Bush in her letter.
- On 15 August 2016 Mrs Bush wrote to both Fisher Phillips and Mr Vieira. This time the peripatetic Mrs Bush wrote from HMRC's Individual and Small Business Compliance office in Bootle. In her letter to Fisher Phillips she said:
"Please find enclosed a copy of the letter issued to Mr Vieiria [sic] today concerning your request for a review of my decision to compulsorily register him for VAT that was made in 2012.
Your client has not given any reason for making a late appeal except that he says he did not understand the implications of my decision. It should be noted that Mr Vieiria was represented by his agent at all stages of my enquiry and full explanations behind the reasons for my decision have been submitted to both Mr Vieiria and his advisor.
Your letter dated 30 December 2015 refers to your client's bank account. Pease note that business income was paid into both his business accounts. This was verified with Mr Vieira at the time.
HMRC also addressed the extent of work put to other drivers and established that Mr Vieiria acts as a Principle [sic] in the business not an agent in making a supply to the customer.
As Principle he must include all of the following when calculating his turnover.
● the full amount payable by the customer before deducting any payment made to his drivers
● any fares he (as the sole proprietor, director or partner) receives if he drives for the firm
● the full fares payable by passengers even if he sub-contracts work to an independent business or owner or owner driver and
● any referral fee he receives from other taxi businesses.
Further information on this may be found in Notice 700/25 Taxis and Private Hire Cars.
In the absence of any new information or reason for a late appeal then I am unable to agree to a meeting to discuss the matter."
As can be seen, the tenor of this letter was that Mr Vieira's requests for a review and a late appeal were both rejected.
- In her letter to Mr Vieira, which was addressed to him at 3 Oldfield House, Mrs Bush commenced by saying that Fisher Phillips had sent HMRC an appeal "against the assessment and penalties we charged you for not registered for VAT at the correct time", but that the deadline for appealing had passed. She then explained the circumstances in which HMRC could accept a late appeal in very similar terms to her letter dated 3 August 2016. She went on:
"If you think that these circumstances apply to you, please write to us stating the reasons why you failed to appeal within the 30 day time limit.
If these circumstances don't apply, we can't accept your agent's letter as an appeal because the deadlines for appealing against the assessment and penalty have passed.
If you don't agree that your appeal is too late
If you don't agree that your agent's appeal was too late for us to consider, you can ask for the case to be reviewed by HM Courts and Tribunal services. They'll arrange for an independent tribunal to consider the appeal. You'll need to do this by 4 August 2016. "
It is common ground that "4 August 2016" was an obvious typographical error and that the letter should have read "4 September 2016".
- On 16 August 2016 the second statutory demand was served on Mr Vieira at 15 Finch Drive.
- On 22 August 2016 Fisher Phillips replied to Mrs Bush's letters dated 22 August 2016 at some length. They pointed out that Mr Vieira's address was 15 Finch Drive; they enclosed a copy of Mr Vieira's witness statement dated 30 January 2015; they referred to their correspondence with Debt Management asking for details of the responsible officer and the absence of a reply before the letter dated 8 June 2016 (which this time they did say was faxed on 22 July 2016); they asked whether Mrs Bush was dealing with all the assessments or just the VAT aspect; they set out reasons for Mr Vieira not having appealed earlier; they noted the erroneous date of 4 August 2016; they set out Mr Vieira's grounds for an appeal against the VAT assessments, namely that he did not act as principal in referring work and that his turnover was below the VAT threshold; and they suggested that it would save time to have a meeting.
- On 26 August 2016 Mrs Bush replied to Fisher Phillips' letter dated 22 August 2016, also at some length. She said (rather remarkably) that this was the first time that she had been informed of Mr Vieira's change of address. She then referred to her letter to Mr Vieira dated 15 August 2016 in which she had advised Mr Vieira that "his request for a review or appeal was out of time" and stated that her opinion had not changed. She noted that no evidence had been produced to substantiate the claim that HMRC had overestimated Mr Vieira's income, and she stated that the direct tax assessment arose from her decision. As for a late appeal, she did not agree that Mr Vieira had a reasonable excuse. Her letter dated 13 February 2012 had advised him that he should ask for a review or appeal within 30 days, but he had not done so despite having engaged an accountant to assist him. Events since then did not provide a reasonable excuse for not making an application at the correct time. She did not consider that there was any benefit to be gained from a further meeting with Mr Vieira given that there had been three meetings with him in 2011 (in fact 2010-2011). She concluded by reminding Fisher Phillips that Mr Vieira could appeal to the FTT.
- On 2 September 2016 Mr Vieira applied to set aside the second statutory demand.
- On 9 September 2016 C. Shakespeare of HMRC's Business Tax Operations Unit in Wolverhampton wrote to Mr Vieira at 15 Finch Drive saying that they had "recently" been informed of a change to his principal place of business and asking him to complete VAT Form 484 with his new details.
- Mr Vieira's evidence is that he did not receive the letter dated 9 September 2016 until a copy of it was exhibited to HMRC's evidence on the present application.
- On Friday 30 September 2016 Fisher Phillips filed a notice of appeal to the FTT on behalf of Mr Vieira. I infer that it was sent after close of business, since it was stamped as having been received by the FTT on 3 October 2016. The FTT acknowledged receipt of the notice of appeal on 4 November 2016 and gave HMRC until 6 January 2017 to serve a statement of case.
- On 11 November 2016 Mrs Bush wrote to Mr Vieira, with a copy to Fisher Phillips, to correct the erroneous date of 4 August 2016 in her letter dated 15 August 2016.
- On 21 November 2016 Mr Vieira's application to set aside the second statutory demand was heard by Deputy Registrar Mullen.
- I was informed at the hearing before me that, in their statement of case before the FTT, HMRC had requested the FTT to strike out Mr Vieira's appeal under rule 8(3)(c) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, but that this application had not yet been determined. I was informed subsequently that a hearing to determine the application had been fixed for 18 May 2017.
The Deputy Registrar's judgment
- In his judgment the Deputy Registrar said that Mr Vieira's application was based on two grounds: first, that Mr Vieira disputed the debt; and secondly, that the statutory demand was premature because Mr Vieira had been told that he had until 3 September 2016 to appeal.
- So far as the first ground was concerned, the Deputy Registrar held that the matter was "squarely within" paragraph 13.3.3 of the Practice Direction. The reason for that provision, which had been established in cases such as Lam v Inland Revenue [2005] EWHC 592 (Ch), [2006] STC 893 and Her Majesty's Revenue and Customs v Chamberlin [2011] EWCA Civ 271, [2011] STC 1237, was that "questions about the validity of the statutory debts arising from those assessments is [sic] within the exclusive jurisdiction of the tax tribunal". He went on to observe that it would be for HMRC to consider whether it was appropriate to present a petition in the light of an extant appeal to the tax tribunal. The tax tribunal would consider the issues raised by Mr Vieira and its decision would be "effective" (meaning, I think, binding) save in the very limited circumstances contemplated in Lam.
- As to the second ground, he held that he "need not consider this", because Mr Vieira's notice of appeal had not been filed until about a month later.
- When reviewing the transcript of his judgment, the Deputy Registrar added that in dismissing the application he had been exercising the power conferred by rule 6.5(3) of the Insolvency Rules.
The appeal
- On 12 December 2016 Mr Vieira filed a notice of appeal seeking permission to appeal against the Deputy Registrar's order on eight grounds. Grounds 1-5 allege various procedural irregularities on part of the Deputy Registrar while grounds 6-8 concern the interpretation and application of paragraph 13.3.3 of the Practice Direction. On 16 January 2016 Rose J ordered that the application for permission to appeal be listed for an oral hearing with the hearing of the appeal to follow immediately if permission was granted. At the end of the hearing before me I granted permission to appeal.
Grounds 1-5
- Counsel for Mr Vieira did not press grounds 1-5 at the hearing. In my judgment he was right not to do so. I will deal with them briefly. Ground 1 is a complaint that the Deputy Registrar should not have dealt with the matter summarily given that it was listed for 10 minutes, but should have given directions. This complaint is unfair to the Deputy Registrar, since counsel for Mr Vieira had himself requested summary dismissal of the second statutory demand in his skeleton argument. Furthermore, the Deputy Registrar sat through his lunch hour to hear the matter. Ground 2 is a complaint that the Deputy Registrar did not have, and therefore had not pre-read, HMRC's evidence or Mr Vieira's evidence in reply. This again is unfair to the Deputy Registrar: it was not his fault that he had not been provided with copies of the relevant statements in advance. In any event, he was handed the statements during the hearing and Mr Vieira's case was not prejudiced by this. Ground 3 is a complaint that, in his judgment, the Deputy Registrar referred to two authorities which had not been mentioned in argument, namely Lam and Chamberlin. There is nothing in this point: the Deputy Registrar relied upon paragraph 13.3.3 of the Practice Direction, which he explicitly put to counsel for Mr Vieira during the course of argument. All he added in his judgment was that cases such as Lam and Chamberlin explained the rationale for that provision. Ground 4 is a complaint that the judgment was factually inaccurate. There is nothing in this point either. The inaccuracy was pointed out to the Deputy Registrar at the time, and he corrected it. It did not affect his reasoning. Ground 5 is that the Deputy Registrar did not deal with the cases cited by counsel for Mr Vieira in his skeleton argument. But the key authority cited in the skeleton argument was not mentioned by counsel in his oral submissions. In those circumstances, it is understandable that the Deputy Registrar did not refer to it.
Ground 7
- Ground 7 is that the Deputy Registrar was wrong to interpret paragraph 13.3.3 of the Practice Direction as requiring the dismissal of an application to set aside a statutory demand in circumstances where there was an extant appeal to the FTT. The correctness of this contention is the central issue raised by this appeal.
The statutory framework
- Section 73(9) of the Value Added Tax Act 1994 provides:
"Where an amount has been assessed and notified to any person under subsection (1), (2), (3) or (7) above it shall, subject to the provisions of this Act as to appeals, be deemed to be an amount of VAT due from him and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced."
- The 1994 Act does not expressly provide that the amount of VAT declared as owing by a trader in his VAT return constitutes a recoverable debt, but it has been held that this is implicit in the statutory scheme: see Chamberlin at [26] (Sir Terence Etherton C).
- Assessments for the payment of income tax are also recoverable as debts unless and until they are appealed: see sections 29 and 31 of the Taxes Management Act 1970.
- Section 122(1)(f) of the Insolvency Act 1986 provides that a company "may be wound up by the court if … the company is unable to pay its debts". Section 123(1) provides that a company is "deemed unable to pay its debts" if, among other things, (a) a creditor to whom the company is indebted in a sum exceeding £750 has served on the company a "written demand (in the prescribed form) requiring the company to pay the sum so due" and then company has not paid the sum (or secured or compounded for it) within three weeks or (e) it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. Section 125(1) provides that on the hearing of a winding-up petition "the court may dismiss it, or adjourn the hearing conditionally or unconditionally, or make an interim order, or any other order it thinks fit".
- Turning from corporate to personal insolvency, section 267(2) provides that a creditor's petition may be presented to the court in respect of a debt only if four conditions set out in subsubsections (a) to (d) are satisfied: (a) is that the debt is equal to or exceeds the "bankruptcy level" (£5,000) and (c) is that the debt is a debt which "the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay". Section 268(1) provides that the debtor appears to be unable to pay a debt if, but only if, he has been served with "a demand (known as 'the statutory demand') in the prescribed form requiring him to pay it, at least three weeks have elapsed since the demand was served and the demand has not been either complied with or set aside". Section 268(2) provides that the debtor appears to have no reasonable prospect of being able to pay a debt if, but only if, the same conditions are satisfied. Section 271(1) provides that the court shall not make a bankruptcy order unless it is satisfied that the debt in respect of which the petition was presented has been neither paid nor secured or compounded for.
- The statutory demand referred to in section 268(1) is prescribed by rule 6 of the Insolvency Rules 1986. Rule 6.4 enables the debtor to apply to the court for an order setting aside a statutory demand served on him. The grounds on which the court may set a statutory demand aside are those set out in rule 6.5(4). Those grounds include "(b) the debt is disputed on grounds which appear to the court to be substantial" and "(d) the court is satisfied, on other grounds, that the demand ought to be set aside".
- I have set out paragraph 13.3.3 of the Practice Direction in paragraph 2 above. Paragraph 13.3.4(b) of the Practice Direction provides that, where the debtor disputes the debt "(not being a debt subject to a judgment, order, liability orders, costs certificate or tax assessment) the court will normally set aside the statutory demand if, in in its opinion, on the evidence there is a genuine triable issue". Although the Practice Direction came into force on 29 July 2014, these provisions are based on paragraphs 3 and 4 of the Practice Note (Bankruptcy: Statutory Demand: Setting Aside) [1987] 1 WLR 119 issued by the then Chief Bankruptcy Registrar, except that paragraphs 13.3.3 and 13.3.4 extend, whereas paragraph 3 and 4 of the Practice Note did not extend, to liability orders, costs certificates and tax assessments.
Previous case law
- There is a long line of cases in which bankruptcy and insolvency courts have declined to go behind tax assessments and have treated the correctness of such assessments as lying exclusively within the province of the relevant tax tribunal, now the FTT. There are cases, however, in which the courts have appeared to adopt a more flexible approach. I shall consider these two lines of authority in turn. I should make it clear before doing so that, although cases from each line were cited in argument, I have subsequently found additional cases in each line through my own researches.
- The first line begins with In re Calvert [1899] 2 QB 145. In that case the debtor had been assessed for tax under Schedule D in a certain amount. He did not appeal against that assessment. Subsequently a receiving order was made against him, and a proof was lodged by the collector of taxes for the amount of the assessment as a preferential debt. The debtor applied to expunge the proof on the ground that he had made no profits in the period in question. The application was rejected by Wright J. He said at page 147:
"In the case of an assessment there is no question of consideration as there is in the case of a judgment: there is a mere administrative assessment with a special mode of appeal provided which must be followed. I cannot think it possible that it is competent to the Bankruptcy Court, on the invitation of the trustee in bankruptcy or of the debtor, to reopen questions of that kind on a motion to expunge. It is quite impossible to conceive that it would be competent for me sitting here to go into the question of the rateable values of a union or of a parish, or any question of that sort. That seems to me to be a case which is analogous to the case in which I am at present invited to act. I think the application fails and must be dismissed with costs; but my decision will not interfere with any application the debtor may be advised to make to the Inland Revenue under the Board of Trade Regulations of May, 1888."
- In Commissioners of Inland Revenue v Pearlberg [1953] 1 WLR 331 assessments for income tax had been made against Mr Pearlberg. He neither appealed nor paid the tax. The Commissioners issued a writ claiming the unpaid tax. Mr Pearlberg disputed that he was chargeable to the tax. The master granted the Commissioners summary judgment and his order was affirmed by the judge and the Court of Appeal. Denning LJ, with whom Morris LJ agreed, said at 333:
"In my opinion, therefore, all issues on the merits of these cases, as to fact or law, should have been determined by appeal to the Commissioners and cannot be raised at this stage. If there has been no appeal to the Commissioners the debts become absolute and conclusive, and their legal effect cannot be denied."
- In In Re Moschi (1953) 35 TC 92 an assessment to tax had been made against Mr Moschi and had been upheld in the court of first instance and the Court of Appeal. The Commissioners, having obtained judgment based on the assessment, presented a bankruptcy petition based on the judgment and Mr Moschi was adjudicated bankrupt. Mr Moschi's wife applied to annul the bankruptcy. Danckwerts J, having cited from Re Calvert, held at 94 that "the assessment having taken the proper course relevant to such a matter through the Courts, it is final and binding and is not a matter which I can now go into and reopen in the way an ordinary judgment can be reopened".
- In Cullinane v Inland Revenue Commissioners [2000] BPIR 996 income tax assessments against Mr Cullinane were determined on appeal to the General Commissioners in 1992 and 1993. A bankruptcy order was subsequently made against Mr Cullinane in 1996 and he applied for its annulment in 1999. That application was dismissed by the registrar. Mr Cullinane appealed to this Court. When the appeal came on for hearing, Mr Cullinane sought an adjournment to enable him to explore further the question whether the Revenue had any documentation in its possession which might enable him to show that the assessments and determinations on which the bankruptcy petition was founded were in some way fraudulently obtained. Hart J refused the adjournment for a number of reasons. One of them, which he described at 997 as "decisive", was that, in accordance with Re Calvert and Re Moschi, "all the matters to which this evidence is said to relate are matters which go to allegedly to [sic] the finality of the Commissioners' determination, and are not matters with which the bankruptcy court is permitted to concern itself". Hart J went on to dismiss the appeal for the same reason, saying "I cannot make an order allowing the appeal, even if I were satisfied as to the grounds upon which the appeal is made".
- In Lam the Revenue served Mr Lam with a statutory demand seeking payment of arrears of assessed tax, penalties and surcharges. Mr Lam neither applied to set aside the statutory demand nor paid the sum claimed (apart from a small amount). Mr Lam had appealed against some of the assessments, with the result that they had been adjusted downwards, but not others. Mr Lam had, however, repeatedly asserted in correspondence with the Revenue that the assessments were erroneous. The Revenue presented a bankruptcy petition, the registrar made a bankruptcy order and Mr Lam appealed. He continued to protest that he had not made the profits on which he had been assessed to tax. In his judgment Blackburne J said:
"12. I understand that, but I have to remind myself (as [counsel for the Revenue] has submitted), that authority clearly establishes that where assessments to tax are concerned Parliament has provided a clear and exclusive machinery for considering appeals against them. The statutory machinery does provide for appeals to the court. That machinery, as [counsel] correctly submits, is an exclusive machinery and an assessment, when made, is final and binding if it is not appealed. If it is appealed, the determination of an appeal is likewise final and binding, subject to any application there may be, in appropriate circumstances, to the court. In particular, she submits, it is not for the Bankruptcy Court to go behind those matters. As [counsel] also submits, there is a wealth of authority to that effect, stretching back (in relation to predecessors of the current legislation) to the latter part of the 19th century.
13. [Counsel] is correct in that submission. It is not open to the Bankruptcy Court to review the manner in which the assessment has been made, much less to investigate the merits of the assessment. I can see that if there were evidence that the assessments had been made in some fraudulent or collusive way, or there were some other glaring miscarriage of justice, it might be that the Bankruptcy Court could go behind the assessment and not make the Bankruptcy Order based upon the debt created by the unpaid tax resulting from the assessment, but there is no suggestion of that in this case. On the contrary, as I have endeavoured to show, the Revenue have entertained attempts by Mr Lam, personally and through advisers, to reconsider the amount of the assessments, but have not been persuaded on the information that has been provided that they should do so."
- Before proceeding, I note at this point that the exception articulated by Blackburne J at [13] is similar, but not identical, to the test extracted by Etherton J in Dawodu v American Express Bank [2001] BPIR 983 from a series of earlier authorities going back to Re Lennox (1885) 16 QBD 315 in the context of petitions based on judgment debts:
"… the cases establish that what is required before the court is prepared to investigate a judgment debt, in the absence of an outstanding appeal or an application to set it aside, is some fraud, collusion, or miscarriage of justice. The latter phrase is of course capable of wide application according to the particular circumstances of the case. What in my judgment is required is that the court be shown something from which it can conclude that had there been a properly conducted judicial process it would have been found, or very likely would have been found, that nothing was in fact due to the claimant. It is clear that in those circumstances the court can enquire into the judgment and the judgment debt, even though the debtor himself has previously applied to have the judgment set aside, and even though that application has been refused and that refusal has been affirmed by the Court of Appeal …"
- As the authorities discussed by Etherton J make clear, however, judgment debts stand in a different position to tax assessments, in particular because of the risk that a debtor may either consent to judgment or allow a judgment to be entered by default regardless of whether a debt is truly owed, to the potential prejudice of other creditors.
- Returning to the first line of cases, in Worby v Inland Revenue [2005] EWHC 835 (Ch), [2005] BPIR 1249 Mr Worby had been the subject of assessments of income tax, surcharges and penalties, but had not paid. The Revenue served a statutory demand. Mr Worby applied to set the statutory demand aside, but the application was dismissed. The Revenue presented a bankruptcy petition, and the registrar made a bankruptcy order. Mr Worby appealed, disputing the accuracy of the assessments. Sir Donald Rattee dismissed the appeal, saying:
"It is no longer open to Mr Worby to seek to disturb by an appeal to this court the previous determinations of tax, liability to tax for previous years. That liability could have been challenged only in accordance with the statutory procedure laid down by Parliament for appeals to the Commissioners for Income Tax and appeals from there up to this court by way of case stated. It is not open to the court now to re-open and re-examine liability for tax in those previous years."
- Autologic Holdings plc v Inland Revenue Commissioners [2005] UKHL 54, [2006] 1 AC 118 did not concern bankruptcy proceedings, but an attempt by the taxpayer to recover tax paid otherwise than by means of the statutory procedure. After referring to the statutory jurisdictions for which the Taxes Management Act 1970 and other statutes provided, Lord Nicholls of Birkenhead, with whom Lord Steyn and Lord Millet agreed, said:
"12. Clearly the purpose intended to be achieved by this elaborate, long established statutory scheme would be defeated if it were open to a taxpayer to leave undisturbed an assessment with which he is dissatisfied and adopt the expedient of applying to the High Court for a declaration of how much tax he owes and, if he has already paid the tax, an order for repayment of the amount he claims was wrongly assessed. In substance, although not in form, that would be an appeal against an assessment. In such a case the effect of the relief sought in the High Court, if granted, would be to negative an assessment otherwise than in accordance with the statutory code. Thus in such a case the High Court proceedings will be struck out as an abuse of the court's process. The proceedings would be an abuse because the dispute presented to the court for decision would be a dispute Parliament has assigned for resolution exclusively to a specialist tribunal. The dissatisfied taxpayer should have recourse to the appeal procedure provided by Parliament. He should follow the statutory route.
…
15. Lord Wilberforce's formulation [in In re Vandervell's Trusts [1971] AC 912 at 939-940] indicates that, apart from cases of straightforward abuse, there is an area where the court has a discretion. In Glaxo Group Ltd v Inland Revenue Commissioners [1995] STC 1075, 1083-1084, Robert Walker J put the matter this way:
'It is not easy to discern any clear dividing-line between High Court proceedings which are, and those which are not, objectionable as attempts to circumvent the exclusive jurisdiction principle. Possibly the correct view is that there is an absolute exclusion of the High Court's jurisdiction only when the proceedings seek relief which is more or less co-extensive with adjudicating on an existing open assessment: but that the more closely the High Court proceedings approximate to that in their substantial effect, the more ready the High Court will be, as a matter of discretion, to decline jurisdiction.'
I respectfully agree with this approach, subject to noting that, at least as a general principle, the taxpayer and the revenue are each entitled to insist that the statutory procedure for dealing with disputed assessments should be followed."
- In Owen v Her Majesty's Revenue and Customs [2007] EWHC 395 (Ch), [2008] BPIR 164 Mr Owen had failed to file self-assessment returns. HMRC raised assessments which he did not pay. HMRC served a statutory demand which he applied to set aside. Mr Owen adduced medical evidence which he relied on as showing that he had been, and remained, unable to file returns challenging the assessments. Lewison J held that the evidence did not establish that Mr Owen was unable to file returns. He went on:
"22. If Mr Owen does not file tax returns, then the system is such that the assessments made by HM Revenue & Customs stand as debts. The bankruptcy courts are not the process by which the adequacy or accuracy of those assessments may be challenged, as is made clear by the decision of Hart J in Cullinane v Commissioners of Inland Revenue [2000] BPIR 996.
23. A statutory demand can only be set aside if the debtor establishes that he disputes the claimed debt on substantial grounds. Mr Owen, in effect, says that he is not yet in a position to dispute the debts because he cannot file appropriate tax returns which would enable the procedure under the Taxes Management Act to be followed through. That, I regret to say, does not, in my judgment, amount to substantial grounds. …"
- In Chamberlin Ms Chamberlin filed VAT returns but did not pay the sums shown as due. HMRC served a statutory demand, to which she did not respond. HMRC presented a petition which she did not defend and she was made bankrupt. She applied to annul the bankruptcy order, but the application was dismissed by the registrar. She also appealed to the VAT Tribunal, but her appeal was rejected on technical grounds. She also applied to HMRC for the correction of alleged errors in her returns, but that application was also rejected. She then made a second application to annul the bankruptcy order contending that her returns had been wrong and that no VAT was due to HMRC. The chief registrar dismissed the application. Ms Chamberlin appealed to this Court. Her appeal was allowed by David Donaldson QC sitting as a Deputy High Court Judge on the ground that VAT returns did not give rise to a debt. The Court of Appeal allowed an appeal by HMRC, holding that, as noted above, VAT returns did give rise to a debt.
- In his judgment, with which Toulson and Sullivan LJJ agreed, Sir Terence Etherton C stated at [16]:
"The interaction of the insolvency regime and the various tax regimes has led to a well established practice to the effect that the courts involved in the former leave the establishment of a liability to tax to the statutory procedures applicable by the latter. For instance the bankruptcy court does not usurp the jurisdiction of the VAT Tribunal by itself enquiring into matters within the statutory jurisdiction of the latter. This practice is well illustrated by Re Calvert [1899] 2 QB 145 and Lam v Inland Revenue [2005] BPIR 301."
- Having cited from Calvert, Lam and Autologic, Etherton C went on at [20]:
"In the case of judgment debts the bankruptcy court has been prepared to go behind the judgment to satisfy itself that the judgment was not collusive or otherwise for proper consideration, see for example Ex Parte Kibble (1875) 10 Ch App 373. In addition the general principle appears to have admitted of exceptions in the case of the late council tax, see for example London Borough of Lambeth v Simon [2007] BPIR 1629. Neither of those exceptions can avail the Applicant if, as I shall consider in due course, the statutory liability to VAT imposed by the VAT Act and subordinate legislation and the returns submitted by her in compliance with it created debts due by her to HMRC."
- Having concluded that the deputy judge had been wrong to conclude that Ms Chamberlin's VAT returns had not given rise to a debt, Etherton C stated at [27]:
"Second, the question whether those returns had been made in error and had overstated the amount of VAT due was clearly referable to HMRC pursuant to Regulation 35 of the VAT Regulations …. The Applicant made two voluntary disclosures under that Regulation after the bankruptcy order had been made, namely on 4th July 2006 and 20th August 2009. The first was rejected on its merits the second was out of time. In those circumstances it was not open to the deputy judge to conclude as a matter of fact that the relevant returns had contained errors or overstatements ….. Nor was this such an exceptional case as was recognised by Lord Nicholls and Blackburne J as would entitle the bankruptcy court to entertain the question. …"
- In Commissioners of Her Majesty's Revenue and Customs v Harris [2011] EWHC 3094 (Ch), [2011] STI 3429 HMRC had served a statutory demand on Mr Harris in respect of VAT and income tax assessments, surcharges and penalties. There was no application to set aside the statutory demand. HMRC presented a petition. Mr Harris served a notice of opposition. HMRC applied to dismiss the notice of opposition. The registrar acceded to HMRC's application, although he did not proceed to make an immediate bankruptcy order. Mr Harris appealed to this Court, but his appeal was dismissed. The principles established by many of the cases considered above were succinctly summarised by William Trower QC sitting as a Deputy High Court Judge as follows:
"12. Long before the enactment of these provisions, it was an established principle that the bankruptcy court will not go behind a tax assessment for the purposes of determining the existence or amount of a proof of debt (In re Calvert [1899] 2 QB 145). The assessment gives rise to a statutory debt and any challenge is to be made through the machinery laid down in the taxes legislation. The same principle is applicable where the taxpayer seeks to reopen in the context of ordinary High Court proceedings the question of whether he should be treated as indebted to HMRC in respect of the amount of a tax assessment which has not been successfully appealed: IRC v. Pearlberg [1953] 1 WLR 331 in which Denning LJ summarised the position as follows:
'If there has been no appeal to the Commissioners the debts become absolute and conclusive and their legal effect cannot be denied.'
13. It is also well established that these basic principles are applicable not just in the context of HMRC's right to prove, but also on the hearing of a bankruptcy petition where the debtor seeks to challenge a petition debt derived from an assessment, which has not been successfully appealed. Where such an assessment has been made, and therefore a statutory debt has arisen, the bankruptcy court cannot remedy the position, even if it were to conclude that an appeal under the taxes legislation might have succeeded. In the case of a tax assessment, those appeal procedures are the only mechanism by which the debt established by the assessment can be challenged (Cullinane v. IRC [2000] BPIR 996). As Blackburne J explained in IRC v. Lam [2009] BPIR 301 at [ 13]:
'It is not open to the Bankruptcy Court to review the manner in which the assessment has been made, much less to investigate the merits of the assessment.'
14. The principle is applicable whatever the nature of the issue that is said to justify a conclusion that the debt ought not to have arisen. Examples of the circumstances in which the principle has been applied are where the taxpayer alleged that he did not engage in the relevant taxable activity and was a bankrupt (Pearlberg) and where the taxpayer alleged that he was in fact employed and not self-employed (Lam). The underlying principle is a broad one: does the issue raised by the taxpayer amount in substance, whether or not in form, to an appeal against the assessment? If it does, the court will not inquire into the matter because that might lead to the negation of an assessment otherwise than in accordance with the statutory code (cf Lord Nicholls in Autologic plc v. IRC [2005] UKHL 54 at para [12]).
15. Although most of the cases in this area deal with income tax assessments, the same principles apply in relation to VAT assessments (see the decision of the Court of Appeal in HMRC v. Chamberlin [2011] BPIR 691). As the Chancellor confirmed in that case the only exceptions to this principle which may exist are those referred to by Blackburne J. in Lam; namely fraud, collusion or possibly some glaring miscarriage of justice. ..."
- Turning to the second line of cases, in HM Commissioners of Customs & Excise v D & D Marketing (UK) Ltd [2002] EWHC 660 (Ch), [2003] BPIR 539 the Commissioners petitioned to wind up a company. The petition debts were based on VAT assessments. The company had filed an appeal to the VAT Tribunal. The company argued that this meant that the debt was not presently due. Evans-Lombe J rejected that interpretation of section 73(9) of the 1994 Act, but he went on:
"It follows that the petition debt remains due as at today when I am asked by the Commissioners to make a winding-up order against the company. I therefore have to consider whether I should make that order.
That is a matter for my discretion. It does not follow that, because the debt is deemed still to be due, it would be appropriate to make a winding-up order if I were satisfied that the company on its appeal to the VAT Tribunal stood a reasonable chance of succeeding with that appeal."
On the evidence, he held that the appeal did not have a reasonable chance of success and so he made the order.
- In Revenue and Customs Commissioners v Changtel Solutions UK Ltd [2015] EWCA 29, [2015] 1 WLR 3911 HMRC issued a number of VAT assessments against Changtel, almost all of which remained unpaid. The FTT granted Changtel an extension of time for appealing against the assessments on the basis that it was not persuaded that the appeals were hopeless, as HMRC contended. HMRC petitioned to wind up Changtel on the basis that it could not pay its debts, relying upon the unpaid assessments. HMRC had not served a statutory demand. David Donaldson QC sitting as a Deputy High Court Judge dismissed the petition on the ground that the Companies Court should defer to the FTT's decision.
- The Court of Appeal allowed HMRC's appeal for reasons which Vos LJ, with whom Patten and Longmore LJJ agreed, summarised as follows:
"71. For the reasons I have tried shortly to express, I think the judge was wrong to say that the Companies Court must defer to the tax tribunal in a case of this kind. That does not meant that the tax tribunal will not normally be the appropriate forum to determine whether an appeal against a VAT assessment had a real prospect of success. Moreover, when the tax tribunal had reached a conclusion on such an issue, that decision is normally likely to be a compelling factor in the Companies Court's exercise of discretion. That discretion is not, however, completely abrogated by the jurisdiction of the tax tribunal. It need not defer to the tax tribunal in every case, though it may often choose to do so.
72. Here, the facts are quite exceptional, and in my judgment the judge ought, after a full consideration, to have concluded that they showed the debts represented by the dispatch assessments were not disputed by the company in good faith and on substantial grounds."
- A key aspect of Vos LJ's reasoning was that the Companies Court and the FTT had different functions:
"40. … It is true, as the judge said, that the adjudication on the correctness of a tax assessment had been entrusted by Parliament to a specialist tax tribunal. But that does not mean that the question that the Companies Court has to decide is the same, or even substantially the same, as the one that faces the tax tribunal. The presentation of a petition to wind up a trader, which had appealed against a tax assessment, is not an indirect way of winning the appeal. The appeal will remain extant even if the trader is wound up. It is simply that there will be a process of collective execution in place that will allow the liquidator rather than the company's directors to decide whether to pursue the tax appeal. For that reason, the House of Lords' decision in the Autologic case is not applicable here.
41. As [counsel for Changtel] correctly stressed, the decision for the Companies Court both on the company's application to dismiss the petition (and restrain advertisement) and on the petition itself is discretionary. …
…
43. I accept that the substance of the decisions to be reached by the Companies Court and the tax tribunal may, in many cases, be similar, but they are not identical because of the difference between the essential nature of the underlying questions at issue. …"
- At first blush, it seems surprising that (apart from Autologic, which was cited in Changtel) none of the authorities considered in paragraphs 60-74 above was cited in either D & D Marketing or Changtel. This is less surprising, however, once it is appreciated that what distinguishes both D & D Marketing and Changtel from the other cases is that appeals by the taxpayers were pending before the FTT when the petitions came before the Companies Court.
- For completeness, I would add that counsel for Mr Vieira also relied upon the dicta of Robert Walker LJ in Garrow v Society of Lloyds [2000] CLC 241 at 247:
"Although Lloyd's has a judgment against Mr Garrow, it has chosen to proceed by way of a statutory demand and the statutory demand is crucial to the making of a bankruptcy order. It would be contrary to the scheme of the legislation, and to the practice of the bankruptcy court, to allow a doubtful statutory demand to stand on the ground that the debtor would still have the opportunity of opposing a bankruptcy petition, once presented. Counsel for Lloyd's have argued that that course would enable Lloyd's to present a petition and so establish a date by reference to which transactions might be invalidated or impeached under s. 284 and 339ff. of the Insolvency Act 1986, while protecting Mr Garrow by an adjournment of the final hearing of the petition. However it is precisely because of the far-reaching effect of those sections (and comparable sections in the winding-up legislation) that the bankruptcy court and the Companies Court have a strong and well-established policy of discouraging long or repeated adjournments of bankruptcy and winding-up petitions. The judge was right to reject the suggestion that he should allow a petition to be presented and then go into suspended animation."
Those observations were not addressed to statutory demands based on tax assessments, however.
Submissions of the parties
- Counsel for Mr Vieira submitted in summary that it could not be a correct interpretation of paragraph 13.3.3 of the Practice Direction for the Bankruptcy Court to dismiss an application to set aside a statutory demand where an appeal to the FTT was pending.
- Counsel for HMRC submitted in summary as follows:
i) the function of a statutory demand was evidential: in the case of an individual, it provided the basis for concluding that he or she was unable to pay the debt in question;
ii) paragraph 13.3.3 accurately reflected the principles established in cases such as Lam and Chamberlin; and
iii) as shown by Changtel, the Bankruptcy Court had a wider discretion when it came to considering a petition based upon a statutory demand.
Analysis
- In my judgment the starting point is that the Practice Direction is a form of secondary legislation. Accordingly, it must be given effect to by the courts. Turning to the case law, I note that the only case which I have been able to find which considered the position at the statutory demand stage is Owen. Nevertheless, I agree with the Deputy Registrar and counsel for HMRC that it is clear that the rationale underlying paragraph 13.3.3 lies in the principles recognised in the case law that (i) a tax assessment gives rise to a statutory debt, (ii) the FTT has exclusive jurisdiction to consider and determine challenges to tax assessments and (iii) it is not open to the Bankruptcy Court to review an assessment or the manner in which it was made. I also agree with counsel for HMRC that it is relevant that the function of the statutory demand is only evidential. Accordingly, the jurisdiction of the Bankruptcy Court at this stage is limited to considering whether, in the exercise of the court's discretion, to adjourn an application to set aside the statutory demand to await the determination of an appeal to the FTT against the assessment. In my view this is a discretion which should be sparingly exercised. In general, the key factors in the exercise of the discretion will be the status and timing of the appeal. An adjournment is much more likely to be granted in a case where the taxpayer has appealed in time and a decision of the FTT can be expected reasonably soon than in a case where the taxpayer only appealed after service of the statutory demand, was out of time for doing so and thus is dependent on the FTT giving him permission to appeal out of time.
- Turning to the Bankruptcy Court's discretion when considering a petition, I agree with counsel for HMRC that it is wider than when considering whether to set aside a statutory demand, but how wide it is depends on the taxpayer's position with regard to an appeal. If the taxpayer has exhausted his rights of appeal against the tax assessment or is out of time for appealing, then the extent of the Court's discretion is that stated in Lam and Chamberlin: the Court will make a bankruptcy order unless, exceptionally, there is sufficient evidence that the assessment is fraudulent or collusive or that there has been some other glaring miscarriage of justice. If, on the other hand, the taxpayer has an extant appeal pending before the FTT, then D & D Marketing and Changtel show that the Court's discretion is broader. In those circumstances, a key factor in the exercise of the Court's discretion is whether the Court considers that the appeal has a real prospect of success. If the Court is satisfied that the appeal has no real prospect of success, then the Court should make a bankruptcy order. Otherwise, the Court may either adjourn the petition or dismiss it depending on the circumstances.
- Turning to the present case, in my judgment, it follows from the foregoing analysis that the fact that Mr Vieira had filed an appeal to the FTT did not mean that paragraph 13.3.3 of the Practice Direction was inapplicable. On the contrary, the Deputy Registrar was correct to hold that paragraph 13.3.3 precluded the Bankruptcy Court from inquiring into the validity of the assessments upon which the second statutory demand was based at that stage, appeal or no appeal.
Ground 8
- Ground 8 is that the Deputy Registrar should have considered, as a matter of discretion, whether or not to depart from paragraph 13.3.3 of the Practice Direction, but failed to do so. Stated in that way, I consider that this ground of appeal is hopeless. The Deputy Registrar had no discretion to depart from paragraph 13.3.3.
- A better way of putting this ground of appeal would be that the Deputy Registrar failed to exercise the discretion which the second part of paragraph 13.3.3 conferred on him of considering whether to adjourn the application pending the determination of Mr Vieira's appeal. The difficulty from Mr Vieira's perspective with that way of putting the matter, however, is that the Deputy Registrar was not asked by counsel for Mr Vieira to adjourn the application, he was asked to set aside the second statutory demand. In those circumstances the Deputy Registrar cannot be faulted for not having considered the matter.
- I would add that Mr Vieira did not have a good case for the discretion to be exercised in his favour anyway. The original decision adverse to Mr Vieira was Mrs Bush's decision dated 13 February 2012. Mr Vieira did not ask for a review or appeal within the time allowed, and he has never identified any reasonable excuse for not doing so. Moreover, several years elapsed between then and the filing of the notice of appeal on 30 September 2016. Counsel for Mr Vieira submitted, and counsel for HMRC accepted, that Mr Vieira was precluded from appealing during the period he was bankrupt, namely from 11 March 2014 to 23 June 2015, because the debts down to and including the assessment dated 12 March 2014 formed part of Mr Vieira's bankrupt estate. That did not prevent Mr Vieira from appealing after 23 June 2015. Despite his statement in his witness statement dated 21 June 2015 that he was "in the process of appealing", he did not do so until over 15 months later. Moreover, no decision had been made by the FTT to give Mr Vieira permission to appeal out of time.
- Counsel for Mr Vieira submitted that the second statutory demand had been served prematurely given Mrs Bush's statement in her letter dated 3 August 2016 that Mr Vieira had until 3 September 2016 to request a review by a different decision maker, a statement which was effectively repeated in her letter to Mr Vieira dated 15 August 2016. Although counsel relied upon this in support of ground 6 (as to which, see below), in my judgment it is only relevant, if at all, to ground 8. Either way, as counsel for HMRC submitted, the short answer to this point is that Mrs Bush made no representation in either letter that enforcement of the assessments would not be pursued in the meantime.
- Counsel for Mr Vieira also submitted that HMRC had been guilty of maladministration in sending letters to the wrong address and in failing to respond to correspondence, in particular Fisher Phillips' letter 30 January 2015. Again, counsel relied upon this is support of ground 6, but in my judgment it is only relevant, if at all, to ground 8. Either way, there is nothing in the point. HMRC's administrative lapses do not begin to justify Mr Vieira's own inaction. In this regard, I would particularly highlight the fact that the March 2014 assessments were sent to the correct address. As noted above, Mr Vieira became free to challenge them on 23 June 2015, yet his notice of appeal was not filed until over 15 months later.
Ground 6
- Ground 6 is that the Deputy Registrar was wrong to dismiss Mr Vieira's application because there was a substantial dispute between the parties as to the extent, if any, of Mr Vieira's tax liability. As explained above, however, this contention is not open to Mr Vieira at this stage. I would add that Mr Vieira's evidence in support of the contention largely consists of assertion. The highpoint of the evidence is Mr Vieira's accounts for the years dated 2011, 2012 and 2013, but Mr Vieira has not engaged with HMRC's case that those accounts were prepared on the wrong basis because they did not include sums passing through Mr Vieira's personal bank account, but only sums passing through his business bank account.
Conclusion
- For the reasons given above, the appeal is dismissed.
