By Simon Hill
The Bankruptcy Court has a well-established jurisdiction to go behind a judgment debt (or sum ordered to be paid) founding a bankruptcy petition, should there be evidence that the judgment debt is founded upon ‘some fraud, collusion or miscarriage of justice’ (see Dawodu v Amercian Express Bank [2001] BPIR 983, at 990D). For local taxation, business rates and council tax, an unpaid tax obligation will lead to a complaint, summons and then a liability order against the non-paying taxpayer. Within the Dawodu jurisdiction, a Bankruptcy Court presented with a bankruptcy petition founded upon such a liability order can go behind the liability order in the normal way (see Dias v London Borough of Havering [2001] BPIR 395). But what about an assessment for tax? Is the Bankruptcy Court similarly permitted to go behind an assessment of tax, that is, only if it can first be established that there has been some fraud, collusion or miscarriage of justice to the assessment? Moreover, if an appeal is made within the prescribed statutory machinery, must the Bankruptcy Court await the outcome of that appeal, before making a bankruptcy order?
Challenging an Assessment of Tax
On a general level, there is a well-established general practice as to the interaction of the Bankruptcy Court and the various tax regimes. This was acknowledged in the recent case of Chamberlin v Revenue and Customs Commissioners [2011] B.P.I.R. 691, a central taxation case, where the Court of Appeal said at paragraph 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.'
Chamberlin was approved in Revenue and Customs Commissioners v Earley [2011] EWHC 1783, paragraph 27.
In Re Calvert [1899] 2 QB 145, a debtor sought to expunge a proof for schedule D tax (assessments made following his failure to file a return). This was rejected by Wright J. Emphasising the difference between an assessment, and a judgment, Wright J said, at page 147:
‘…this assessment is not like a judgment, nor within the principle which is applied to judgments. It is absolutely necessary in order to prevent fraudulent proofs and fraudulent bankruptcies to adopt the rule that judgments should not of themselves be conclusive. That rule appears to be founded on necessity. Here there is no such necessity. It is quite inconceivable that a man should act in the way that is suggested he might act in order to spite his creditors. But if he did, I am not sure that the bankruptcy law is not strong enough to reach the case within certain limits of time—possibly as a fraudulent preference of the Crown. If not within those limits of time, I should think very likely on common law principles it might be possible for the Court to deal with the matter. 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.’
On this early and very diffident approach, for assessments of tax therefore, the Bankruptcy Court holds back from questioning the ‘mere administrative assessment’; there being no ‘consideration’ (i.e. cause of action or claim) to investigate (both on the liability and quantum), leaving any challenge to be made through the statutory appeal procedure.
This approach was developed, and importantly, relaxed, in Lam v The Inland Revenue [2005] EWHC 592 (Ch). In Lam, the alleged debtor disputed the tax assessments made against him. He had appealed some but not others. In the Bankruptcy Court he said he had not made the profits upon which he had been assessed to tax. Blackburne J repeated the general practice, at paragraph 12 and 13:
‘…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.
[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.’
But then Blackburne J said:
‘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…’
This addition statement by Blackburne J makes clear that, while the Bankruptcy Court generally will not review the manner in which the assessment of tax was made, nor investigate the merits of the assessment of tax, it will where there is evidence demonstrating that the assessments have ‘been made in some fraudulent or collusive way, or there were some other glaring miscarriage of justice’. The reference to a ‘glaring’ miscarriage of justice, apparently raises the bar for these assessment of tax cases – the trigger for when the Bankruptcy Court will or will not investigate is set higher than for judgment debts. This difference was noted in Vieira v Revenue and Customs Commissioners [2017] 4 W.L.R. 86, where Arnold J said, at paragraph 65, 'I note at this point that the exception articulated by Blackburne J at para 13 is similar, but not identical, to the test extracted by Etherton J in Dawodu v American Express Bank [2001] BPIR 983.'
As the Court of Appeal in Chamberlin observed at paragraph 19, this reluctance to permit challenges to tax assessments outside the prescribed statutory procedure for disputing tax assessments, is part of a wider reluctance that permeates the wider law. In Autologic Holdings plc v IRC [2006] 1 AC 118, the House of Lords considered a claim to the High Court for a declaration on a claimant’s tax. Lord Nicholls held that such a claim was an attempt to circumvent, and so defeat, the prescribed statutory scheme, and so was impermissible. Lord Nicholls said, at paragraph 12:
‘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.’
In HMRC v Potter [2008] BPIR 1033, HMRC presented a bankruptcy petition against Miss Potter personally, on manual VAT assessments in relation to invoices headed with her limited company’s name, but bearing her personal VAT number. The assessments were not paid by Miss Potter, Miss Potter contending that she was not liable as the ‘taxable person’[1].
The Bankruptcy Court turned to two salient issues:
(1) The manual assessment had only recently been appealed (out of time) using the VATA s82-84 statutory mechanism. Should the Bankruptcy Court adjourn the bankruptcy petition pending the final outcome of that statutory appeal process. Following HMRC v D& D Marketing (UK) Limited [2002] EWHC 660, the Court considered at paragraph 34, ‘…whether or not an appeal to the VAT Tribunal stands a reasonable chance of success…’ On this question, the Bankruptcy Court found that the appeal had sufficient merits to justify the adjournment, so indicated it would adjourn (subject to any other submissions calling for a different outcome; see paragraph 61).
(2) While recognising the general rule that the bankruptcy court will not go behind VAT assessments, was this an exceptional case where the general rule could be disapplied? The Bankruptcy Court found that Potter was an exceptional case. Two bases were found for dismissing the petition.
The first centred on delineating the scope of the exclusive appeals procedure. The appeals machinery within the VATA set out in detail an exclusive jurisdiction. However the Bankruptcy Court’s jurisdiction is ousted in relation to specific matters only. It does not follow that the Bankruptcy Court is excluded from dealing with all matters. Reliance was placed on Lord Wilberforce in Vandervell Trustees v White [1971] AC 912, when considering the jurisdiction of the High Court after the making of an income tax assessment (at 9399G):
‘But I find nothing in the income tax legislation to justify the comprehensive proposition for which the appellants must contend, namely, that the High Court is absolutely excluded from a vast range of issues of a kind normally justiciable by it, because those questions arise between taxpayer and Crown and form a basis, even a necessary basis, for an income tax assessment.’
In Potter, the Bankruptcy Court first recognised what was within the scope of the statutory appeals procedure. It said at paragraph 74:
‘…I can not, for instance, go behind the assessment to review the registration or cancellation of registration of any person under the VATA; I can not review whether VAT was properly chargeable on a supply; I can not investigate the calculations of debt said to be due in order to determine whether the assessment is correct. All of these and other matters are detailed in ss83 and 84 of the VATA and there is no room for court interference.’
However, the position would be different where there was an identifiable lacuna in that scope (i.e. in the VATA legislation); at paragraph 75:
‘The appeal jurisdiction menu contained in the VATA does not provide for circumstances such as this, namely where the correct ‘taxable person’ is in dispute. It does not provide for a procedure governing the making of an assessment based on a ‘belief’ as to the correct ‘taxable person’.'
Later, at paragraph 76:
‘In the absence of appeal machinery within the VATA that deals with whether or not the correct person has been assessed there can, in my judgment, be scope for a court to intervene and determine the position. As Fox LJ acknowledged in the Aken case[2], there are exceptional cases where the statutory machinery for appeals does not provide exclusivity. In my judgment, this is one of the exceptional cases by reason of a lacuna in the legislation.’
Having found that there was a substantial dispute as to whether Miss Potter was the correct ‘taxable person’ within s3 of VATA, the Bankruptcy Court was not satisfied that the debt was due from the Miss Potter on the face of the petition (for s271 of the Insolvency Act 1986).
The second basis for going behind the VAT assessment was the familiar Lam exception. The Bankruptcy Court in Potter said at paragraph 78:
‘I find that this case does fall within the exceptional category as enunciated in Lam. To make bankrupt a person who has put in dispute the identity of the correct ‘taxable person’ would be unjust; disproportionate and may result in a miscarriage of justice. If Miss Potter is correct, the debt said to be due from her is due from a different ‘taxable person’. To make a bankruptcy order when there is a substantial dispute opens the door through which injustice may walk.’
The petition in Potter was dismissed.
The approach of Blackburne J in Lam was approved by Mr Elleray QC, sitting as a deputy judge of the High Court, in Flett v HMRC - a case involving a taxpayer’s self assessment for tax. Flett has been doubted by Wooley v Payne [2015] BPIR 933 but on other grounds.
In Hope v Ireland [2015] BPIR 344, Mr Male QC sitting as a deputy judge of the High Court, heard an appeal which included an argument that HMRC had failed to use best judgment when making a VAT assessment. The point had not been raised in the court below, so the first question the deputy judge had to consider was whether it was an issue which could properly have been raised before the registrar in the court below. The deputy judge held at paragraph 36 that ‘…it could not properly have been adjudicated upon by [the registrar]…because…absent a truly exceptional case, it would not have been open to [the registrar], exercising an insolvency jurisdiction, to go behind the assessment.’ The deputy judge quoted Blackburne J in Lam in support of his position, stating that Lam ‘represents the true position in law.’ Contrary comments by the First-Tier Tribunal (Tax Chamber) in Hussein v HMRC TC/2013/04144 at paragraphs 33 and 34 were deprecated. Hope was not ‘a truly exceptional case’ on its facts.
Revenue and Customs Comrs v Harris [2011] EWHC 3094 (Ch); [2011] STI 3429 involved a Mr Harris receiving a statutory demand from HMRC, founded upon VAT and income tax assessments, surcharges and penalties. Mr Harris did not apply 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 no immediate bankruptcy order was made. Mr Harris appealed to the High Court but the appeal was dismissed. The deputy High Court Judge gave a concise summary of the law, at paragraphs 12–15:
'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.’
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 Inland Revenue Comrs [2000] BPIR 996). As Blackburne J explained in Inland Revenue Comrs v Lam [2009] BPIR 301 at para 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.’
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 Inland Revenue Comrs [2005] UKHL 54 at para 12).
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 …'
Where an Appeal is made within Statutory Machinery to Appeal Tax
A person facing a bankruptcy petition founded upon an assessment of tax, may wish to available themselves of the statutory tax appeal machinery - how does this affect the Bankruptcy Court's process.
Firstly, it is important to note that the existence of an appeal within the statutory tax appeal machinery does not mean the debt is not due. In the Companies Court case of Customs and Excise Comrs v D & D Marketing (UK) Ltd [2002] EWHC 660 (Ch), [2003] BPIR 539, a winding up petition was brought by the commissioners to a company. The petition was founded upon VAT assessments. The company had filed an appeal to the VAT Tribunal and the company contended that this meant that the debt was not presently due. This argument failed before Evans-Lombe J - who did not accept such was the proper construction of section 73(9) of the 1994 Act.
Secondly, the existence of the statutory tax appeal can form a ground for the Bankruptcy Court (or Companies Court) to exercise its discretion and decline to make the order. In D & D Marketing, Evans-Lombe J continued, at 4:
'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.'
As will be apparent, the Insolvency Court (i.e. either Companies Court or Bankruptcy Court) will exercise its discretion on whether to make or decline to make the order, depending on its evaluation of the appeal and its assessment of whether the appeal has at least a reasonable/ chance of succeeding (or real prospect of success - see Vieira below), and is genuinely pursued - if it is, the Insolvency Court may adjourn its proceedings, until the outcome of the tax appeal is known. The Insolvency Court must assess the appeal's attributes itself though - it cannot simply defer to the statutory appeal tribunal's determination on this. In Revenue and Customs Comrs 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 First Tier Tribunal ('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. The deputy High Court Judge dismissed the petition on the ground that the Companies Court should defer to the FTT's decision.
Overturning the deputy High Court Judge's decision, Vos LJ said, paragraphs 71–72:
'...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 mean that the tax tribunal will not normally be the appropriate forum to determine whether an appeal against a VAT assessment has a real prospect of success. Moreover, when the tax tribunal has 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 that the debts represented by the dispatch assessments were not disputed by the company in good faith and on substantial grounds.'
The different functions of the Insolvency Court and tax tribunal lay at the centre of Vos LJ's reasoning. At paragraphs 40, 41 and 43, he said:
“40. …It is true, as the judge said, that the adjudication on the correctness of a tax assessment has 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 has 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 …'
Summary in Vieira
Helpfully, Arnold J in Vieira summarised the current position of the law, at paragraph 84:
'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.' [3]
Conclusion
The Bankruptcy Court will not go behind an assessment of tax, not subject to a pending statutory appeal, unless it is ‘exceptional’ or ‘a truly exceptional case’ where either: (a) there is evidence demonstrating that the assessments of tax have ‘been made in some fraudulent or collusive way, or there were some other glaring miscarriage of justice’; or (b) the contentious issue is not within the jurisdiction delineated exclusively for the applicable statutory appeals process (or, to put it another way, the ground for disputing the assessment of tax is outwith the ambit of the statutory appeal procedure). But where there is a pending statutory appeal, if in the Bankruptcy Court's view that statutory appeal has at least real prospect of success, the Bankruptcy Court may adjourn the petition or dismiss the petition, depending on the circumstances.
SIMON HILL © 2017
BARRISTER
33 BEDFORD ROW
NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.
By s73(1) of the Value Added Tax Act 1994 (‘VATA’), the commissioners may make a manual VAT assessment (‘…may assess the amount of VAT due from him to the best of their judgment and notify it to him.’). S73(9) then reads ‘Where an amount has been assessed and notified to any person under subsection (1) … 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.’ Appeals can be made under s82-84 of VATA. Schedule 11, paragraph 5 (1) reads ‘VAT due from any person shall be recoverable as a debt due to the Crown.’
Inland Revenue Commissioners v Aken[1990] 1 WLR 1374
For those interested in what Arnold J in Vieira v Revenue and Customs Commissioners [2017] 4 W.L.R. 86, had said earlier about such an assessment at the setting aside of a statutory demand hearing, this is found in paragraph 83:
'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.'