High Court allows VAT and income tax penalties against Kevin O'Brien for failure to file returns.

[2018] IEHC 749

THE HIGH COURT

[2017 No. 360 M.C.A.]

IN THE MATTER OF PART 47 OF THE TAXES CONSOLIDATION ACT, 1997 AS AMENDED BY THE FINANCE (NO 2) ACT, 2008

BETWEEN

FERGUS O’BRIEN

APPLICANT

AND

KEVIN O’BRIEN

RESPONDENT

Judgment of Ms. Justice Pilkington delivered on the 18th day of December, 2018

1. By originating notice of motion, the applicant seeks the following reliefs:

1. A determination pursuant to s.1077B (3) of the Taxes Consolidation Act 1997 as inserted by the Finance (No. 2) Act

2008 that the respondent herein is liable to penalties in the total amount of €108,423.77 pursuant to s.1077E of the

Taxes Consolidation Act 1997, s.27 of the Value Added Tax Act 1972, s.27A of the Value Added Tax Act 1972 and s.116

of the Value Added Tax Consolidation Act 2010.

2. Such further or other order pursuant to s.1077C of the Taxes Consolidation Act, 1997 as inserted by the Finance (No.

2) Act 2008 regarding the recovery of the penalty of the subject matter of this application.

3. The standard reliefs of further or other order and costs.

4. In reality the reliefs are focussed on (1) above.

5. The originating notice of motion issued on 29th November, 2017, the applicant’s grounding affidavit sworn on the 21st

November, 2017, replying affidavit of the respondent sworn on 6th March 2018, the supplemental affidavit of the

applicant sworn on 4th April 2018 and finally the second replying affidavit of the respondent sworn on 16th May 2018.

2. The respondent’s VAT liabilities have been quantified at €60,638 with a further fixed penalty of €125 for negligently failing to file

VAT returns.

3. The income tax liabilities have been quantified for the period at €47,660.77 bringing a total penalty amount to €108,423.77.

4. The applicant contends that this respondent has failed to file VAT returns between 1st January, 2008, and 31st December, 2013

and failed to file income tax returns between 1st January, 2009 and 31st December, 2013.

5. On the 28th April, 2015 the respondent was compulsorily registered for VAT with affect from 1st January, 2008.

6. In May 2015 assessments to income tax were raised the years ending 31st December, 2009, 2010, 2011, 2012 and 31st December

2013. No valid appeal was ever lodged to these assessments and accordingly those assessments are now final.

7. In September 2015 assessments to VAT were raised for the taxable period ending 31st December, 2008, 2009, 2010, 2011, 2012,

2013 and 2014. These assessments have not been appealed and accordingly are also now final.

8. A notice of an opinion issued to the respondent on the 18th November, 2016; it is not relied upon as an amended notice of opinion

issued on the 16th June, 2007.

The legislation

9. Section 1077B (3) of the Taxes Consolidation Act 1997 states as follows:

“Where a person to whom a notice issued under subs. (1) or (2) does not, within 30 days after the date of such notice:-

…

then a Revenue officer may make an application to a relevant court for that court to determine whether-

(i) any action, inaction, omission or failure of, or

(ii) any claim, submission or delivery by,

the person in respect of whom the Revenue officer made the application gives rise to a liability to a penalty under the

Acts on that person.”

10. The imposition of penalties is dealt with in s.1077E and is headed “Penalty for deliberately or carelessly making incorrect returns,

etc.” in respect of income tax, corporation tax and capital gains tax. Subsection (3) states as follows:

“Where any person deliberately fails to comply with a requirement to deliver a return or statement of a kind mentioned in

any of the provisions specified in column 1 of Schedule 29, that person shall be liable to a penalty.”

11. The penalty provision in s.1077E (4) is as follows in respect of subs.(3) above it is:

“…the amount specified in subsection (12),

reduced, where the person liable to the penalty cooperated fully with any investigation or inquiry started by the Revenue

Commissioners or by a Revenue officer into any matter occasioning a liability to tax of that person, to—

(i) 75 per cent of that amount where subparagraph (ii) or (iii) does not apply,

(ii) 50 per cent of that amount where a prompted qualifying disclosure is made by that person, or

(iii) 10 per cent of that amount where an unprompted qualifying disclosure is made by that person.”

12. Subsection (5) deals with where a person “carelessly but not deliberately” delivers an incorrect return or statement of any kind

and subs. (6) deals with the situation where a person “carelessly but not deliberately” fails to comply with the requirement to deliver

a return or statement of any kind.

13. Subsection (7) states as follows:

1“(a) The penalty referred to-

(i) In subsection (5) shall be the amount specified in subsection (11), and

(ii) In subsection (6) shall be the amount specified in subsection (12),

reduced to 40% in cases where the excess referred to in subparagraph (I) of paragraph (b) applies and to 20% in other

cases.

(b) Where a person liable to a penalty co-operated fully with any investigation…”

14. Subsection (12) states as follows:

“The amount referred to in (b) of subsection (4) and in paragraph (b)(ii) of subsection (7) shall be the difference

between-

a) the amount of tax paid by that person for the relevant period before the start of the Revenue Commissioners or

by any Revenue officer of any inquiry or investigation where the Revenue Commissioners had announced publicly

that they had started an inquiry or investigation or where the Revenue Commissioners have, or Revenue officer has,

carried out an inquiry or investigation into any matter that would have been included in the return or statement if

the return or statement had been delivered by that person and the return or statement had been correct, and

b) the amount of tax which would have been payable for the relevant periods if the return or statement had been

delivered by that person and the return or statement had been correct.”

15. It is clear that the categories of person to whom a penalty might be imposed are differentiated- subs. (3), speaks of a person

who “deliberately” fails to comply, subs. (5) deals with a person “carelessly, but not deliberately” and that is referable also to subs.

(6) and then to subs. (7)(b) dealing with a person who has “co-operated fully”. Subsection (4) also sets out differing percentages for

the imposition of a penalty and this is set out below.

16. It therefore follows that the penalty imposed by this legislation varies and is dependant upon the categorisations above.

17. The applicant contends that this is a case where the “deliberately” criteria applies. If that is accepted then, within that category,

the penalty can be reduced “where the person liable has co-operated fully with any investigation or inquiry started by the Revenue

Commissioners or by a Revenue officer into any matter occasioning a liability to tax of that person and is referable as set out above,

to either 75% with regard to full co-operation of any investigation or inquiry started by the Revenue Commissioners, 50% in the case

of a “prompted qualifying disclosure” and 10% in the case of an “unprompted qualifying disclosure.”

18. “Qualifying disclosure” is defined as:

“A disclosure that the Revenue Commissioners are satisfied is a disclosure with complete information in relation, with full

particulars of, all matters occasioning a liability to tax that gives rise to a penalty referred to in subs. (4).”

19. “Prompted qualifying disclosure” is defined as

“a qualifying disclosure that has been made to the Revenue Commissioners or to a Revenue official in the period between:

(a) The date on which the person is notified by a Revenue Officer on the date which an investigation or inquiry into

any matter concerning a liability to tax of that person will start,

(b) the date that the investigation or inquiry starts.”

20. “Unprompted qualifying disclosure” is defined as where a “qualifying disclosure that the Revenue Commissioners are satisfied has

been voluntarily furnished to them…” (essentially prior to any investigation or inquiry started by them where upon notification of such

an inquiry, the disclosure is made prior to that time.)

21. Finally, “carelessly” is defined as by a “failure to take reasonable care”.

22. In respect of the imposition of the penalty in respect of VAT, the legislation is similar in almost all respects and mirrors the

legislation above with respect to income tax. Section 27 of the VAT Act 1972, by the insertion 1A states:

“Where a person fraudulently or negligently fails to comply with a requirement in accordance with this Act or Regulations

to furnish a return, that person shall be liable to a penalty of:

(a) €125 (this penalty does not appear in the income tax legislation).

(b) The amount… of the difference between-

(i) the amount of tax properly payable of such person if the said return had been furnished by that

person and that return had been correct,

(ii) the amount of tax (if any) paid in respect of the taxable period for which the said return was not

furnished.”

23. Section 27A of the VAT Act 1972 and s.116 of the VAT Consolidation Act 2010 effectively deals with the situation where a person

“deliberately” fails to furnish a return and the same percentage reductions if that person has “co-operated fully with any investigation

or inquiry started by the Revenue Commissioners” and thereafter as to whether the person comes in the criteria of a “prompted

qualifying disclosure” or an “unprompted qualifying disclosure”.

24. Again subs.(12) of s.116 states:

“The amount referred to in paragraph (b) of subsection (4) and in parargraph (b)(ii) of subsection 7 is the difference

between: -

(a) the amount of tax (if any) paid by that person for the relevant period before the start, by the Revenue

Commissioners or by any Revenue Officer, of any inquiry... or where the Revenue Commissioners have, or a Revenue

officer has, carried out an inquiry or investigation in respect of any matter that would have been included in the

return if the return had been furnished by that person and the return had been correct, and

(b) the amount of tax properly paid by that person for that period.”

25. Within the categories defined above the applicant contends that the imposition of the penalty should be, in respect of both

income tax and VAT within the respective categories where the respondent is a person who has “deliberately” failed to comply- that

he does not come within the category of making a “prompted qualifying disclosure”, an “unprompted qualifying disclosure” or any

categorisation of “carelessly, but not deliberately delivering an incorrect return or failing to make a return”. Nor it is contended has he

co-operated fully in any sense with the investigation or inquiry of the Revenue Commissioners so as to permit any diminution in the

penalty sought to be imposed.

26. In other words, this respondent comes within s.1077E(3)(4)(b) being liable for the full amount set out in subs.(12) as not being

entitled to a reduction for any of the criteria set out within subs.(4)(b) of s.1077E. The same argument is advanced by the applicant

in respect of the criteria imposed in respect of his failure to pay VAT- that he has “deliberately” failed to comply with the

requirements of the Act, that he does not come within any of the definitions cited above in respect of income tax and VAT and

moreover is not entitled to any reduction either within the definitions of “prompted qualifying disclosure” or unprompted qualifying

disclosure, nor has he in any sense co-operated fully in any sense with the investigation or inquiry of the Revenue Commissioners so

as to permit any diminution in the penalty sought to be imposed.

27. In the affidavits filed, the respondent seeks to dispute a number of matters, amongst them:

a) His objection to being categorised in any way as a “deliberate” defaulter as opposed to being merely ‘careless’.

b) That for a significant period whilst there was outstanding income tax and VAT liabilities he was having difficulties with

his accountant, in that there was a dispute about his failure to discharge accounting fees which resulted in him having

difficulties in having returns filed and dealing with matters in respect of Revenue matters generally.

c) That once the position was explained to him by the applicant in 2013, the position was thereafter rectified and there

has been no default since that time.

d) He sought to cooperate at the meeting, which was at the instigation of the applicant in October 2013.

e) The respondent also points out that the underlying judgment amount (as opposed to an imposition of a penalty) was

sought against him in proceedings bearing record number 2016/189R, that he consented to judgment in respect of the

amount sought on 26th January, 2017. He asserts his understanding, that in consenting to judgment being entered

against him, this satisfied all his outstanding liabilities with the Revenue and brought matters to a conclusion between the

parties. He did not thereafter anticipate a new set of proceedings seeking the penalties sought within this application.

f) The respondent correctly points out that being categorised as being in “deliberate default” means that there is a 100%

tax geared penalty against him and he rejects such a clarification both in principle and on the facts of his case.

g) The respondent who is in his mid-70’s ran a bed and breakfast business with his wife from 1990 to 2015. At the

relevant times he avers to being unaware that VAT was payable on his business and furthermore, that none of his

competitors were paying VAT. He also states, that he was below the threshold amount for some considerable period of

time. Difficulties with his accountant referred to above also impeded his abilities to discharge the amount sought.

h) The respondent’s significant difficulty (more so in my view than any of the matters set out above) and a relationship

with the Revenue Commissioners that he describes as “difficult throughout” largely arises from a company established by

the respondent being charged VAT by a third party entity in the conduct of the respondent company’s ferry business. The

respondent’s company was ultimately reimbursed a certain sum of money, which that the respondent believes does not

reflect the ultimate figure that the company established by him is due.

i) It is clear both in the affidavits filed and in the submissions made on his behalf that his difficulties with regard to his

assertions as to his discharging VAT in circumstances where none was liable, has significantly clouded his relationship with

the Revenue Commissioners and also his attitude to the discharge of VAT in respect of the matters at issue in these

proceedings. Of course, the ultimate reimbursement of certain figures by the Revenue Commissioners was not a

reimbursement to the respondent personally, but to a company and the two issues are, for the Court’s purposes, entirely

separate and distinct.

j) At one point the respondent appears to suggest, or to certainly have appeared to have adopted a view, that if the

Revenue Commissioners had been incorrect as to the entitlement of a third party to discharge VAT in respect of the ferry

business, that they likewise could well be (or were) incorrect in their view that VAT was chargeable in respect of his bed

and breakfast business.

k) Throughout the documentation the respondent takes the view that his other issue with the Revenue (the ferry

business) must be dealt with initially prior to these matters. A loose form of ‘set-off’ also appears to be envisaged.

(j) In October 2013, when the applicant sought a meeting with the respondent he avers that the applicant’s attitude to

him was overly hostile and that the issues he had with regard to other VAT payments were not being addressed.

(k) Alternatively, the respondent points out that the reliefs are penal in nature, the reliefs sought are discretionary in

nature and seeks mitigation in respect of all the circumstances that he has set out in detail within the affidavit.

(j) The respondent in his affidavit and submissions made by counsel sets out certain matters of a personal nature to

which he claims regard should be had by this court and I will deal with this subsequently.

28. Within the grounding and replying affidavits of the applicant he sets out and confirms:

(a) That the respondent had Revenue liabilities in the amount of €160,000 (his principle liability) with approximately

€35,000 collected to date by way of attachment of farm subsidy payments.

(b) He takes issue with the matters constituting the imposition of a penalty at the the lower end of the statutory regime

penalty of “merely careless” and points out that the applicant did not properly disclose anything before the

commencement of the Revenue audit or investigation nor did he at that point cooperate fully with it or respond properly

to any inquiries of the Revenue Commissioners by providing all appropriate documentation to them.

(c) The applicant also points out that the VAT and income tax assessments are now finalised and whilst disputed by the

respondent in general terms no specifics are adduced.

(d) The applicant avers and absolutely denies that there never was nor could the Revenue ever agree or consent that

there was any consent or agreement that the adjudication before the Master of the High Court in respect of the principle

debt was in full and final settlement of any and all outstanding claims and/or that there would be thereafter no imposition

of any penalties arising from that indebtedness.

(e) The applicant’s supplemental affidavit of 4th April, 2018 states that the respondent had not filed returns for the period

since 2013 until the incorporation of the limited company on 16th March, 2016, that assessments had been raised for that

period also and collection is awaited. The respondent asserts on more than one occasion that he has been tax compliant

since 2013 when these matters were brought to his attention.

29. Accordingly, the issues are as to what categorisation is to be invoked for the imposition of the penalty and consider the

submissions advanced by counsel for the respondent as to whether, as she contends, I should exercise any discretion pursuant to the

inherent jurisdiction of the court.

30. It is common case, from the decision of Tobin v. Foley [2011] I.E.H.C. 432 that the appropriate test for the imposition of any

penalty pursuant to the statutes recited above is one of the balance of probabilities.

31. For the reasons particularised below I find the default by this respondent comes within subsection (3) of both statutes. I find his

default within the category of ‘deliberate.’ It therefore follows that he is then liable to the imposition of a penalty. The next issue is to

consider, in imposing such a penalty, is as to whether the percentage diminution of the amount of penalty imposed within subpara. (4)

(i) can be inferred from the statutory definition, where I must consider, whether this respondent has “cooperated fully with any

investigation or inquiry started by the Revenue Commissioners or by a Revenue officer into any matter occasioning a liability to tax of

that person” and thereafter whether he has made either a “prompted qualifying disclosure” or an “unprompted qualifying disclosure.”

32. Accordingly, in my view (leaving aside the respondent’s submissions as to why the reliefs sought within the notice of motion

should be refused in full), the only question for determination, pursuant to an interpretation of the statute is the extent of the liability

of the respondent to the imposition of the penalty.

33. In my view the statute itself sets out the parameters within which a penalty may or may not be imposed and accordingly any

determination must operate within the same parameters.

34. With regard to sub-paras. above “prompted qualifying disclosure” and “unprompted qualifying disclosure” are both defined and I

am satisfied, on the basis of the affidavits and exhibits filed that this respondent does not come within either of those categories of

disclosure. Whilst the respondent protests that he has cooperated in my view the matters disclosed on affidavit paint a different

picture. On many occasions documents were promised either to dispute the figures sought by the Revenue and/or to advance his own

position. They were simply not provided. Ultimately the assessments raised by the applicant is not on the basis of documentation

furnished by him and accordingly I cannot see that he comes within either of these two categories. Nor in my view has this

respondent come within the definition of a ‘careless’ defaulter. In my view the position adopted by the respondent throughout is

significantly more than careless. I appreciate his contention that he has sought to cooperate when asked and he did attend the

meeting of October 2013 but thereafter and even at times during that meeting that cooperation was less then comprehensive. I

therfore conclude that this respondent does come within the category of a deliberate defaulter.

35. Accordingly, therefore I must thereafter consider whether the respondent is entitled to any amelioration in penalty by virtue of his

having “cooperated fully with any investigation or inquiry started by the Revenue Commissioners or by a Revenue officer into any

matter occasioning a liability to tax of that person.” Again I have difficulty in discerning any appreciable level of cooperation.

36. The language of the statute as quoted above talks of “cooperated fully” and in my view it cannot be said on the facts of this

case that there has been a full cooperation by this respondent to the applicant. It may have been partial at times but in my view it

was never full cooperation. The respondent may have had his own reasons for not doing so (largely related to the issues surrounding

his company’s liability for VAT in respect of his former ferry business) but in my view these are insufficient to deal with his liabilities

both in respect of income tax and VAT as have been disclosed within the affidavits filed by the applicant.

37. In my view therefore subs. (3) of s.1077E and the similar criteria within s.27A and s.116 of the VAT legislation applies and on the

balance of probabilites I find this respondent to be in deliberate default. Again on the balance of probabilities in my view none of the

ameliorating criteria set out in subs.(4)(b) of s.1077E and s.116 does apply in respect of either his liability to income tax or VAT on

the facts of this case.

38. Thereafter the respondent has argued that the inherent jurisdiction of the court should be invoked in favour of the respondent.

39. In seeking to invoke the inherent jurisdiction of the court, the respondent relies upon the case of Ross v. Cohalan [2014] I.E.H.C.

686. On the facts of this case, the Revenue Commissioners were seeking to impose a penalty by reason the respondent having

negligently submitted an incorrect and incomplete voluntary disclosure to the Revenue Off-Shore Assets Group. In July, 2005, the

respondent made a qualifying disclosure and enclosed a cheque in full and final settlement of those liabilities. No response was

received by the applicant until January, 2007. The Revenue issued an opinion in May, 2010, and an amended opinion issued on 13th

December, 2012. Subsequently, the applicant issued the originating notice of motion; one of the arguments advanced by the

respondent in that case was that there had been an ordinate and inexcusable delay by the applicant causing a legitimate expectation

in the encashment of the cheque proffered in 2005 that the tax liabilities had, in fact, been settled in full. The Court considered the

question of delay and the principles articulated by the Supreme Court in Primor Plc v. Stokes Kennedy Crowley [1996] 2 I.R. 459. On

the basis of the facts outlined, the Court held that the delay was inordinate and that no reasonable excuse had been provided to the

Court by the applicant and thus, the delay was inexcusable. On that basis, the Court favoured the respondents on the issue of delay

and the relief sought (the imposition of a penalty pursuant to s. 1077B (3)) was refused.

40. In my view the delay criteria as found in Ross v. Cohalan above differs markedly from the facts of this case. The tax payer in that

case was in a position to argue that he had understood that his payment to the Revenue would not be the subject of challenge. That

is very different from the facts of this case where no payments whatsoever have been furnished (save recently in respect of the

attachment of certain farm payments to satisfy the principle judgment). This respondent paid no income tax or VAT for in excess of

four years within the period of assessment. I find no significant delay on the facts of this case on the part of the applicant. Nor do I

find anything, notwithstanding the able submissions on behalf of the respondent that persuades me that, on the balance of

probabilities, this respondent is in deliberate default and liable for 100% of the penalty imposed.

41. Counsel for the respondent has also pointed to certain matters in this respondent’s personal history which I should and have

considered. He is a gentleman of advanced years who has suffered serious physicial consequences arising from an ongoing health

complaint. Moreover he is the carer for his daughter, who herself has serious health complaints. He is a farmer with a modest

farmholding. Whilst I have a personal sympathy for the respondent in such circumstances, in my view I am obliged to adhere to the

statutory provisions in the imposition of a penalty on the facts of this case.

42. Accordingly I make the following Order in the terms sought being;

A determination pursuant to s.1077B (3) of the Taxes Consolidation Act 1997 as inserted by the Finance (No. 2) Act 2008

that the respondent herein is liable to penalties in the total amount of €108,423.77 pursuant to s.1077E of the Taxes

Consolidation Act 1997, s.27 of the Value Added Tax Act 1972, s.27A of the Value Added Tax Act 1972 and s.116 of the

Value Added Tax Consolidation Act 2010.

43. I shall hear the parties as to any further orders sought.