Our Director of Tax Graham Webber takes a look at recent First and Upper Tier Tax Tribunal cases
It looks as though the Covid pandemic is beginning to reach manageable proportions in the UK at least and that whatever normal life will be after such an event will slowly establish itself.
To their credit, the tax Tribunals (First and Upper Tiers) have continued to sit – albeit virtually – during the pandemic and decisions continue to appear. In June there are 36 reported decisions and in July, so far around 30 have been published. I’ve taken a brief tour of these and consider the potential impact upon the various issues WTT Consulting deals with on a day to day basis.
Please bear in mind that these cases are early in their litigation process and decisions may be appealed, reversed or amended in later stages.
Follower Notices and HMRC behaviours
Bentley – TC/2019/06432 – First Tier.
Mr Bentley used a Montpelier scheme (called the DTA scheme) in 2005/06, 2006/07 and 2007/08. The scheme was stopped by retrospective law in 2008 and a subsequent series of cases (Huitson) failed to overturn that law or show that the scheme was outside it. Montpelier do claim that the action continues in the European courts but of so, we can find no listed hearing due.
Following the above decisions, HMRC issued Follower Notices. These essentially say that if a taxpayer has undertaken a scheme sufficiently similar to an earlier decided case such that it would fall to be decided in the same way, then the taxpayer can either take “corrective action”, i.e. agree that the decision is applicable or he can contest it. A further contest that fails attracts penalties. Failing to take corrective action within the time allowed also attracts penalties.
Here the issue was penalties of around £43,000 for failing to take action.
Mr Bentley advanced various reasons why it was unreasonable for the penalty to apply including statements from Montpelier as to a continued actions which may not have materialised; taxpayers in similar circumstances having different treatment; confusion between FNs and APNs which had also been issued; HMRC prejudice and motives.
None of these were considered sufficient alone or together to mitigate the penalty.
Learning Point: If you have any notice or communication from HMRC, do not ignore it. If you are confused, get advice. Try asking HMRC first. Do not assume that HMRC is driven by personal motives or is singling you out for “special treatment”. Whilst there are instances of this in HMRC behaviour, it is very rare.
Disclosing tax avoidance
Hyrax Resourcing Ltd – TC/2020/00777
In March 2019 the Tribunal decided that the Hyrax arrangements should be disclosable as tax avoidance. HMRC subsequently applied for disclosure of documents including internal emails between directors. The individuals (David Gill, Nicola Stone, Karin Sowden, Iain McLeod and Paul Merrill) sought Tribunal support in refusing to find and supply the material requested.
The Tribunal agreed that they had sufficient legal rationale for not disclosing more than they already had (128 documents) but that in exercising this right, they ran a risk that an adverse decision might arise that they could not subsequently adduce contrary evidence for.
Given this decision, as we are now more than two years after the DOTAS disclosure was required, we can expect APNs shortly.
Learning Point: HMRC, despite many years of investigation, remain very unclear in certain areas of DR schemes and were trying to use this application to obtain information. Having failed, they will almost certainly try to obtain that from individual users. If you are approached, please contact us.
Discovery and continuity
Desmond Malcolm – TC/2018/07060
Mr Malcolm had submitted tax returns but HMRC later considered that the turnover from his business (and therefore the profits) were understated. The taxpayer relied solely upon his computer to compile his accounts and that had developed a fault meaning that the data was corrupted or missing.
HMRC sent him 60 different communications in two years amounting to over 150 pages of requests, instructions, guidelines, penalties, surcharges and debt collection notices. The taxpayer claimed that he was completely overwhelmed.
Regardless, the Tribunal felt that there had been a discovery and that having shown this was the case in a later year, the principle of continuity (if it happened in a later year, it probably happened in an earlier year) was correctly applied. As it happened, HMRC was already too late for the earlier two years of assessments and these, along with penalties, were dismissed.
Compare the efforts of Mr Malcolm with those of Mr Upadrasta (TC/2018/06420) who tried to create a confusing and contrary series of arguments as to why his admitted under declaration was not careless or deliberate. In truth Mr Upadrasta had little hope of overturning the discovery assessments and the Tribunal treated him with patience and forbearance beyond a reasonable measure.
Learning Point: Once there is a default, HMRC will follow a procedure that is designed to reach a conclusion. That process can be “overwhelming”. At the first hint of any HMRC action, please get advice.
Are you obliged to supply information?
Cotswold Financial Planning Ltd – TC/2020/03824
The above firm recommended its clients use a Remuneration Trust of the type advanced by the Baxendale-Walker entities. HMRC contested the results of the schemes and issued a Sch 36 notice to the company. This notice required the company to provide certain information and documents.
One key document required was the Trust Deed for the Belize based trust claimed to be at the heart of the scheme. Cotswold did not provide that document, did not explain why they could not get it, did not advise HMRC of what steps they had taken to obtain it. HMRC imposed penalties. (It should be noted that Cotswold provided the Trust Deed when they appealed the penalty).
The taxpayer argument was that the advisers to the RT and the Trust were hostile and gave advice that included responses to HMRC that were unhelpful and obfuscating. It was not until their own advisers became “aggressive” that the Trust Deed was provided.
Unfortunately this behaviour from those supporting the Remuneration Trust schemes is commonplace and the decision here shows that the Tribunal is not impressed.
The penalties were upheld save a discussion as to proportionality.
Learning Point: The Remuneration Trust schemes are very much in the headlines right now and HMRC is taking no prisoners. If you have used one and get a letter from HMRC, take advice from an independent party.