Case: Failure to provide personal evidence fatal to appeal against follower notice penalties

Released 5 November 2018

[2018] UKFTT 0593 (TC)

First-Tier Tribunal Tax Chamber

Judge Anne Redston

Decision released 27 September 2018

Income tax – Follower Notice penalties – FA 2014, Pt. 4 – Whether First-Tier Tribunal (‘FTT’) has jurisdiction to set aside penalties – Yes – Whether errors in follower notices sufficient to set aside penalties – No – Whether reasonable in all the circumstances for appellants not to take corrective action – No – Failure to provide evidence – Appeals dismissed and penalties confirmed.

Benton & Ors [2018] TC 06755

Summary

Before the hearing in the main appeal, the Tribunal judge dismissed an application from the respondents (HMRC) that she should recuse herself from the main appeal because, as a barrister, she had been instructed by one of the appellants in a related appeal.

The Appellants had participated in the ‘Working Wheels’ tax-avoidance scheme, under which they had claimed trade-loss relief against current-year and prior-year income. The scheme involved their becoming partners in a partnership purporting to trade in used cars. Following the FTT decision in Flanagan [2014] TC 03314, which had found the scheme to be ineffective and had become final, HMRC issued follower notices under FA 2014, s. 204 to other participants, including the Appellants. Acting under the advice of their tax adviser, the Appellants eventually agreed to take corrective action in respect of the current-year losses but not in respect of the prior-year losses, on the grounds that the Supreme Court’s decision in R & C Commrs v Cotter [2013] BTC 837 meant that HMRC’s only route to enquire into prior-year (‘carry-back’) loss claims was via TMA 1970, Sch. 1A, which HMRC had not done in the Appellants’ case. In response, acting under FA 2013, s. 208, HMRC charged the Appellants penalties for non-compliance with the follower notices, in the amount of 30% of the denied tax advantage. The maximum such penalty is 50%.

In the meantime, the Upper Tribunal had decided, in R (on the application of De Silva) v R & C Commrs [2014] BTC 514 that [film] partnership loss carry-back claims were not ‘stand-alone’ claims requiring enquiries under TMA 1970, Sch. 1A, which was directly relevant to the Cotter argument on which the Appellants’ adviser relied. The Upper Tribunal’s decision was subsequently upheld by the Court of Appeal ([2016] BTC 6) and the Supreme Court ([2017] BTC 37).

The eventual grounds of appeal against the penalties, on which the Tribunal had to decide, were:

(1)The follower notices contained defects and were invalid

(2)It was reasonable in all the circumstances for the appellants not to have taken corrective action (FA 2013, s. 214(3)(d)) and

(3)If penalties were due, HMRC should have given a larger deduction for cooperation (FA 2013, s. 210)

The Appellants did not appear in person and did not provide any witness evidence. They relied solely on the evidence of their tax adviser.

On the first ground, the Tribunal found that a follower notice that failed to meet one or more of the statutory requirements in FA 2013, s. 204 had to be invalid, but that the FTT had no jurisdiction to set aside a notice on such grounds. It could, however, cancel the non-compliance penalty under FA 2013, s. 208 in such circumstances and under a general power given it under the opening words of FA 2013, s. 214(3). It was agreed that all the requirements in FA 2013, s. 204 had been met, but the Appellants argued that the follower notices contained errors (that could not be ‘cured’ by the want-of-form waiver in TMA 1970, s. 114) making them invalid. On examining the three alleged errors, however, the Tribunal found that none of them had any practical consequences detrimental to the Appellants’ case and therefore provided no valid basis for setting aside the penalties.

On the second ground, the Appellants’ failure to provide evidence resulted in their not meeting the burden of proof that their actions had been ‘reasonable in all the circumstances’ because they had neither provided sufficient evidence to allow the Tribunal to identify all the circumstances relevant to their decisions not to take corrective action, nor had it been possible for the Tribunal to make sufficient findings of fact about their personal circumstances to determine whether their actions had been reasonable, which was the test laid down in jurisprudence. The appeal therefore failed on this ground also.

The third ground concerned the quantum of the penalty. The grounds for mitigation of the penalty on account of the taxpayer’s cooperation were defined and limited by FA 2013, s. 210(3). The maximum reduction permitted by the legislation was from 50% to 10% of the denied advantage (FA 2013, s. 210(4)). Although the Tribunal judge disagreed with HMRC’s weighting of the mitigating factors, by applying her own reasoning, she arrived at the same 30% of the denied advantage as charged by HMRC.

Subject to a recalculation of the denied advantage in respect of one of the Appellants, the appeal was therefore dismissed, and the penalties confirmed.

Comment

The Appellants had been designated under r. 18 of the Tribunal Rules as a lead case for other participants in the Working Wheels scheme on two issues, both concerning errors or defects in the follower notices. The Tribunal’s binding decision on those issues was that these errors were not sufficiently significant to have the penalties set aside.

What was fatal to the Appellants’ defence against the penalty under FA 2013, s. 214(3)(d) that it had been reasonable in all the circumstances for them not to have taken the necessary corrective action was their decision, on the advice of their tax adviser, neither to appear in person at the hearing nor to give witness statements. As a result, it was impossible for the Tribunal to determined whether they had indeed acted reasonably. In particular, the tests for what was reasonable conduct, as laid down in Onillon [2018] TC 06313, Barrett [2015] TC 04514 and Perrin v R & C Commrs [2018] BTC 513 all required knowledge of the particular circumstances, knowledge and attributes of the taxpayer concerned. This they failed to provide.

As an aside, following the Supreme Court’s decision in de Silva, it must now be certain that an argument based on Cotter (which, incidentally, was a victory for HMRC on the particular facts) to preserve on procedural grounds a claim for tax relief on losses that had been found not to exist will inevitably fail.

For the treatment of follower notices and related appeals, see Direct Tax Reporter, ¶192-764.

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