FTT quashes tax adviser’s money laundering regulations penalty

A tax adviser from Northern Ireland who failed to pay annual fees due under money laundering regulations in protest against HMRC requirements for enhanced due diligence (EDD) has won his appeal at a First Tier Tribunal (FTT) to have a penalty imposed for carrying on business while unregistered cancelled

The appeal was brought by Desmond Martin, who carries on business under the name Coppergate International, and provides tax advice for expatriates in the UK and other countries, notably the US. [Desmond Martin and HMRC, UKFTT/TC/2019/TC07035].

Under the Money Laundering Regulations 2007 (MLR), HMRC established a register on 1 April 2008 of tax advisers who were not supervised by a professional body. Martin registered with HMRC in December 2008.

Following a routine money laundering compliance visit in 2014, Martin and HMRC discussed his failure to comply with various money laundering requirements and in particular the requirement to carry out EDD on some clients.

While in dispute with HMRC, Martin did not pay the required fee to renew his registration for money laundering supervision for 2015. HMRC subsequently deregistered him and, as he continued trading, issued him with a penalty of £1,000 under MLR, regulation 42 for trading without being registered with HMRC.

The FTT had to decide whether the penalty had been validly imposed and in the context of regulation 42, it thought that this required HMRC to show that Martin’s conduct was such as to amount to a contravention of MLR, regulation 33 so as to be within regulation 42(1).

There also had to be reasonable grounds for HMRC to be satisfied that Martin did not take ‘all reasonable steps and exercised all due diligence to ensure’ that the requirement in regulation 33 was complied with (as required by regulation 42(2)), as well as whether he had followed any relevant guidance (as required by regulation 42(3)).

In addition, HMRC had to have given Martin notice of the decision to impose the penalty and its amount; the reasons for imposing the penalty; the right to a review and the right to appeal to the tribunal (as required by regulation 42(4)).

The tribunal found in favour of HMRC on most of these points, with the exception of the first one, that is whether or not Martin’s conduct contravened MLR regulation 33.

On this point, the tribunal said it depended on the reading of the wording of that regulation. This stated, with the tribunal’s emphasis in italics, ‘If HMRC establishes a register a tax adviser not otherwise supervised may not carry on that business for a period of more than six months beginning on 1 April 2008 unless he is included in the register.’

The FTT stated: ‘Had the italicised words been omitted, we would have had no difficulty in saying that with effect from the date on which the appellant was treated as deregistered, he was contravening regulation 33 in that form if he continued to carry on his business as tax adviser after the cancellation of his registration and when doing so he was not supervised by a relevant professional body.  We should say that the appellant has never suggested that he was at any time so supervised.

‘But our provisional reading of the regulation including the italicised words was that the prohibition on carrying on business only applied if the tax adviser was carrying on business on 1 April 2008 and was still carrying it on without being registered on 1 October 2008.’

Thus the italicised words seemed only to punish those businesses which, being in existence at the date the register was established, did not take advantage of a six month period of grace from that date to make an application.

The FTT accordingly found that on its provisional reading the regulation it did not apply to:

(1) a business which was set up after the start of the register relating to the type of business concerned but which failed to register.

(2) a business carried on on the date the register was established but which was not registered within the six-month period but which had applied to be registered within that period and had not had its application either approved or refused within that period.

(3) a business which ceased to be supervised by a relevant professional body and which continued to carry on the business without registering.

(4) a business which was compulsorily deregistered but which continued to carry on the business (i.e. this case).

There was nothing in HMRC’s arguments that caused the FTT to alter its view based on its provisional reading of the regulations. The FTT accordingly cancelled the penalties.

Croner-i tax writer said: ‘Judge Richard Thomas noted that while the tax adviser was not liable to a penalty for trading while unregistered that did not mean that HMRC were without power to monitor the appellant’s activities, and they could still impose penalties on him for the contraventions of other provisions in the MLR, such as those relating to customer due diligence and record keeping.’

The MLR considered in this case have since been replaced by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

Desmond Martin and HMRC UKFTT/TC/2019/TC07035

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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