Benton v. HM Revenue & Customs: Establishing the Reasonableness Standard in FN Penalties
Introduction
Benton & Ors v. Revenue & Customs ([2018] UKFTT 593 (TC)) is a significant judgment delivered by the First-tier Tribunal (Tax Chamber) on September 27, 2018. The case involves three appellants—Mr. Benton, Mr. Jackson, and Mr. Hudson—who were participants in a tax planning arrangement known as "Working Wheels." HM Revenue & Customs (HMRC) issued Follower Notices (FNs) under the Finance Act 2014, alleging that the appellants failed to take corrective action as required. As a result, HMRC imposed penalties based on a percentage of the "denied advantage" obtained through the scheme.
The central issues in this case revolve around the validity of the penalties imposed by HMRC, the jurisdiction of the First-tier Tribunal (FTT) to set aside such penalties, and whether the appellants had reasonable grounds for not taking the corrective actions stipulated by their FNs.
Summary of the Judgment
The Tribunal upheld the penalties imposed by HMRC on all three appellants. The penalties were calculated as 30% of the denied advantage, a reduction from the statutory maximum of 50%, based on the appellants' partial compliance with corrective actions. The appellants contested the penalties on several grounds, including the validity of the FNs and the reasonableness of their failure to take corrective action.
The Tribunal found that:
- The Follower Notices met the statutory conditions outlined in the Finance Act 2014.
- The appeals challenging the validity of the FNs were dismissed as the FTT lacks jurisdiction to declare FNs invalid; it can only set aside penalties under specific circumstances.
- The appellants failed to provide sufficient evidence to establish that their failure to take corrective action was reasonable in all the circumstances.
- The penalties were appropriately mitigated based on the extent of co-operation by the appellants, resulting in a 30% penalty each.
Analysis
Precedents Cited
The judgment extensively references several key cases that influenced the Tribunal’s decision:
- Flanagan v HMRC [2014] UKFTT 175 (TC): Established that certain tax schemes lacked genuine trading activity, leading to disallowed losses.
- R (oao Cotter) v HMRC [2013] UKSC 69: Clarified the procedural requirements HMRC must follow when challenging carry-back loss claims.
- R (oao de Silva) v HMRC [2014] UKUT 170 (TCC): Reinforced the Supreme Court’s stance in Cotter, limiting HMRC’s enforcement capabilities.
- Rowe v HMRC [2015] EWHC 1511 (Admin): Confirmed that HMRC’s procedural approach in challenging loss carrybacks was appropriate and consistent with prior judgments.
- Wickersham v HMRC [2016] EWHC 2956: Reinforced the approach taken in de Silva, denying the applicability of Cotter in altering substantive positions.
- Anderson v HMRC [2018] UKUT 159 (Anderson): Demonstrated that the FTT can make decisions without direct witness evidence if sufficient documentary evidence exists.
- Perrin v HMRC [2018] UKUT 156 (Perrin): Provided a framework for assessing "reasonable excuse" defenses, emphasizing the consideration of all relevant circumstances.
- Wisniewski v Central Manchester Health Authority [1998] PIQR 324 and Society of Lloyd's v Jaffray [2002] EWCA Civ 1101: Addressed the implications of witness absence in tribunal proceedings, though deemed not directly applicable.
These precedents collectively underscore the judiciary's stance on ensuring that HMRC adheres strictly to procedural requirements and that taxpayers must provide comprehensive evidence to justify their actions or inactions.
Legal Reasoning
The Tribunal’s legal reasoning can be distilled into several critical points:
- Jurisdiction Over Follower Notices: The FTT was limited to setting aside penalties under specific predefined grounds and lacked the authority to declare FNs invalid. Therefore, challenges to the validity of FNs had to be pursued via judicial review in higher courts, not tribunals.
- Reasonableness in All Circumstances: The core of the appellants' argument rested on whether their failure to undertake corrective actions was reasonable given their circumstances. The Tribunal noted that establishing reasonableness required comprehensive evidence, which the appellants failed to provide due to their non-participation in the hearing and absence of direct witness testimony.
- Mitigation of Penalties: While HMRC proposed a mitigation schedule based on various factors of cooperation, the Tribunal found inconsistencies in how these factors were applied. Ultimately, the Tribunal adopted a revised approach, awarding a 20% mitigation for reasonable assistance in quantifying the tax advantage, resulting in a final penalty of 30%.
- Impact of Legal Advice: The Tribunal considered the reliance on NDTP's (New Dawn Tax Partnership) advice significant but found that without direct evidence from the appellants about their understanding and reliance, the Tribunal could not ascertain the reasonableness of their decisions.
The absence of appellants at the hearing impeded the Tribunal’s ability to fully assess the reasonableness of their actions. This lack of evidence was deemed a critical shortfall, leading to the dismissal of their grounds of appeal.
Impact
This judgment has several implications for future cases and the broader tax law landscape:
- Strengthening of Procedural Compliance: HMRC must ensure that all statutory conditions for issuing FNs are meticulously met, as the FTT will not entertain challenges to the validity of FNs beyond the grounds specified.
- Burden of Proof on Taxpayers: Taxpayers face increased responsibility to provide comprehensive evidence when contesting penalties, especially regarding their decision-making processes and reliance on professional advice.
- Clarification of Mitigation Factors: The Tribunal’s approach to mitigating penalties by clearly delineating the types of cooperation recognized sets a precedent for how such mitigations should be balanced and applied.
- Non-Attendance Consequences: The judgment underlines the importance of participation in tribunal hearings. Failure to attend can severely disadvantage appellants, as crucial evidence and defenses cannot be effectively presented or assessed.
- Limited Tribunal Jurisdiction: The case reinforces the boundaries of the FTT’s jurisdiction, emphasizing that it cannot override statutory conditions to invalidate FNs but can only address penalties based on the criteria laid out in the Finance Act 2014.
Overall, the judgment narrows the avenues through which taxpayers can contest HMRC penalties, emphasizing the need for thorough preparation and presentation of evidence within the established institutional frameworks.
Complex Concepts Simplified
Follower Notice (FN)
An FN is a notice issued by HMRC under the Finance Act 2014 to taxpayers who have failed to take required corrective actions related to specific tax arrangements. It serves as a warning that penalties may be imposed if corrective measures are not undertaken within a specified timeframe.
Denied Advantage
The "denied advantage" refers to a portion of the tax benefit that HMRC contends the taxpayer has unlawfully obtained through particular tax arrangements. Penalties are calculated as a percentage of this denied advantage.
Reasonable in All Circumstances
This is a standard used by the Tribunal to assess whether a taxpayer’s failure to comply with corrective actions was justifiable. It requires a holistic examination of all relevant factors, including the taxpayer’s knowledge, expertise, and the specific situational context.
Section 208 Penalty
Under the Finance Act 2014, Section 208 permits HMRC to impose a penalty for failing to take corrective action in response to an FN. The penalty can be up to 50% of the denied advantage, but this can be mitigated based on the taxpayer’s cooperation.
Mitigation Factors
Mitigation factors are elements that can reduce the penalty imposed by HMRC. These include providing reasonable assistance to HMRC, counteracting the denied advantage, and enabling HMRC to take corrective actions, among others.
Conclusion
The judgment in Benton & Ors v. Revenue & Customs establishes a stringent precedent regarding the assessment and imposition of penalties under the Finance Act 2014. It underscores the necessity for taxpayers to actively participate in tribunal proceedings and provide comprehensive evidence to substantiate their defenses. Additionally, it delineates the specific grounds on which penalties can be mitigated, offering a clearer framework for both taxpayers and HMRC in future engagements.
Importantly, the judgment reinforces the Tribunal's limited jurisdiction in challenging Follower Notices, steering such disputes to higher courts if foundational flaws in the issuance of FNs are alleged. This ensures that HMRC's enforcement mechanisms are robustly supported by statutory requirements, promoting fairness and due process in tax compliance matters.
For legal practitioners and taxpayers alike, this case serves as a critical reminder of the importance of adhering to procedural requirements and the substantial burden of proof required to contest HMRC-imposed penalties. It also highlights the evolving legal interpretations surrounding tax arrangements and the enforcement thereof, shaping the landscape of tax law enforcement in the United Kingdom.
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