Introduction

The case of Hutchinson v Revenue & Customs ([2018] UKFTT 290 (TC)) presents a pivotal examination of the obligations imposed on taxpayers in responding to HMRC's "Follower Notices." The appellant, Joseph Hutchinson, faced a substantial penalty under Section 208 of the Finance Act 2014 for failing to take the necessary corrective action within the stipulated timeframe after HMRC identified a disputed tax advantage claimed through a tax avoidance scheme known as "Working Wheels."

Central to this case were the questions of whether Hutchinson's payment of an Accelerated Payment Notice (APN) constituted adequate corrective action, whether his reasons for non-compliance were reasonable, and the proportionality of the penalty imposed. The Tribunal, led by Judge Barbara Mosedale, provided clarity on these issues, setting important precedents for future tax disputes involving similar circumstances.

Summary of the Judgment

HMRC assessed Hutchinson a penalty of £64,162.40 for failing to comply with a Follower Notice related to his participation in the "Working Wheels" tax avoidance scheme. Hutchinson argued that his payment of the APN was a sufficient corrective action and that his personal circumstances, including stress and anxiety, justified his non-compliance.

The Tribunal meticulously analyzed the sequence of events, the definitions of corrective action under the Finance Act 2014, and the relevance of Hutchinson's actions. The key findings were:

• Payment of the APN did not equate to taking corrective action as defined by the legislation.
• Hutchinson failed to provide compelling evidence that his reasons for non-compliance were reasonable.
• The penalty, while reduced from the initial amount, remained proportionate to the tax advantage disputed.

Consequently, the Tribunal upheld the penalty but reduced it to £46,205.02 after considering partial mitigations for cooperation.

Analysis

Precedents Cited

The judgment referenced several precedents, notably:

• Flanagan and others [2014] UKFTT (TC): This case established that the "Working Wheels" scheme was ineffective in reducing taxpayers' liabilities, directly influencing HMRC's decision to issue a Follower Notice to Hutchinson.
• An Appellant [2016] UKFTT 839 (TC): Highlighted the importance of protecting taxpayers' privacy in exceptional circumstances, although Hutchinson's case did not meet the stringent criteria for anonymity.
• International Transport Roth [2002] EWCA Civ 158: Provided guidance on the proportionality of penalties under the European Convention on Human Rights, emphasizing that penalties must not be "plainly unfair."

These precedents collectively informed the Tribunal's approach to evaluating the validity of the Follower Notice, the nature of corrective action, and the proportionality of the penalty imposed.

Legal Reasoning

The Tribunal's legal reasoning centered on interpreting and applying the relevant sections of the Finance Act 2014, particularly Sections 204, 206, 208, and 214. Key points included:

• Definition of Corrective Action: The Tribunal clarified that corrective action entails either amending the tax return to remove the disputed tax advantage or entering into an agreement to relinquish the claim, neither of which was achieved simply through paying the APN.
• Distinction Between APN and Follower Notice: The Tribunal emphasized that the APN and Follower Notice are separate mechanisms with distinct purposes. While the APN addresses the timing advantage of delayed payment, the Follower Notice compels the taxpayer to settle disputes in favor of HMRC.
• Reasonableness of Non-Compliance: Hutchinson's personal circumstances, including stress and anxiety, were examined but deemed insufficient to justify his failure to comply with the corrective action requirements.
• Proportionality of Penalty: The Tribunal assessed whether the 50% penalty rate was proportionate to the offense, ultimately finding it to be within acceptable bounds given the nature of the tax advantage claimed.

The meticulous breakdown of these legal principles ensured a fair and comprehensive evaluation of Hutchinson's appeal.

Impact

This judgment has significant implications for both taxpayers and HMRC:

• Clarification of Corrective Action: The case sets a clear precedent that paying an APN does not fulfill the requirement of taking corrective action in response to a Follower Notice.
• Emphasis on Compliance: Taxpayers must understand the distinct obligations associated with different HMRC notices and ensure timely and appropriate responses to avoid penalties.
• Guidance on Reasonableness and Proportionality: The Tribunal’s approach to assessing the reasonableness of non-compliance and the proportionality of penalties provides a framework for future cases, balancing HMRC’s enforcement objectives with taxpayers’ rights.

Consequently, this ruling enhances the clarity of tax compliance obligations and reinforces the importance of timely and effective communication with HMRC.

Complex Concepts Simplified

Conclusion

The Hutchinson v Revenue & Customs case underscores the critical distinction between different HMRC mechanisms for addressing tax disputes. It reinforces that complying with one requirement, such as paying an APN, does not satisfy other obligations like taking corrective action in response to a Follower Notice. The Tribunal's thorough analysis provides valuable insights into the application of the Finance Act 2014, particularly regarding the necessity and nature of corrective actions, the assessment of reasonableness, and the proportionality of penalties.

For taxpayers, this judgment serves as a cautionary tale emphasizing the importance of understanding and adhering to all HMRC notices and requirements. For HMRC, it reinforces the structured approach to enforcing tax compliance while allowing for proportionality and fairness in penalty assessments. Overall, this decision contributes significantly to the jurisprudence surrounding tax avoidance schemes and the regulatory framework governing their resolution.