Introduction

The case of Onillon v. Revenue and Customs ([2018] UKFTT 33 (TC)) addresses the issuance of a penalty under the Finance Act 2014 for failing to comply with a follower notice related to a tax avoidance scheme. Emmanuel Onillon, the appellant, contested a penalty of £78,026.76 imposed by Her Majesty's Revenue and Customs (HMRC) for not taking necessary corrective action as outlined in the follower notice. The key issues revolved around the interpretation of "reasonable in all the circumstances" within the statutory framework and the adequacy of HMRC's communication regarding the corrective measures required.

Summary of the Judgment

Emmanuel Onillon engaged in a tax avoidance scheme known as 'Working Wheels' during the 2006/07 tax year. HMRC identified discrepancies in his tax return, leading to an enquiry and the issuance of a follower notice on 17 December 2014, which required corrective actions to counteract the denied tax advantage resulting from the scheme. On 10 May 2016, HMRC imposed a penalty of 30% of the denied advantage (£78,026.76) for failing to comply with the follower notice by the specified deadline of 24 March 2015.

Onillon appealed the penalty, arguing that his failure to take corrective action was reasonable under the circumstances. He contended that HMRC's communications were ambiguous, leading him to rely on his accountant's advice that no further action was required. The Tribunal examined the facts, the statutory provisions under the Finance Act 2014, the correspondence between Onillon and HMRC, and the legal arguments presented by both parties.

Ultimately, the Tribunal ruled in favor of Onillon, determining that his failure to comply with the follower notice was reasonable given the specific circumstances, including HMRC's erroneous issuance of an accelerated payment notice and the ambiguous instructions accompanying the follower notice. Consequently, the penalty was cancelled.

Analysis

Precedents Cited

The judgment references several key precedents that influenced the Tribunal's decision:

• Flanagan v. HMRC [2014] UKFTT 175 (TC): This case determined that the 'Working Wheels' scheme did not work as intended, thereby denying participants the asserted tax advantages.
• Birley Estate Ltd v. HMRC [2017] UKFTT 720 (TC) and Jackson v. HMRC [2017] UKFTT 341 (TC): Onillon cited these cases to support his reliance on professional advice, although the Tribunal differentiated the circumstances, noting they were not binding precedents.
• Rowland v HMRC (2006) STC (SCD) 536: Referenced for its elucidation on the objective test of reasonableness.
• The Clean Car Company Ltd v Customs and Excise [1991] VATTR 234: Cited to illustrate the objective nature of the 'reasonable excuse' test.

Legal Reasoning

The core of the Tribunal's reasoning hinged on the interpretation of "reasonable in all the circumstances" under section 214(3)(d) of the Finance Act 2014. The following points summarize the Tribunal's legal analysis:

• Statutory Framework: The Finance Act 2014 outlines the procedures and penalties related to follower notices (sections 204-218). A follower notice requires taxpayers to amend their returns to counteract denied tax advantages and notify HMRC of such amendments.
• Burdens of Proof: HMRC must establish the conditions for penalty issuance and the accuracy of the penalty calculation. Conversely, Onillon must demonstrate that his failure to comply was reasonable.
• Interpretation of Reasonableness: The Tribunal adopted an objective standard, assessing whether a prudent and reasonable person in Onillon's position would have acted similarly, considering all circumstances and HMRC's communications.
• Ambiguity in HMRC's Communication: The Tribunal noted that the covering letter accompanying the follower notice contained ambiguous instructions, leading Onillon and his accountant to reasonably believe that no further corrective action was necessary beyond contacting HMRC to settle the tax affairs.
• Error in Issuance of Accelerated Payment Notice (APN): HMRC erroneously issued an APN demanding a substantial payment, which was later acknowledged as incorrect. This mistake contributed to the misunderstanding and reasonable determination by Onillon that no further action was required.
• Reliance on Professional Advice: Onillon reasonably relied on his accountant's advice based on the communications received, which the Tribunal found to be a legitimate basis for his actions.
• HMRC's Policy on Penalty Reduction: The Tribunal found no obligation for HMRC to adhere strictly to its internal policies on penalty reduction, allowing for a case-by-case assessment of cooperation.

Impact

This judgment has significant implications for the interpretation of taxpayer obligations and the assessment of reasonableness in failing to comply with HMRC notices:

• Clarification of Reasonableness: The Tribunal provided a more flexible and context-sensitive understanding of what constitutes reasonable non-compliance, emphasizing the importance of clear communication from HMRC.
• Obligation to Ensure Clarity: HMRC is underscored as having a duty to provide unambiguous instructions and correct errors in official notices to prevent misunderstandings.
• Professional Advice Reliance: Taxpayers are further validated in relying on professional advisers, provided that the advisers act within reasonable expectations based on received communications.
• Penalty Assessment Practices: HMRC may need to reconsider its rigid approaches to penalty reductions, allowing for more nuanced evaluations based on individual circumstances.
• Future Dispute Resolutions: The decision paves the way for more equitable resolutions in future tax disputes, especially where taxpayer actions were influenced by HMRC's internal errors or ambiguous communications.

Complex Concepts Simplified

Conclusion

The Tribunal's decision in Onillon v. HMRC underscores the necessity for HMRC to maintain clarity and accuracy in its communications with taxpayers. It highlights the importance of considering the entire context and individual circumstances when assessing the reasonableness of a taxpayer's actions or inactions. By ruling that Onillon's failure to comply with the follower notice was reasonable, the Tribunal sets a precedent for more nuanced evaluations of compliance obligations, especially in cases where miscommunication or administrative errors by HMRC may influence taxpayer behavior. This decision emphasizes fairness and equitable treatment within the UK's tax dispute resolution framework.

For taxpayers and professionals alike, this judgment serves as a reminder to meticulously review all communications from tax authorities and seek clear, documented confirmations when uncertainties arise. It also signals HMRC's potential need to refine its notification processes to prevent similar disputes in the future.