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Penalty of £900k for tax avoidance scheme promoter

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In the second part of this complex tax avoidance scheme tale, the umbrella company operating a flimsy scheme found that omitting to notify HMRC was not the answer.

9th Apr 2024
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In my previous article, we saw how the first tier tribunal (FTT) found IPS Progression Ltd (TC09071) liable to a penalty under the Disclosure of Tax Avoidance Schemes (DOTAS). Although required to disclose information to HMRC within a strict time limit, it had failed to do so.

The FTT’s next obligation was to establish what was the precise period of non-compliance, and what penalty should be due, in the range from £nil to the maximum of £600 a day.

Period of non-compliance

Promoters are required to notify HMRC on form AAG1 within five business days of first becoming aware of the first transaction under the “arrangements”.

The earliest set of employee documents supplied in evidence was dated 7 April 2016 (signed only by IPS). HMRC had applied this date and calculated the deadline as 14 April.

However, there was no evidence of when the employee signed the paperwork, but his payslips indicated he first worked on 11 April, so he could be assumed to have agreed to the terms no later than then. 

IPS would have first been aware that it was operating potentially notifiable arrangements on 11 April, so its deadline for notifying HMRC was 18 April. 

The date on which IPS finally complied with its obligations was 25 April 2022. HMRC originally refused to accept the form filed on that date, since it contained – in addition to the statutory information – a statement that it was made solely “on a protective basis as [IPS] did not agree that the DOTAS legislation required this.” 

A second AAG1 filed on 16 May and omitting the additional statement was accepted by HMRC. 

HMRC’s argument, that the relevant date was 16 May 2022, was soundly rejected by the judge. A document that contained all of the information called for by statute should not have been rejected because it contained additional information. Besides, HMRC’s suggestion that AAG1 cannot be filed “protectively” was absurd and “would be unjust and oppressive if it were correct”.

The period of non-compliance ran from 19 April 2016 to 24 April 2022 – a period of 2,197 days. 

Size of penalty

A wide range of arguments for the quantum of the penalty were discussed. The maximum usually allowed by statute is £600 per day, but in setting a penalty the FTT must “take account of all relevant considerations”. These include:

  • the reasons for, and the gravity and duration of, the non-compliance
  • the availability of other methods for HMRC to recover any tax at risk (for example by assessment) 
  • the need to achieve a fair and proportionate outcome, having regard to the interests of all parties.

The desirability of setting penalties at a suitable level to deter similar non-compliance in the future should also be a consideration, as should the “amount of fees received by the promoter in connection with the notifiable arrangements”.

The judge noted that “non-compliance for a given period is not of itself necessarily twice as serious as non-compliance for a period of half as much time”. Merely to calculate a daily penalty and multiply that by the number of days would be “wrong in principle”.

He would not accept HMRC’s simplistic and somewhat lazy argument that “there is no particular reason why the penalty should be less than the maximum allowed by the statute”.

It was clear to the judge that IPS had had many months – many years – during which it could have made a “protective” disclosure without conceding liability, as it eventually did in 2022. Its failure to do so was “more than simple carelessness”.

Balancing arguments ranging from £nil (IPS) to £1,333,200 (HMRC) with evidence around IPS’s financial outcomes from operating the scheme, the judge decided that a penalty of £900,000 was appropriate.

Last chance saloon

After the conclusion of the hearing, but before the judge had issued his judgment, IPS made a “Hail Mary” application to admit fresh evidence and a new ground of contention.

According to IPS, new evidence had come to light that suggested that they had been operating the scheme since January 2016. If that were the case, the deadline for them to notify HMRC, and accordingly HMRC’s deadline for applying to the tribunal, would have been some three months earlier. As matters stood, HMRC had made its application to the FTT on the last day available to it: this new situation would mean that HMRC had been out of time, and no penalty could be imposed.

In deciding whether to admit this new application, Judge Staker was bound to apply the three-stage test given by the court of appeal in Denton vs TH White Ltd.

  • How serious and significant was the failure to have raised this by the normal time limit?
  • Why was it not raised at the appropriate juncture? 
  • Balance the merits of the reasons given for the delay and all other relevant factors, including the prejudice that would be caused to both parties by granting or refusing permission, and the importance of the need for litigation to be conducted efficiently and at proportionate cost, and for time limits to be respected.

Serious and significant

Clearly the issue would be both serious and significant, with clear prejudice to either side should the decision go against them. Of the three tests, the judge focused most on the middle one.

Why, during the five years since HMRC first raised issues with the scheme, and in particular in the time since March 2022 when HMRC had written to IPS stating that the “earliest contract of employment, loan agreement and bonus agreement held by HMRC is dated 7 April 2016”, had no one at IPS bothered to look for evidence of any earlier activity?

The company’s reasons involved a convoluted tale of chaotic archiving, the departure of the original “IT person” and a fortuitous discovery, quite late in the day, by the new “IT person”.

No good reason

None of this, the judge felt, entirely justified a failure to have provided full information prior to the hearing. “If a business manages its information in a way that makes it difficult or impossible for its own staff to be aware of or retrieve some of its records, that is hardly a good reason for a tribunal to allow evidence to be produced at a late stage, especially after the conclusion of a hearing.”

Furthermore, on reviewing the “new evidence”, it was by no means clear that it evidenced activity within the scheme prior to 7 April. No documents were produced suggesting that any of the loan/bonus arrangements existed before then – it was clear that the company was operating some form of PAYE in January, but not necessarily in the same format as in April. 

In particular, the employee (MA) whose scheme documents were dated 7 April had been on IPS’s payroll back in January. “It is difficult to see why [IPS] would have asked MA in April 2016 to sign these documents if MA had already signed such documents in January 2016”.

The judge concluded that, since the alleged new evidence did not prima facie demonstrate that the company’s use of the scheme predated 7 April, and since its reasons for producing this argument at so late a date were inadequate, he would not admit the late application.

The penalty stands at £900,000.

So if you thought that DOTAS was annoying enough as a consumer or an adviser to consumers, try being a promoter – especially one operating flimsy schemes unlikely to stand close scrutiny, such as this one. Omitting to notify HMRC and get an scheme reference number is not the answer.

Replies (6)

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By carnmores
09th Apr 2024 14:00

this is a hell of a lot of surely they wont pay it

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By Paul Crowley
09th Apr 2024 18:18

If profits exceed the penalty, then this type of evasion will continue.
How could they even pretend to claim that a loan scheme was not a scheme or even had a chance of being successful
Hope somebody buys up the carcass and pursues the loans that the crooked 'employees' still clearly owe to the promoter. Those 'employees' were fully aware that it was a scam.

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By FactChecker
09th Apr 2024 19:45

So after the wait for Pt 2 ... no actual cliff-hanger.

The only interesting bit (to me) in this sorry saga is how much time and money is being wasted on cases which no longer have a tenuous grasp on the concepts of right and wrong ... but rely solely on matters of technical law and the judge's ability to perceive/interpret reality through the fog.

The fact that the transgressors' main (attempted) plank was to claim (probably falsely and without proof) that they had actually been transgressing for *longer* than they had been charged ... is a dire indictment of the way in which this kind of law is prosecuted. What a shower (the lot of them)!

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Replying to FactChecker:
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By Justin Bryant
11th Apr 2024 09:21

I disagree. There are lots of "cliff-edge" deadlines in tax (that cut both ways in taxpayer's and HMRC's favour respectively) as you know and this is just one of them. See:
https://www.accountingweb.co.uk/any-answers/dotas-penalties-toothless-ag...

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Replying to Justin Bryant:
By Ruddles
11th Apr 2024 11:58

You have misunderstood (no surprise there) the reference to "cliff-hanger"

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By Ruddles
11th Apr 2024 12:12

Is it just me, or is there a potential paradox in the penalty provisions? The maximum penalty is £600 per day, ie £1,318,200 in this case (HMRC obviously don't do arithmetic). However, if that penalty were to be considered to be inappropriately low in light of the circumstances then the maximum penalty becomes £1m.

In the real world, of course, if the maximum daily penalty exceeds £1m no-one is going to bother to consider the point, the purpose of the provision clearly being to allow a penalty of up to £1m where the daily penalties are lower. Nevertheless, on a strict interpretation of the words one could end up with a strange outcome.

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