Judgment summary
This decision concerns penalties issued under Finance Act 2014 for failing to take 'corrective action' following a Follower Notice (FN). Mr Rahman had entered into tax arrangements promoted by Montpelier Tax Consultants Ltd from 2004-05 to 2007-08, involving partnerships and a trust structure relying on the Isle of Man double tax treaty (26-29).
HMRC issued FNs on 9 November 2016 on the basis that the FTT decision in Huitson v HMRC [2015] UKFTT 448 (TC) was a relevant judicial ruling. Mr Rahman was required to take corrective action by 17 November 2017 but did not do so, and HMRC issued FN penalties on 9 October 2019, later reduced to £91,848.91 (4, 33-34, 53-55).
The Tribunal considered three grounds of appeal: which party bore the burden of proving the judicial ruling was 'relevant'; whether Huitson was in fact a relevant judicial ruling; and whether it was reasonable in all the circumstances for Mr Rahman not to take corrective action by the deadline (6-7).
The Tribunal found that the burden lay on Mr Rahman (not HMRC) to show the ruling was not relevant, that Huitson was a relevant judicial ruling, but that it was reasonable in all the circumstances for Mr Rahman not to have taken corrective action by 17 November 2017. The appeal was accordingly allowed (7-8, 129).
Background
Mr Rahman, an IT consultant, previously worked through his personal service company before participating, from 2004-05 to 2007-08, in arrangements promoted by Montpelier Tax Consultants Ltd, notified under the DoTAS provisions. He was a partner in the Fuelmas partnership (2004-05 to 2006-07) and then the Fernleigh partnership (2007-08), having established a trust that became a partner in each partnership. He received partnership income as a trust beneficiary and, relying on a provision of the Isle of Man double tax treaty, claimed that income was not taxable in the UK (27-28).
HMRC opened enquiries and issued closure notices and amendments in 2010, which Montpelier appealed on his behalf (29). On 3 September 2015 the FTT decided Huitson v HMRC, finding a similar Montpelier-promoted arrangement ineffective; this became final on 23 January 2016 (30).
On 9 November 2016 HMRC issued Mr Rahman with FNs and APNs for the relevant years, comprising 35 pages of technical documents, requiring corrective action by a date later extended to 17 November 2017 following representations (31-40). Montpelier continued to advise Mr Rahman, including preparing a 'letter before claim' for judicial review, but no JR claim was ultimately made (41-43).
HMRC notified Mr Rahman on 23 November 2017 that he was liable to 50% penalties. Montpelier subsequently became difficult to contact, and Mr Rahman's accountants, VCAL, were initially unable to assist in this specialist area until Mr Ali joined VCAL in mid-2019 and took over the matter (44-46). The underlying closure notice appeals were resolved by a review conclusion letter of 23 March 2020, which, by operation of TMA ss 49F and 54(1), was deemed a settlement agreement as no appeal was made within 30 days (48-52, 59-63). FN penalties totalling £112,076.72 were issued on 9 October 2019, later reduced to £91,848.91 following a policy change allowing a co-operation reduction (53-55).
Core dispute
The dispute concerned whether Mr Rahman was liable to Follower Notice penalties for failing to take corrective action by 17 November 2017. Three issues arose: first, whether the burden of proof lay on HMRC or on Mr Rahman to show that the Huitson decision was a 'relevant judicial ruling' under section 205 FA 2014; second, whether Huitson was in fact such a relevant ruling given differences between the partnerships involved; and third, whether it was 'reasonable in all the circumstances' for Mr Rahman not to have taken corrective action by the deadline, given his reliance on Montpelier's advice and his lack of tax knowledge (6-7, 99).
Court findings
The Tribunal held that although the burden normally rests on HMRC in penalty proceedings to establish the primary facts justifying a penalty, Condition C (relating to the judicial ruling) is an exception: the statutory scheme distinguishes between HMRC's opinion in issuing the FN and the taxpayer's separate right of appeal on relevance, so the burden of showing the ruling was not relevant rests on the taxpayer (70-84, citing Sintra and Beadle).
Applying Haworth (Court of Appeal and Supreme Court), the Tribunal found that Mr Rahman and Mr Huitson had entered into the same 'cookie-cutter' Montpelier arrangement, with the only identified difference being the names of the partnerships involved; this was an immaterial detail. Huitson was therefore found to be a 'relevant judicial ruling' (85-98).
On the reasonableness issue, the Tribunal made detailed findings that Mr Rahman had no tax knowledge, did not understand the FNs, APNs or related correspondence, and reasonably relied on Montpelier as experts, including their advice not to take corrective action because the FNs were said to be invalid and to preserve appeal rights. When Montpelier became unresponsive, Mr Rahman sought help from VCAL, who could not assist until Mr Ali joined the firm and took on the case. The Tribunal found that a reasonable person in Mr Rahman's position, with no tax knowledge, would have acted as he did, and rejected HMRC's submission that he should have contacted HMRC directly for help (106-123).
The Tribunal further found that corrective action was in fact taken, by operation of TMA ss 49F and 54(1), 30 days after the review conclusion letter, that is on 22 April 2020, which was after both the 17 November 2017 deadline and the 9 October 2019 date of the penalty assessments (56-69). Given the finding on reasonableness, the Tribunal did not need to decide whether a further reduction for co-operation should apply, but recorded its preliminary view, without deciding the point, that HMRC's submission distinguishing Comtek was likely correct (124-128).
Outcome
The Tribunal allowed Mr Rahman's appeal against the Follower Notice penalties (7-8, 129).
Major issues / areas of contention
- Which party bears the burden of proving that a judicial ruling relied on for a Follower Notice is 'relevant' under section 205 FA 2014.
- Whether the FTT decision in Huitson v HMRC was a 'relevant judicial ruling' in relation to Mr Rahman's Montpelier-promoted tax arrangements.
- Whether it was 'reasonable in all the circumstances' for Mr Rahman not to take corrective action by the specified deadline of 17 November 2017.
- When, if at all, Mr Rahman took 'corrective action' for the purposes of section 208 FA 2014, including the effect of the deeming provision in TMA section 54 and section 49F.
- Whether a further reduction for co-operation under section 210 FA 2014 was warranted following the approach in Comtek, an issue left undecided.