Judgment summary
Mr Mohammad Farrokhshad appealed against follower notice (FN) penalties issued under s 208 Finance Act 2014 for the tax years 2004-05, 2005-06 and 2006-07, originally totalling £42,446.90, later reduced by HMRC to £33,349.49 following a 'View of the Matter' letter and upheld on review (1).
The Tribunal first considered whether to admit the appeal, which was made 48 days after the statutory deadline. Applying the Martland guidance as confirmed in HMRC v Medpro Healthcare Ltd, and noting HMRC's non-objection, the Tribunal admitted the late appeal (3-6).
On the substantive appeal, the Tribunal found that the FNs were validly issued, that Mr Farrokhshad had not taken the corrective action required by s 208(5) and (6), and that none of his arguments established that it was reasonable in all the circumstances for him not to have taken that action. The Tribunal confirmed the reduced penalty figures calculated by HMRC and found no basis for a further reduction for co-operation, allowing the appeal only to the extent of the reduction already made by HMRC (44-45).
Background
Mr Farrokhshad was a member of a tax arrangement scheme marketed by Montpelier Tax Management (the 'Scheme'), which sought to exploit double taxation arrangements between the UK and the Isle of Man by routing participants' earnings through Isle of Man partnerships and a trust (16). He withdrew from the Scheme in early 2007 due to growing press scrutiny of tax avoidance schemes (16).
Despite withdrawing, in his self-assessment returns for 2004-05, 2005-06 and 2006-07 he had returned income from the offshore trust and claimed equivalent double taxation relief. HMRC opened enquiries and issued closure notices, which Mr Farrokhshad appealed (17).
On 3 September 2015 the Tribunal decided Huitson v HMRC [2015] UKFTT 448 (TC), concerning similar Montpelier arrangements, finding the scheme ineffective. That decision became final on 23 January 2016 (19-20). HMRC subsequently issued FNs to Mr Farrokhshad on 28 October 2016 for the three tax years, totalling £42,466.90 (as later summarised in Appendix I), requiring corrective action by 31 January 2017, later extended to 2 May 2017 (21, 25).
Mr Farrokhshad made representations against the FNs, which HMRC rejected. He did not take the corrective action required by s 208(5) and (6) by the due date (24-26, 36). He later raised various arguments, including comparisons with the Broomfield litigation, a payment of £93,390.69 made in November 2018 under an Accelerated Payment Notice, and allegations of discriminatory treatment (27-30, 42).
Core dispute
The dispute concerned whether the FN penalties were correctly issued and calculated, and whether it was reasonable in all the circumstances for Mr Farrokhshad not to have taken the corrective action required by the follower notices under s 208(4)-(6) Finance Act 2014 (32, 36-37).
Mr Farrokhshad argued that withdrawing from the Scheme in 2007 amounted to corrective action, that HMRC had given no warning at the time he joined the Scheme, that the penalties amounted to double taxation given he had declared his full income, that the FNs were out of time, that his payment of £93,390.69 in November 2018 settled all liabilities including the FN penalties, and that the penalties were an abuse of HMRC's power that discriminated against him as an unrepresented individual (35, 38-42).
HMRC contended that the FNs were validly issued because Conditions A to D under s 204 were met, that Mr Farrokhshad had not taken the necessary corrective action by the due date, and that the penalties, as reduced, were correctly calculated (33).
Court findings
The Tribunal found that Conditions A to D in s 204 were satisfied: Mr Farrokhshad's appeals against the closure notices were unresolved when the FNs were issued, the asserted advantage arose from the Scheme, HMRC reasonably considered Huitson a relevant judicial ruling, and no previous FNs had been issued for the same advantage, arrangements or ruling (33). The FNs were issued within 12 months of the Huitson ruling becoming final and were therefore in time (34, 40).
The Tribunal held that withdrawal from the Scheme in 2007 could not amount to 'corrective action' because, under s 208(4)-(6), only the specific steps of entering a written agreement with HMRC and notifying HMRC would suffice, and Mr Farrokhshad accepted he had not taken those steps by 17 May 2017 (35-36).
The Tribunal rejected the argument of double taxation, finding the penalties arose from the failure to take corrective action and had nothing to do with liability to, or payment of, income tax (39). It also rejected the contention that HMRC's failure to apply the Broomfield consent order to Mr Farrokhshad, who was not a party to that litigation, amounted to any breach (40).
The Tribunal found that the letter of 5 November 2018 was headed 'Accelerated Payment Notice' and its attached Statement of Liabilities did not include any FN penalty amount, so the £93,390.69 payment could not be regarded as settling the FN penalties (41).
The Tribunal accepted that Mr Farrokhshad had suffered anxiety and stress but held that its jurisdiction, being statutory, did not extend to supervising HMRC's conduct, and the circumstances did not fall within s 214(3)(d) (43). The Tribunal also concluded, having considered co-operation, that the reduction already given by HMRC was appropriate and no further reduction was warranted (44).
Outcome
The Tribunal allowed the appeal only in part, confirming the reduction in the FN penalties from £42,446.90 to £33,349.49 as already applied by HMRC. It otherwise found that the FN penalties were correctly issued in the right amount and that Mr Farrokhshad remained liable for them, having failed to take corrective action by the due date of 2 May 2017 (45).
Major issues / areas of contention
- Whether the appeal, made 48 days late, should be admitted applying the Martland guidance
- Whether the follower notices met Conditions A to D under s 204 Finance Act 2014
- Whether withdrawal from the Scheme in 2007 could amount to 'corrective action' under s 208(4)-(6)
- Whether it was reasonable in all the circumstances for Mr Farrokhshad not to take the required corrective action under s 214(3)(d)
- Whether the FN penalties were out of time
- Whether the £93,390.69 payment in November 2018 settled the FN penalties
- Whether the FN penalties amounted to double taxation given full income declaration
- Whether the Tribunal had jurisdiction to consider allegations of abuse of power or discriminatory treatment by HMRC
- Whether a further reduction in penalties for co-operation was warranted