Tax Avoidance Schemes – Do fines deter promotion?

HMRC issued a press release on 27 July 2022 regarding a fine of £1m as a promotor penalty to a promoter who failed to disclose an avoidance scheme. HMRC’s Director of Counter-Avoidance, Mary Aiston said:

“This £1 million fine should serve as a stark warning to tax avoidance promoters. Those who ignore their legal duty will face serious consequences.”

“We actively tackle promoters of tax avoidance schemes and are determined to drive them out of business. We continue to use the full force of the law to challenge tax avoidance scheme promoters.”

I dispute whether HMRC have (actively) efficiently tackled promoters. Also, will the fine be a stark warning or deterrent? I do admire HMRC’s efforts given they (or the Treasury) have created interesting yet problematic legislation. The tools developed to counter avoidance have then been handled on the assumption that they are effective, without regard for all the obstacles that can be thrown in the way by professionals. The Hyrax case demonstrates how long it can be to get a result, which may not actually be a deterrent. The scathing comments made against some individuals may inspire action by other government bodies but this may also take a long time. The quantum of penalty may be worth the potential reward and I wonder whether the penalty will be paid or even collectible.

HMRC first succeeded at the tribunal only three years ago. In 2019 the promoter, Hyrax, was ordered to provide details of the avoidance scheme they promoted and its users. The scheme operated between 2014 and 2019. HMRC made an application for specific disclosure dated 17 March 2021 (Hyrax Resourcing Ltd [2021] TC 08162). HMRC then applied to the Tribunal (Hyrax Resourcing Ltd [2022] TC08541) for penalties for the company’s failure to notify a scheme under DOTAS.

HMRC had lodged an application with the Tribunal for a penalty on 18 February 2020 for Hyrax’s failure to notify notifiable arrangements within the prescribed period after the date on which it first became aware of any transactions forming part of those arrangements. The arrangements were notifiable and an Order identifying Hyrax as a promoter in relation to the arrangements was issued on 5 March 2019.

The Order was not subject to any right of appeal and Hyrax accepted it was a promoter and the arrangements were notifiable. Hyrax did however seek a Judicial Review Claim. However, on 10 September 2019, the application for Judicial Review was refused by the High Court. On 20 September, Hyrax renewed their claim for permission to apply for Judicial Review although did not progress it.

In 2021, the company’s argument was that it had relied on advice that the scheme was not notifiable. There was no contemporaneous documentation. The company relied on witness evidence. The FTT refused HMRC’s application for the taxpayer company to be ordered to make specific disclosures in support of their assertion that they had a reasonable excuse for failing to notify a scheme under the DOTAS regime. The Tribunal found that there was no reason to depart from the normal Tribunal disclosure rules and therefore it was up to the company to decide the documents on which it intended to rely, albeit that their appeal could stand or fall on what they chose to disclose.

The burden of proof to establish conditions to impose a penalty lay with HMRC. The penalty is subject to a reasonable excuse defence and Hyrax would need to establish what is a reasonable excuse for not disclosing throughout the relevant period. HMRC amended their application on 1 July 2021 to not seek the penalty in respect of the period after 14 March 2019. Therefore for the period 1 April 2014 to 14 March 2019 the issues at hand were whether Hyrax had a reasonable excuse and if not, the quantum of the penalty.

HMRC were found to have satisfied the burden to demonstrate there had been a failure to notify and the period the failure to comply continued.  The burden of proof to establish a reasonable excuse lay with Hyrax.

The approach to reasonable excuse was set out in Perrin v HMRC:

“In deciding whether the excuse put forward, viewed objectively, is sufficient to amount to a reasonable excuse, the tribunal should bear in mind all relevant circumstances; because the issue is whether the particular taxpayer has a reasonable excuse, the experience, knowledge and other attributes of the particular taxpayer should be taken into account, as well as the situation in which that taxpayer was at the time or times…….”

Hyrax relied on the alleged actions and beliefs of its sole director, Joanna Macnamara.

Limited oral evidence which imported that if EDF (the boutique tax firm behind the avoidance scheme) told her something then she did it. She acted as a post office for the letters to HMRC cutting and pasting letters from EDF and Venables QC. The Tribunal found it likely she understood the basics although was unlikely to have any input on strategic matter. The Tribunal ‘would not have been surprised if HMRC had argued that (David Gill) he was a shadow director’ and did not accept ‘his assertion that he distanced himself from the promotion of Hyrax. The Tribunal found that ‘David Gill supported by Karin Mountain, with Richard Hopkins and Nicola Stone in the background, was the controlling mind of Hyrax’.

Hyrax did not have a reasonable excuse for the failure to notify.

Regarding the quantum of penalty, HMRC calculated the gross receipts during the period were £37,608,000. Hyrax had effectively split the ‘tax saving’ with scheme users retaining some 18.5% of funds.

The Tribunal accepted HMRC’s argument that the penalty should act as a deterrent. It should deter others from deliberately setting up a company with a sole director who displays ‘Nelsonian acuity’ in regard to the company’s affairs. It should also deter those who rely only on the advice of the promoter of the tax avoidance scheme and a promoter who makes large sums of money from it. The Tribunal was mindful that David Gill sought to hide behind Joanne Macnamara whilst at all times being actively involved.

The penalty was set at £1,074,600.

HMRC may consider this result to be a victory, which in principal it is. However, if you make a lot of money from operating something, which then ceases and three years later, after turning over £38m you get a penalty of £1m, are you deterred? More interestingly, I wonder if the penalty is affordable by either Hyrax or Joanna because if the controlling mind were others, I would suspect others would hold financial benefit. HMRC could still pursue others but in the absence of knowing the facts, I suspect that would take some more time and expense.

To learn more about author Anton Lane by visit his LinkedIn profile

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