RK Hosking v The Commissioners for HMRC

The appeal in respect of which this application is made concerns the imposition of a £300 penalty (Penalty) issued to the Appellant by HMRC pursuant to paragraphs 39 and 46 Schedule 36 Finance Act 2008 (Sch 36) for failure to produce information and documents requested by HMRC in respect of the Appellant’s tax return for the tax year ended 5 April 2019 and in particular the Appellants use of a disguised remuneration trust.

The notice of appeal was dated 2 February 2023 and lodged on 15 February 2021. The Tribunal indicated that the appeal should be determined by video hearing as a basic case.

On 13 April the Appellant notified the Tribunal that:

Following an indication from HMRC that the status of the trust was not pertinent to the determination of the appeal against Sch 36 penalties, on 5 May 2023 the Appellant made a formal application for stay. The grounds of the application were stated, in summary, to be:

The Tribunal directed the parties to provide submissions on the question of the appropriateness of a stay. A summary of these submission is set out below.

The Appellant is a director of Ortho Solutions Limited (Company).

Between 9 December 2010 to 5 April 2017 the Company made contributions to Ortho Solutions Limited Remuneration Trust (OSLRT) totalling £1,983200 which then made loans to the Appellant. Further amounts totalling £1,433,250 were contributed and loaned in periods prior to 9 December 2010.

Sometime before 25 February 2019 the Appellant was approached by Buckingham Wealth Ltd with a solution which met the concerns of some individuals who had established remuneration trusts, regarding the introduction of a tax charge on outstanding loans made by such trusts. The solution was known as “the Sunrise solution”. The arrangement involved a “Finco” which had been “established under a joint business venture between Minerva and a 3^rd party financier”.

On 25 February 2019 the Appellant signed a hypothecated loan memorandum (HLM) pursuant to which LSC Finance Limited (LCS), an entity established in the BVI, as lender, hypothecated “all such sums as may be claimed by HMRC … as falling subject to the provisions of [the loan charge], in respect of [the Appellant]”. The Appellant borrowed £2,946,000 pursuant to the agreement, apparently for repayment of sums originally loaned by OSLRT (the trustee for which was Griffin Trustees Limited (Griffin)).

At or about the same date £2,946,000 was paid by LCS at the Appellant’s order, to Griffin who subsequently confirmed receipt of the sum.

HMRC’s understanding of the hypothecated loan arrangements offered under the Sunrise solution by Buckingham Wealth is that Griffin subscribed as a shareholder of LCS for the “subscription amount”, a sum equal to the sum advanced to the Appellant under the HLM.

The Appellant’s self-assessment tax return for tax year ended 5 April 2019 did not bring a loan charge was bought into account in respect of the sums lent to the Appellant by OSLRT.

On 21 October 2020 HMRC opened an enquiry pursuant to section 9A Taxes Management Act 1970 (Enquiry) into the Appellant’s self-assessment tax return for the year ended 5 April 2019. The notification of the Enquiry indicated that HMRC were “checking [the Appellant’s return] to see whether it should have included information about outstanding disguised remuneration loans”.

The letter sets out:

On 18 June 2021 HMRC sent an informal request for information and documentation to be provided.

HMRC received a response dated 19 August 2021 which stated:

The informal request for information was reissued on 12 October 2021.

By letter dated 8 November 2021 the Appellant reiterated that no loan charge was appropriate as there were no outstanding amounts due to OSLET from the Appellant. Reference was made to case law supporting the assertion as to the underlying tax position.

On 10 February 2022 HMRC issued a formal notice to produce information and documents as set out in the accompanying schedule (Notice). The Appellant was notified that if he did not possess a copy of any particular document that he was expected to try to obtain it from others who might have such a copy and to provide evidence of all attempts to obtain the document if it was not produced. The deadline for production was set as 21 March 2022. The Appellant was notified that a failure to produce the documents by 21 March 2022 may render the Appellant liable to a £300 penalty and subsequent daily penalties. The Appellant was also duly notified of his right to appeal against the requirement to produce information and documentation.

In response to the request, on 18 March 2022, the Appellant, via his representative wrote to HMRC demanding a response to the position adopted in the 8 November 2021 letter that no loan charge was applicable by reference to the case law cited. Further case law was referenced. Certain information and documents which had been required by HMRC were provided under cover of the letter. The response stated that the Appellant was unable to provide copies of his own bank statements at that time as one of the accounts was closed and Barclays were unable to locate the account on their system; however he indicated that he was making further enquires and sought and extension of time in which to comply with the Notice regarding the statements to 30 April 2022. The letter also appealed the requirement to produce a number of the requested documents on the grounds that they were not in the Appellant’s possession.

HMRC provided their view of the matter in respect of the appealed items on 29 March 2022. HMRC stated that the technical points raised in earlier correspondence were a matter for determination by the Tribunal as necessary. HMRC confirmed that all the documents and information requested were reasonably required for the purposes of and relevant to, checking the Appellant’s tax position. An extension was granted in respect of the provision of the Barclays bank statements. HMRC stated that they considered that the documents against which an appeal had been made were documents which they considered were in the Appellant’s possession or power. The Appellant was offered a review of the decision to maintain the information request and informed of their right to notify the appeal to the Tribunal.

The Appellant accepted the offer of a review on 20 April 2022. Various points were raised regarding the technical basis on which it was contended that no loan charge could arise. It was stated that all documents in the Appellant’s possession had been produced. A further point was made highlighting that HMRC’s view of the matter letter had referenced a taxpayer other than the Appellant; general data protection regulation concerns were raised.

On 12 May 2022 the Barclays bank statements were provided together with an email from the Appellant to LCS. The email to LCS enclosed the Notice and “formally request[ed] that [LCS] provide [the Appellant] with copies of the required paperwork in order that [the Appellant could] comply with HMRC’s correspondence.” LCS was requested to acknowledge receipt of the request and to confirm that assistance would be provided.

By letter dated 28 June 2022, HMRC acknowledged the data breach and apologised. HMRC confirmed that there had been no breach of the Appellant’s data.

The outcome of the review was communicated on 18 July 2022. It confirmed HMRC’s view that all the information and documentation requested was reasonably required for the purposes of checking the tax return for the year ended 5 April 2019 and that, in HMRC’s view, all documents were within the Appellant’s possession or power to obtain. It stated that the documents were required to test the position advanced by the Appellant as to the existence at law or in fact of a disguised remuneration loan and thereby whether the loan charge applied. A response was also provided as to HMRC’s position with regard to the substantive tax arguments raised on behalf of the Appellant.

The review conclusion letter identified that 1) there was a discrepancy in the information provided as to the amounts said by the Appellant to have been repaid to the Appellant and clarification was sought; and 2) with regard to the documents which the Appellant contended were not in his possession the Appellant was required to obtain them from third parties. HMRC notified the Appellant that compliance with the Notice was required within 30 days of the date of the letter (i.e. 18 August 2022).

No appeal was notified to the Tribunal in respect of the review decision.

Under cover of a letter dated 15 August 2022 the Appellant provided some further information together with certain additional documents and evidence of a communication sent to LCS together with a copy of the Sunrise solution marketing material received by the Appellant from Buckingham Wealth. The letter was misdirected and was not received by the case officer until 6 September 2022.

On 16 September 2022 the Appellant provided a response received from LCS refusing to provide copies of the documents on the grounds of confidentiality but indicating if there was a statutory entitlement or other lawful basis to compel delivery to advance such basis in writing.

On 22 September 2022 HMRC issued the Penalty considering that the Appellant had continued to fail to meet the terms of the Notice in full. The documents and information HMRC considered to be outstanding on 18 August 2022 were:

By letter dated 19 October 2022 Lucentum responded appealing the penalty. The appeal contended:

In their view of the matter letter dated 14 November 2022, HMRC accepted, by reference to the information and documents provided on 19 October 2022, that items 2 and 13 the Appellant had complied with the Notice. Certain clarification questions were asked regarding the provision of the bank statements. With regard to Item 19 HMRC stated:

Lucentum responded on 7 December 2022 by way of appeal and providing the clarification as to the bank statements. They questioned why HMRC considered there was a share subscription agreement as the Appellant understood that the only parties to the arrangements were himself and LCS. On that basis it was asserted that no other party would have the documents, nevertheless the Appellant enclosed an email (also dated 7 December 2022) in similar form to that sent to LCS but addressed to Griffin.

It was contended that the Appellant had no influence over LCS so as to compel production of any documents with all efforts having been made and exhausted without successfully obtaining the documents. It was stated that that the Appellant was not aware of any bank statements which would show the transfer of funds associated with the HLM as it was only a transfer of the liability and not the funds themselves. It was also confirmed that not promotional or marketing material or correspondence had been produced.

By the same letter the Appellant notified HMRC that OSLRT (to which the Company made the payments, and which lay at the heart of HMRC’s enquiry) was not a trust as it did not meet one or more of what are described as “the 3 certainties required for valid formation of an express trust” such that the Enquiry was redundant thus invalidating the Notice.

On 20 December 2022 Lucentum provided a copy of the response received from Griffin enclosing various documents complying with item 15 but item 19 of the Outstanding Information/Documents.

HMRC’s review conclusion letter dated 20 January 2023 acknowledges that certain of the Outstanding Information/Documents had been provided under cover of the letter of 15 August 2022 but were not received until after 18 August 2022. The letter confirmed the Penalty on the basis that absent a notification to the Tribunal of the appeal against the Notice the terms of the Notice had become final, and the Appellant was bound to comply with its terms. Its terms had not been complied with, with the consequence that he had rendered himself liable to a penalty. As the assessment to the Penalty had been raised within the relevant statutory time limits it had been validly issued. HMRC identify that OSLRT through Griffin was party to the arrangements and who might reasonably be expected to also have copies of the remaining Outstanding Information/Documents and conclude that as no attempt had been made to obtain the documents from these parties no reasonable excuse was made out. In particular HMRC reference the terms of the HLM which provides that Griffin subscribed to a share in LCS in exchange for the subscription amount which countermands the Appellant’s position that Griffin was a party to the arrangements. HMRC also reject any contention that the voiding of the trust rendered the information request redundant as their powers to require provision of information and production of documents, in the present case, are founded in the Enquiry.

Pursuant to paragraph 1 Sch 36 HMRC may require a taxpayer to provide information or produce documents “if the information or document[s] [are] reasonably required for the purposes of checking the taxpayer tax position”. Where a person is required by a paragraph 1 notice to provide information or produce documents they must do so within the period reasonably specified in the notice. Paragraph 18 provides that a notice under paragraph 1 “only requires a person to produce a document if it is in the person's possession or power”.

Section 49F Taxes Management Act 1970 (TMA) provides that where HMRC give notice of the conclusions of a review, then, absent notification of the appeal to the Tribunal, those conclusions are treated as the basis of a formal settlement under section 54(1) of the appeal formerly notified to HMRC.

Rule 5 Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 grant the Tribunal wide powers of case management. Including the power to stay proceedings. In exercising its case management powers the Tribunal must act in accordance with the overriding objective to deal with matters justly and fairly.