The Commissioners for HMRC v Industria Umbrella LTD

This case concerns the disclosure of tax avoidance schemes (“DOTAS”) provisions set out in Part 7 of the Finance Act 2004 (“FA 2004”), and regulations made thereunder (the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 SI 2006/1543, as amended) (“the Prescribed Descriptions Regulations”) (Footnote: ¹).

The Applicants (“HMRC”) submit that between 2017-18 and 2019-20, the Respondent (“Industria”) promoted contractor loan scheme arrangements, which enabled participants to take home a higher net return of their contract value due to the fact that only a portion of their contract value was paid through the payroll (and subject to deductions of tax and national insurance contributions (“NICs”)). The arrangements (“the Industria Arrangements”) were designed to allow users to provide contractor services to arm’s length end-user clients, whilst retaining more money than they would as an employee, a self-employed individual or a director of their own company. The arrangements sought to avoid income tax on remuneration for services and/or reduce PAYE and NICs in relation to the scheme’s users by making payments to users in the form of:

The arrangements further purported to allow users to take home approximately 80% of their gross contract pay; the large majority of which was received pursuant to the ‘loan agreements’.

By a letter dated 15 April 2021, HMRC explained that absent agreement that the Industria Arrangements were notifiable under the DOTAS legislation, HMRC’s intention was to apply to the Tribunal for penalties under s 98C of the Taxes Management Act 1970 (“TMA”) for the failure to notify these arrangements (“the Penalty Application”). By virtue of s 100 TMA, HMRC do not have the power to impose a penalty under s 98C(1)(a). Instead, pursuant to s 100C TMA, HMRC must make an application to the Tribunal.

This is HMRC’s application for an order, under s 100C TMA, for a penalty under s 98C TMA in relation to Industria’s failure to comply with the requirement under s 308(3) FA 2004 to notify the notifiable arrangements to HMRC within the prescribed period, after the date on which Industria first became aware of any transactions forming the notifiable arrangements. Section 308(3) FA 2004 requires a promoter in relation to notifiable arrangements to provide the “prescribed information (Footnote: ²)” relating to those arrangements within the “prescribed period (Footnote: ³)” after the date on which they first became aware of any transaction forming part of the notifiable arrangements.

As Industria entered into creditors’ voluntary liquidation on 28 May 2021, HMRC served the Penalty Application on Mr Edward M Avery-Gee and Mr Daniel Richardson of CG & Co (“the Liquidators”). By an email dated 29 November 2023, the Liquidators informed the Tribunal that they do not wish to contest or appeal the action being taken by HMRC.

On 21 February 2025, the Tribunal directed that the Penalty Application would be determined on the papers.

Neither party has requested an oral hearing.

The authorities specifically referred to in the application included:

The documents for the hearing comprised of pleadings, documents relating to the Industria Arrangements, witness statements and other correspondence.

The issues for consideration are:

It is settled law that no penalty can arise in any case where the taxpayer is not in default of an obligation imposed by statute.

In Perrin v R & C Comrs [2018] BTC 513 (‘Perrin’) (Judges Herrington and Poole), at [69], the Upper Tribunal (‘UT’) explained the shifting burden of proof as follows:

“Before any question of reasonable excuse comes into play, it is important to remember that the initial burden lies on HMRC to establish that events have occurred as a result of which a penalty is, prima facie, due. A mere assertion of the occurrence of the relevant events in a statement of case is not sufficient. Evidence is required and unless sufficient evidence is provided to prove the relevant facts on a balance of probabilities, the penalty must be cancelled without any question of “reasonable excuse” becoming relevant.”

Section 118(2) TMA provides that:

“For the purposes of this Act, a person shall be deemed not to have failed to do anything required to be done within a limited time if he did it within such further time, if any, as the board or the tribunal or officer concerned may have allowed, and where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased.”

The factual prerequisite is, therefore, that HMRC have the initial burden of proof: see also Burgess & Brimheath v HMRC [2015] UKUT 578 (TCC) (‘Burgess & Brimheath’) (in the context of a discovery assessment).

The burden of proof on HMRC is to show that the conditions for imposing a penalty are satisfied. The burden is discharged where HMRC demonstrate:

Where HMRC have demonstrated the non-compliance with the statutory obligation, and the period over which it continued, the burden shifts to Industria to establish that it had a reasonable excuse for not disclosing the Industria Arrangements to HMRC throughout the relevant period.

In R & C Comrs v Tager [2018] EWCA Civ 1727; [2018] STC 1755; [2019] 1 WLR 720 (‘Tager’) at [88], Henderson LJ said this:

“... In agreement with the Upper Tribunal, I consider that this condition makes it clear that the Upper Tribunal should have regard to the usual considerations which apply when the imposition of a tax penalty is in question, including such matters as the reasons for non-compliance, the extent to which the position has been remedied, the gravity and duration of the non-compliance, the presence of aggravating or mitigating factors, the availability of other methods for HMRC to recover the tax at risk (most obviously by making an assessment, if necessary on a best of judgment basis), and generally the need to achieve a fair and proportionate outcome, having regard to the interests of the public purse and the general body of taxpayers as well as the circumstances of the non-compliant taxpayer himself.”

The standard of proof is the ordinary civil standard; that of a balance of probabilities.

In Hyrax, at [36], Judge Mosedale described principles of general application regarding the burden of proof as follows:

“It seems to me that the principal effect of the respondent’s failure to rely on any evidence is that where HMRC can establish a prima facie case on the balance of probabilities then that case is proved.”

As Judge Mosedale noted, this is not a matter of adverse inferences. Instead, it is application of the usual burden of proof process. Where HMRC have produced evidence which discharges that burden, it is then for Industria to rebut that with its evidence. Therefore, where Industria does not do so, I make findings relying upon HMRC’s evidence.

The background facts are not in dispute between the parties and are as follows:

On 9 May 2017, Industria was incorporated in the United Kingdom. Henry Thomas Radford-Fragoso was the sole director between incorporation and 4 August 2017, and then again from 23 August 2017. Samantha Cubbon was a director between 17 July and 23 August 2017. Mr Radford-Fragoso was also the sole shareholder between incorporation and 4 August 2017, and then again from 23 August 2017 until 19 December 2019 when Chloe Marie Walker became the sole shareholder. Samantha Cubbon was the sole shareholder between 4 and 23 August 2017.

Peter Morris Barry Holmes Adamson is a director and shareholder of numerous companies, including the companies which own the comparison websites utilised by users of the Industria Arrangements. The scheme documents sent out by these entities, including Industria, share the same IP address in the Isle of Man.

HMRC’s records confirm that Industria operated a PAYE system, which commenced on 25 August 2017 and continued to operate until the end of 2019-20, when 117 users moved to the PAYE system reference for ‘Industria Paye Limited’ (registered at the same address as Industria), and where Mr Radford-Fragoso was a previous director.

The Industria Arrangements involved an arrangement whereby the scheme user, being a professional contractor (“users”), had generally already found work with an arm’s length recruitment agency (“the agency”), or an end-user client or customer (“the end user client”) through an agency. Users engaged Industria as an ‘umbrella’ company provider. Industria’s website encouraged potential users to complete an online enquiry, request a call-back, or enter their dates to calculate their take home pay, but provided little information in relation to the arrangements, beyond stating that:

“you will become an employee of Industria and be scheduled to complete a number of assignments for agencies during the course of your contract of employment”.

The same webpage also said that Industria would:

“handle all payments and deductions”

The majority of users of the Industria Arrangements were referred to Industria by a recruitment agency, or after using ‘umbrella’ comparison websites. The users also received a ‘company details pack’ which contained various documents, including Industria’s certificate of incorporation, VAT registration certificate, employer’s liability insurance certificate and banking details. The process involved the following steps:

In respect of ‘Step 6’, the payslips issued by Industria to users (i.e., payments to users via PAYE) confirmed the part of their income was paid via Industria’s PAYE system “reference number 475/WB66760” and indicated that most users’ gross salaries were between £300 and £350 per week for a five-day week, or equivalent for part-time or fortnightly pay cycles. The amounts paid via Industria’s PAYE system are corroborated by HMRC’s Real Time Information (“RTI”) records, which indicate most users were paid between £1,200 and £1,300 per month and, in line with the NMW rates during 2018-19, on the basis of £350 per week for five days at eight hours per day. These payments were also evidenced in users’ bank statements, with one of the two payments from Industria being described as ‘salary’, and the other as ‘loan’. As an example, ‘S Dempsey’ entered into a loan agreement with Industria, indicating that:

In respect of ‘Step 7’, the additional payments were confirmed in letters from Industria to users entitled “Letter of Credit Advice” confirming the date and amount of the loan payments made. These payments were also evidenced in users’ bank statements.

From around December 2018, the Industria Arrangements altered, such that users received only one payment constituting both the net salary and the purported loan amounts.

The analysis of the employment history of five of the example users whose documents were relied on for the purposes of the Penalty Application shows that for four of the five users, there was a pattern of leaving the employment of Industria and finding more stable and significantly higher paid employment.

An examination of the invoices, payslips and Letters of Credit Advice issued by Industria users, as well as users’ bank statements for the corresponding periods, indicate that the take home pay received by users constituted approximately 78% to 84% of their gross contract value. Therefore, it is the net renumeration that is enhanced by using the arrangements. The user’s gross remuneration, agreed between the end-user client and user, is not enhanced. One such example was as follows:

The payments, in the form of loans, were claimed to be advances of unearned ‘bonus’ payments users might have been entitled to. (Footnote: ⁴) This is despite the fact that the scheme documentation does not give substance to the asserted bonuses. There are no specific explanations about how users’ entitlements to bonuses are triggered. There is no reference to infrastructure or systems which enable employees to fulfil their obligations, or enable employers to monitor compliance.

The ‘loan’ payments were funded by income generated from the economic activity of individual scheme users for end-user clients and were a ‘balancing payment’ to top up users’ take home pay to approximately 80%.

An example of this is in relation to an individual by the name of ‘M Shannon’. His gross contract value (Footnote: ⁵) for the week ending 18 February 2018 was £1,295, of which he received £254.27 as net salary and £826.65 as loan. This equated to a take home pay of 83.5%. The expected tax and NICs paid by Mr Shannon should have been £394.32 (along with employers NICs of £157.04). However, the amount actually deducted (including employers NICs (Footnote: ⁶)) was £44.15, which resulted in a tax and employee NICs saving of £350.29 (or £507.33 including employers NICs). (Footnote: ⁷)Over the course of a year, a tax saving of £18,000 could have been obtained.

HMRC issued 68 Schedule 36 Information Notices to users of the Industria Arrangements between February and April 2019. Of those notices, HMRC received 35 responses from users of the arrangements (or their agents/representatives), with accompanying documents. The documents obtained from users of the arrangements includes contracts of employment between Industria and users, loan agreements between Industria and users, payslips and ‘Letters of Credit Advice’ issued by Industria to users, along with copies of email correspondence between users and Industria and email correspondence from umbrella comparison websites demonstrating the expected take-home pay of around 80% if choosing to use Industria as their umbrella provider.

After reviewing the documents obtained from HMRC’s enquiries, and the Schedule 36 Notices issued to users of the scheme, HMRC Officer Jamie Decroos initially wrote to Industria, on 24 April 2019, requesting a meeting to discuss the employment and remuneration arrangements provided by the company, including any potential DOTAS notifications and the company’s role in the promotion, organisation and marketing of the arrangements. No response was received to this letter.

Officer Decroos sent a further letter to Industria on 27 August 2019, describing the details of the scheme and requesting that Industria, as a promoter of the scheme, notify the scheme under DOTAS and submit an AAG1 if they now believed the scheme was notifiable, or offer a detailed explanation if they believed it was not. The letter stated that if a response was not received by 30 September 2019, HMRC may issue a notice under s 313A FA 2004.

An email response was received from Mr Radford-Fragoso, on behalf of Industria, on 15 October 2019, requesting the basis for HMRC’s belief that Industria are the promoter of the described scheme before Industria could offer a substantive response.

Officer Decroos sent a reply to Mr Radford-Fragoso’s email on 22 November 2019, restating the details of the arrangements and advising Industria that HMRC had received evidence from users of the scheme that showed Industria was the promoter under s 307 FA 2004, and that the arrangements were notifiable under s 306 FA 2004. A response was requested by 23 December 2019. Once again, no response was received from Industria.

On 6 January 2020, Officer Decroos issued a s 313A notice setting out the details of the arrangements and requesting a response from Industria as to whether the arrangements are notifiable, or providing reasons why Industria believe the arrangements are not notifiable. This letter requested a response by 6 February 2020.

On 28 February 2020 Mr Radford-Fragoso responded to Officer Decroos’ letter of 22 November 2019. The letter reiterated the contents of the letter of 15 October 2019, with the request for all evidence’ that HMRC held to support their claims that Industria was a promoter of arrangements.

Officer Decroos issued a holding response on 8 April 2020, to the same email address that Mr Radford-Fragoso had sent his letter from. The email was returned as “undeliverable” as the address could not be found.

Officer Bontempo, having taken over the case, issued a reply to Industria on 3 June 2020. He addressed the points raised in Industria’s earlier correspondence and confirmed that the evidence that HMRC held was used to inform their understanding of the arrangements, and that Industria were the promoter of those arrangements. He stated that if Industria did not agree that the arrangements were notifiable, or provide a substantive response as to why they believed they were not, he would consider making an application under s 314A to the First-tier Tribunal (‘FtT’), at which point the FtT would have the opportunity to review any and all evidence. No response was received to this letter.

On 15 April 2021, Officer Bontempo wrote to Mr Radford-Fragoso, informing him that, in the absence of agreement that the arrangements are notifiable, HMRC intended to apply to the FtT for penalties under s 98C TMA for failure to notify the arrangements under s 308(3) FA 2004. The letter further advised that the initial period for which a penalty for failure to comply with s.308(3) will be charged will:

He further explained that if an appropriate disclosure under s 308(3) FA 2004 is made, the length of time that a penalty can be imposed will be reduced relative to whether the case proceeds to the Tribunal without prior disclosure. He concluded by stating that any further representations in response to the letter would be carefully considered and HMRC would respond as appropriate in their application to the Tribunal. No response was received.

A letter was received from the Liquidators on 18 May 2021, informing all creditors that the directors of Industria had decided to place the company into creditor’s voluntary liquidation, and that it was proposed Edward M Avery-Gee and Daniel Richardson of CG&Co be appointed as liquidators. The letter further stated that a creditor’s meeting would be held on 28 May 2021.

On 28 May 2021, Industria decided that the company would be wound up voluntarily, and that the Liquidators would be appointed as joint liquidators of the company for the purposes of the voluntary winding-up.

On 21 June 2021, Officer Charles Jackson sent an email to Andrew Walker of CG&Co asking if they had been able to study Officer Bontempo’s letter of 15 April 2021, and if they were considering submitting a disclosure.

On 22 June 2021, Mr Walker replied, by email, to Officer Jackson requesting that Officer Bontempo sends the AAG1 for completion. On the same date, Officer Bontempo emailed Mr Walker a link to the AAG1 form on the gov.uk website.

On 24 June 2021, the Liquidators submitted a completed a ‘Disclosure of Avoidance Scheme form (“AAG1 form”) to HMRC. The AAG1 form submitted is for use by scheme promoters when notifying under s 308 FA 2004 and/or reg. 8 of the National Insurance Contributions (Application of Part 7 of the Finance Act 2004) Regulations 2012 SI 2012/1868 (“the 2004 Regulations”). The form stated that:

The completed AAG1 form further stated that:

“The users of the scheme would receive their gross contract value in two separate payments. The first element was a salary paid via Industria Umbrella Limited under the PAYE reference 475/WB66760. This was generally [National Minimum Wage (“NMW”)] at around £60 to £70 a day. The balance of the contract value was in the form of a loan. It did not go through PAYE and was made as a separate payment”.

The following explanation was provided as to the element of the arrangements from which the expected tax and/or NIC advantage arose:

“[a] tax advantage arose as the loan element was not ‘earnings’ and therefore not subject to PAYE or NIC”.

The statutory provision relevant to the element of the arrangements from which the expected tax and/or NIC advantage arose was identified as s 62 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”). The form also identified that the regulation most applicable to the arrangement was reg. 18 of the Prescribed Descriptions Regulations, described as “Employment Schemes” (i.e., Description 8). On the same date (i.e., 24 June 2021, HMRC advised the Liquidators that the Industria Arrangements had been allocated Scheme Reference Number (“SRN”) “98220957”.

On 3 February 2022, Officer Bontempo sent a letter to the liquidators, confirming HMRC’s intention to file an application for an order, under s 100C TMA, for a penalty under s 98C(1)(a) and (2)(a) TMA, in relation to Industria’s failure to comply with the requirement under s 308(3) FA 2004 to notify the Industria Arrangements within the prescribed period.

On 11 March 2022, HMRC applied to the Tribunal for a penalty to be imposed on Industria by reason of its failure to notify the arrangements earlier (i.e., the Penalty Application).

On 16 May 2023, HMRC issued Mr Henry Radford-Fragoso with a joint and several liability notice (“the JSLN”) pursuant to the Finance Act 2020 (“FA 2020”). Mr Radford-Fragoso subsequently appealed the JSLN (“the JSLN Appeal”).

On 29 November 2023, the Liquidators advised the Tribunal that they do not wish to contest or appeal the action being taken by HMRC in relation to the Penalty Application. Accordingly, the Penalty Application is unopposed

On 24 January 2024, the Tribunal directed that the Penalty Application and the JSLN Appeal should be heard together.

By a consent order signed on 14 February 2025, the JSLN Appeal was dismissed following HMRC’s withdrawal of the JSLN on the same date. As he is no longer in receipt of a JSLN, Mr Radford-Fragoso no longer has standing to participate in the Penalty Application under paras. 5(1) and 16 of Schedule 13 FA 2020. The only parties to the Penalty Application are the HMRC and Industria. (Footnote: ⁸)

The relevant law is set out in the “Appendix” to this Decision.

In support of the Penalty Application, HMRC rely on the witness statement of Officer James Bontempo. Officer Bontempo is an investigator in the Counter-Avoidance Directorate of HMRC. Officer Bontempo has been an HMRC tax compliance officer for five years, covering investigations of personal and company tax returns. In December 2019, he joined the Counter-Avoidance Directorate. He took over the case from Officer Decroos. In his witness statement, Officer Bontempo explains that the arrangements promoted by Industria are a form of contractor loan scheme. The advantage is that the user takes home a higher net return of their contract value, compared to a standard umbrella, as only a portion of their contract value is paid though the payroll and subject to deductions of tax and NICs. He adds that for the purpose of the Penalty Application, HMRC selected several users as examples of how the arrangements operated.

Officer Bontempo considered:

Officer Bontempo conducted a full review of the above documents and was of the firm belief that the arrangements were notifiable, and that Industria were clearly the promoter of these arrangements. Officer Bontempo reviewed the employment history of several of the users of the arrangements. HMRC selected, as examples, five of the users whose documents were relied upon in the Penalty Application. These examples are not exhaustive. He identified the following from a review of the PAYE records from 2018-19 onwards, as those are the years that were available on the system that he had access to.

In relation to scheme user ‘S Dempsey’:

In relation to scheme user ‘P Browne’:

In relation to scheme user ‘M Shannon’:

In relation to scheme user ‘S Gammon’:

In relation to scheme user ‘T Barry’:

The PAYE records show that for four of the five users, there was a pattern of leaving the employment of Industria and finding more stable and significantly higher paid employment. In Officer Bontempo’s view, as a result of the prevalence of arrangements, and the suggested saturation of the market, he was not aware of any which did not attract a premium fee. He added that regardless of any suggestion that due to the plethora of arrangements available a premium fee could not be charged, the evidence submitted as part of the Penalty Application demonstrates that a fee was withheld from the users, and that fee was directly related to the tax advantage obtained. Thus, a premium fee was charged to users of the arrangements promoted by Industria.

Officer Charles Everitt has also provided a witness statement. He is the Governance & Technical Lead in the Fraud Investigation Service (‘FIS’) Economic Crime Strategy Unit within HMRC. Officer Everitt has 16 years’ experience across tax, civil recovery and insolvency matters. He has been employed as the Governance & Technical Lead by HMRC since July 2021. Prior to his current role, he worked as a Senior Insolvency Caseworker in HMRC’s Counter Avoidance Directorate, specialising in the collection and recovery of amounts where disguised remuneration and tax avoidance schemes had been utilised. Prior to his employment with HMRC, he worked for several insolvency practitioners across the full spectrum of corporate and personal insolvency regimes. He is the authorised officer who issued the JSLN dated 16 May 2023.

The witness statements submitted on behalf of HMRC have not been challenged by, or on behalf of, Industria. Having considered the witness statements against the documentary evidence included in the bundle, I am satisfied that I can place reliance on the witness statements (and the information recorded therein).

HMRC’s written submissions can be summarised as follows:

I have considered all of the documentary evidence in determining the facts in my reasons for the Decision.

As there is no dispute as to the background facts (“The Facts”) at [23] to [61] above, I shall not repeat those here (which I adopt the ‘Facts’ as the “Findings of Fact”).

This is HMRC’s application for an order for penalties for the failure to notify the Industria Arrangements. The arrangements which are the subject matter of this application are described at [26] to [36] above.

HMRC submit that the Industria Arrangements were notifiable under s 306(1)(a) to (c) FA 2004 on the basis that: (i) they fall within the descriptions prescribed by regs. 8, 10, 18 and/or 19 of the Prescribed Descriptions Regulations; (ii) they enable or expect to enable any person to obtain an advantage in relation to tax that is prescribed in relation to the arrangements; and (iii) the main benefit or one of the main benefits that might be expected to arise from the arrangements is the obtaining of that tax advantage.

HMRC are of the view that Industria is liable because:

On the basis of the above conclusions, HMRC submit that Industria failed to comply with its s 308 obligation (from, at the latest, 15 November 2017 until 23 June 2021, which equates to 1,316 days). Thus, Industria is liable to a penalty under s 98C(1)(a)(i) and (2)(a) TMA, at a rate of up to £600 per day, subject to s 118(2) TMA.

HMRC are of the view that the correspondence sent to Industria from April 2019 onwards made clear that HMRC believed that the arrangements were notifiable under DOTAS. Despite having sent no less than six letters to Industria, HMRC only received two brief responses from Mr Radford-Fragoso on behalf of Industria. The first email from Mr Radford-Fragoso on 15 October 2019 requested the basis for HMRC’s belief that Industria was the promoter of the scheme before Industria could offer a substantive response. The second letter was emailed by Mr Radford-Fragoso on 28 February 2020 and was, essentially, a reiteration of the earlier letter with the additional request for “any and all evidence” that HMRC held to support their claims.

Based on the information and documents held by HMRC, and the limited responses received from Industria to HMRC’s correspondence, HMRC are of the view that:

The relevant legislation in relation to penalties is to be found in ss 98C, 100C and 118 TMA. The first sets out the penalty provisions. The effect of s 100 TMA is that an HMRC officer is not permitted to make a determination to impose a penalty for non-compliance with a promoter’s obligations under s 308(3) FA 2004. The officer must commence penalty proceedings before the Tribunal. Section 118 is the reasonable excuse provision. The Tribunal’s jurisdiction, once HMRC have established that the conditions for a penalty are satisfied, is to either set aside, confirm, reduce or increase the penalty as it appears to be appropriate to the Tribunal.

In this Decision, the legislation and case law are cited so far as relevant to the issues. My conclusions regarding the key submissions made are set out below.

The central mechanism used by HMRC to alert it to tax avoidance schemes is the ‘DOTAS’ regime. The DOTAS regime is a set of administrative measures designed to impose on promoters a duty - subject to serious sanctions if not observed - to provide advance warning to HMRC of tax avoidance schemes. The essence of the DOTAS regime is, thus, to enable HMRC to apply the law to new types of arrangements as they emerge. The DOTAS regime is designed to allow HMRC to obtain early information about certain tax arrangements, how they work, and who has used them. The statutory provisions are to be found in Part 7 FA 2004, as amended by the Finance Act 2021; which amendments came into effect on 10 June 2021. The HMRC Guidance, published on 4 February 2014, makes it clear, in simple English, that notification should be made within five days of a scheme being made available or implemented.

The DOTAS regime imposes obligations on high-risk promoters of tax avoidance schemes. If a promoter satisfies any of a list of threshold conditions in Schedule 34 FA 2004, or a promoted scheme has been defeated (Schedule 34A), an authorised HMRC officer may issue a “conduct notice”. Such circumstances include, but are not limited to, breaches of DOTAS obligations. Liability for a penalty does not arise if there is a reasonable excuse for the failure. However, reliance on legal advice (such as the opinion of senior counsel) is to be taken, automatically, not to constitute a reasonable excuse in the case of a monitored promoter if either the advice was not based on full and accurate disclosure of the facts, or the conclusions in the advice were unreasonable.

From about 2004 onwards, Employment Benefit Trust (‘EBT’) loan schemes were popular amongst contractors. HMRC have succeeded in securing orders - against which there is no appeal - that specific loan scheme arrangements which had not been disclosed were disclosable under the DOTAS rules, and that named persons were promoters of the scheme. This enabled Accelerated Penalty Notices (‘APNs’) to be issued to participators, and opened the way for HMRC to seek substantial penalties from promoters, in accordance with s 98C TMA.

In the course of 2012 and 2013, the Government consulted on a series of proposals to improve and strengthen the DOTAS regime. In particular, it focused upon two tax avoidance issues. The first concerned “high-risk promoters”; and the second was focused upon taxpayers who had used avoidance schemes which had been defeated in litigation brought by third parties (“Follower” cases). In relation to Follower cases, the view of the Government was that the taxpayer should amend their returns, accordingly, to reflect the litigated result. They proposed to impose a tax geared penalty upon taxpayers who could not demonstrate that there was a reasonable explanation for not making an amendment.

In the 2013 Autumn Statement (December 2013), the Chancellor announced that he would impose “pay now” notices to “Follower” taxpayers whose schemes had already been defeated but that he would, in addition, consult upon the scope for widening the criteria for ‘pay now’ notices.

In his budget speech on 19 March 2014, the Chancellor announced that those who had carried out, or implemented, disclosed tax avoidance schemes would be required to pay their taxes up front, and that this would also apply to schemes covered by the General Anti- Abuse Rule (“GAAR”). For transactions taking place after 16 July 2013, HMRC would consider the GAAR. After 14 September 2016, transactions where the GAAR applied would be subject to a 60% GAAR penalty.

The Finance Act 2014, which introduced the APN system, received Royal Assent upon 17 July 2014. The Act entitles HMRC to impose upon persons suspected of tax avoidance an obligation to, in effect, pay on account the amount the Revenue considers represents understated tax. The Act requires parties to tax avoidance schemes to pay the disputed tax within a fixed period of time from receipt of an APN, which may be issued and payment required before the tax is assessed.

The legality of the APN was challenged by a taxpayer who had been formally assessed in Rowe & Ors v HMRC [2015] EWHC 2293 (Admin) (‘Rowe’). In that case, it was argued that the system was unlawful because, in essence, it violated legitimate expectations, defeated natural justice, infringed art. 6 of the ECHR, denied citizens access to the courts, and infringed the fundamental right to property set out in art. 1 of the First Protocol to the ECHR (“A1P1”). Simler J rejected all of these arguments. A further, and particular, aspect of the scheme was considered by the Court of Appeal in R (on the application of De Silva) v HMRC [2016] EWCA Civ 40, where the Court of Appeal upheld the position adopted by HMRC.

By 2016, the “EBT loan schemes” became widespread and there were many variations on the theme of structuring income loans. All were based on the premise that a loan made to an individual was not taxable, other than as a benefit-in-kind of an employment. The EBT loan schemes were arrangements under which an employer provided funds to a third-party (typically an offshore trustee) which made loans to an employee; i.e., those in which an individual provided personal services through an intermediary employer (offshore) which contributed, out of the earning generated by the individual, funds to an offshore trust which then made loans to the individual. Alternatively, if the loan was first made by the employer, the employer then assigned to a third-party the right to repayment. In the case of self-employed contractors, loans were typically made either out of an offshore trust funded directly or indirectly out of income generated by the work undertaken by the individual, or made initially by the intermediary employer, or end-client, and then assigned to an offshore EBT.

Such arrangements, and many variations, were promoted to and used by individuals who provided their services as contractors, either to multiple engagements with one client, or under one of more engagements with many clients. In one iteration which was heavily promoted to contractors, their services would be supplied to the client by an “umbrella” company (commonly offshore), or an associated company (such an individual’s personal service company) formed for the purpose, and which would invoice the client for the individual’s services (a fee being charged by the provider and/or scheme promoter for doing so).

In a further iteration, the engagement for the provision of the individual’s services to the end-user was through an offshore trust of which the trustee was owned by the scheme promoter. After deducting fees of 15% to 20%, the trust paid the contractor the NMW and provided a loan repayable on demand, but not expected to be repaid. In a more complex arrangement, the umbrella company (or an associated company) would undertake various share transactions typically involving an offshore trust, which supposedly resulted in notional repayment of the outstanding loans.

An example of a complex scheme was that known as “Delta”. The arrangement was that an employer would establish an EBT with a Jersey trustee by settling a small sum. The trustee created sub-funds for each individual employee or director participant. Later, under a tripartite deed, the employer paid substantial sums to the individual employees and directors as consideration for them, undertaking to discharge the employer’s initial obligation to make such payments to the trustee; the expectation being that these obligations of the individuals would not be called upon for 20 years (if ever). The fees paid to the scheme promoter were as much as 13% of the sums covenanted. In EDF Tax, HMRC succeeded in securing an order from the tribunal, under s 314A FA 2004, that these arrangements were notifiable under the DOTAS rules, thereby enabling APNs to be issued by HMRC to scheme participants.

Within the 2016 Budget, the Government announced a number of changes to tackle existing avoidance schemes and prevent their future use. The changes were to include a new ‘loan charge’ on disguised remuneration loans which were outstanding on 5 April 2019. To prevent attempts to exploit the new loan charge, a targeted anti- avoidance rule would ensure further avoidance schemes do not work. Using such a scheme, and paying further fees to a promoter, would not prevent the loan charge from applying to disguised remuneration loans outstanding on 5 April 2019. HMRC would investigate any attempts to avoid the new loan charge.

In Hyrax and Curzon Capital, the FtT decided that the disguised remuneration (“DR”) arrangements being promoted were notifiable under the DOTAS legislation. In both cases, the arrangements were designed to disguise income for which tax and NICs would be due. Scheme users were rewarded with amounts paid as loans, which they ultimately owed to an offshore benefit trust. The arrangements used in those cases were typical examples of DR schemes that involve individuals receiving their earnings through a small taxable element, and the remainder in the form of a loan. They are often described as “contrived arrangements” that pay scheme users their income in the form of loans, normally routed through an offshore trust in a low or no tax jurisdiction, with the only purpose being to avoid income tax and NICs. The loans are provided on terms that mean they are not repaid, in practice, and the amounts paid by way of a loan are no different to normal income and are (and have always been) taxable. These DR arrangements claimed to offer a much lower tax charge than if the scheme user had been paid all of their income as a salary.

Hyrax was an iteration of the “contractor loan scheme” which was a tax planning product that had existed in earlier forms since 2004. Under the arrangements promoted by Hyrax (which succeeded the K2/Lighthouse schemes which were marketed in 2014-15 and were disclosed under DOTAS), an individual director/contractor participator was employed by Hyrax as trustee of Hyrax Resourcing Trust (‘HRT’). The services of the participator were subcontracted to an end-user, being the client wishing to engage the services of the individual. The trust invoiced the client for the services of its employee. HRT paid its individual employee a NMW and gave him of her interest-free loans (not expected to be repaid), the benefit of repayment of which was then assigned to an offshore employer-financed retirement benefits scheme. No PAYE tax was accounted for on the loan, which was instead declared as a beneficial loan on the employee’s tax return.

Judge Mosedale found that each of the schemes was a phoenix and the iterations were introduced to avoid evolving tax avoidance legislation. Hyrax argued that no penalty was due on the basis that the most recent of the iterations of the scheme, the K2 arrangements, which had been notified and had an SRN, were “arrangements which [were] substantially the same as the notifiable arrangements” for the purposes of s 308(4B), which had the effect that s 308(4C) deemed Hyrax to have complied with its disclosure obligation. They submitted that the loan arrangements that were at the heart of both schemes were the same.

Hyrax argued that they had a reasonable excuse for not notifying the Hyrax arrangements because, prior to the tribunal’s decision, they had not considered that they were notifiable. They said that they took advice from the company that had been involved in devising the schemes (EDF) and EDF’s advice was informed by advice that EDF had commissioned from counsel. They considered that the test of reasonable excuse had to be applied in relation to the knowledge and beliefs of Hyrax’s sole director at the relevant time, JM; specifically, that she had no tax knowledge and that she had relied on EDF’s advice as she had been entitled so to do. Hyrax also considered the quantum of the penalty sought by HMRC disproportionate and excessive.

In Hyrax (No. 2), Judge Scott held that the term ‘substantially the same’ had to be considered in context, including the tax avoidance legislation. In that context, schemes could only be substantially the same if the differences were immaterial to the analysis as to whether there was tax avoidance. A change or difference, because it rendered an ineffective scheme effective, would be material because that would defeat the ‘obvious’ purpose of the legislation. What was required was to look at the whole context and whether there was a difference that did, or might have, changed the legal analysis of the effectiveness of the arrangement. The two schemes in Hyrax were very similar, economically and financially, but they were fundamentally different in both their factual and legal consequences. The sole point of the Hyrax arrangements was to render the ineffective K2 arrangements effective. The whole purpose of the Hyrax arrangements was to obtain a tax advantage. The very obvious purpose of the legislation was to prevent that. A penalty was, therefore, due (see [158], [160], [171], [175] – [181] and [282].

The DOTAS regime was described by Green J in R (on the application of Walapu) v R & C Comrs [2016] EWHC 658 (Admin); [2016] STC 1682 (‘Walapu’). Warapu was a claim for judicial review concerning the scope and effect of Chapter 3 of the Finance Act 2014. The case considered that the express objective of the Chancellor of the Exchequer, in promoting the legislation, was to alter the economics of tax avoidance by stripping from parties to such schemes all of the liquidity advantages that they, hitherto, enjoyed. An important consideration leading to the provisions was the experience of HMRC of dealing with aggressive delaying tactics and strategies engaged in by tax avoidance scheme promoters. Documentary evidence placed before the High Court by HMRC showed that, not infrequently, the unravelling of tax avoidance schemes could take many years prior to HMRC being in a position to assess a taxpayer’s liability, and then obtain payment. In the interim, participants held money that HMRC considered was due to the State, and promoters of tax avoidance schemes continued to be in a position to promote their schemes as having longevity.

At [11] to [12], Green J said this:

“11.

The Disclosure of Tax Avoidance Schemes (“DOTAS”) regime was introduced by Part 7 of the Finance Act 2004 entitled “Disclosure of Tax Avoidance Schemes”. Pursuant to these provisions certain persons, normally the promoters of tax avoidance schemes, were required to provide HMRC with information about “arrangements” and “proposals for arrangements” (i.e. the tax avoidance schemes): where that arrangement or proposal might be expected to provide a person with a tax advantage in relation to a specified tax; where the tax advantage might be expected to be the main benefit, or one of the main benefits, of using the scheme; and, where the scheme fell within certain descriptions contained within the Regulations. There have been changes to the Regulations since 2004 and the scheme now in force was introduced in 2006.

12.

In circumstances where a scheme is notifiable the promoter is required to provide specified information to HMRC. The obligation to notify normally accrues within 5 days of the marketing of the scheme or the making of the scheme available to clients for implementation. HMRC may issue a Scheme Reference Number (“SRN”). If so the promoter is required to pass the SRN on to the scheme users who, in turn, are obliged to notify HMRC of their use of the scheme. They do this normally by including the SRN upon their tax return. This enables HMRC to identify the users of a particular scheme.”

In Root2Tax (HC), Whipple J stated that Parliament is, clearly, seeking to cast the net wide, as would be expected, with the purpose of enabling HMRC to know what they do not know about products which are giving rise to a ‘tax advantage’.

The statutory provisions of relevance are found in ss 306-319 FA 2004. Section 306(1) provides that “notifiable arrangements” means any arrangements which:

“(a)

fall within any description prescribed by the Treasury by regulations,

(b)

enable, or might be expected to enable, any person to obtain an advantage in relation to any tax that is so prescribed in relation to arrangements of that description, and

(c)

are such that the main benefit, or one of the main benefits, that might be expected to arise from the arrangements is the obtaining of that advantage.”

The regulations which prescribe (under s 306(1)(a) FA 2004) the descriptions of arrangements were the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004, which came into force on 1 August 2004. These were revoked and replaced by the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006, (i.e., the Prescribed Descriptions Regulations referred to earlier), which came into force on 1 August 2006.

Section 306(2) provides that a “notifiable proposal” means a proposal for arrangements which, if entered into, would be notifiable arrangements (whether the proposal relates to a particular person or to any person who may seek to take advantage of it).

Section 308(1) is concerned with the duties on “promoters” in relation to ‘proposals’. It requires promoters to provide HMRC with “prescribed information” in relation to a ‘notifiable proposal’ within a defined period after the earlier of (i) the date on which the promoter first makes the notifiable proposal available for implementation by any other person; or (ii) the date on which the promoter first becomes aware of any transaction forming part of notifiable arrangements implementing the notifiable proposal. The duty is in the following terms:

“(1)

The promoter must, within the prescribed period after the relevant date, provide the Board with prescribed information relating to any notifiable proposal.”

Section 308(3) imposes a duty on the promoter of notifiable arrangements to provide HMRC with prescribed information relating to those arrangements within a prescribed period after the date on which it first becomes aware of any transaction forming part of the notifiable arrangements unless those arrangements implement a proposal in respect of which notice has been given under subsection (1). It provides that:

“(3)

The promoter must, within the prescribed period after the date on which he first becomes aware of any transaction forming part of any notifiable arrangements, provide the Board with prescribed information relating to those arrangements, unless those arrangements implement a proposal in respect of which notice has been given under subsection (1).”

However, s 308(5) provides, in its effect, that the promoter is not under a s 308(1) or (3) duty if it has already provided information under s 308(1) or (3) in relation to other notifiable proposals or arrangements that are “substantially the same” as the new otherwise notifiable proposals or sets of arrangements.

Section 311 provides that where a person complies (or purports to comply) with, inter alia, s 308(1) or (3), the Revenue may allocate a reference number (the SRN) to the notifiable arrangements or proposed notifiable arrangements.

Section 312 provides that where a promoter provides services to any client in connection with notifiable arrangements it must within 30 days of the relevant date provide the client with, inter alia, the SRN number that has been notified by HMRC in relation to (a) the notifiable arrangements; or (b) any arrangements substantially the same as the notifiable arrangements (whether involving the same or different parties).

Section 319 contains transitional provisions which exempt promoters from their s 308 duties in respect of notifiable proposals and notifiable arrangements, inter alia, where the notifiable proposal was first made available for implementation prior to 18 March 2004 or the notifiable arrangements include any transaction entered into before 18 March 2004. HMRC draws a contrast between this provision and the transitional arrangements included in the Prescribed Descriptions Regulations. Section 319(3) provides that:

“(3)

Section 308 does not apply to a promoter in the case of— "

(a)

any notifiable proposal as respects which the relevant date, as defined by subsection (2) of that section, fell before 18th March 2004,

(b)

any notifiable arrangements which implement such a proposal, or

(c)

any notifiable arrangements which include any transaction entered into before 18th March 2004.”

In Hyrax, HMRC succeeded in securing an order against the first respondent, under s 314A and s 306A FA 2004, that the arrangements that arose when a person became employed by Hyrax were notifiable arrangements within the meaning of s 306(1) FA 2004.

There is a difference between s 314A and s 306A FA 2004 in that in order to come within the former, the relevant arrangements must meet all of the criteria set out in paras. (a) to (c) of s 306(1); whereas the latter merely indicates that the para. (a) criterion may be a relevant factor.

The High Court decision Root2Tax Ltd confirms that the ‘tax advantage’ condition must be addressed first.

Section 306(1) FA 2004 provides that:

“306 Meaning of “notifiable arrangements” and “notifiable proposal”

(1)

In this Part “notifiable arrangements” means any arrangements which—

(a)

fall within any description prescribed by the Treasury by regulations,

(b)

enable, or might be expected to enable, any person to obtain an advantage in relation to any tax that is so prescribed in relation to arrangements of that description, and

(c)

are such that the main benefit, or one of the main benefits, that might be expected to arise from the arrangements is the obtaining of that advantage.

(2)

In this Part “notifiable proposal” means a proposal for arrangements which, if entered into, would be notifiable arrangements (whether the proposal relates to a particular person or to any person who may seek to take advantage of it).”

The reference to falling “within any description prescribed by the Treasury by Regulations”, at s 306(1)(a), is to the ‘hallmarks’ set out in the Prescribed Descriptions Regulations. HMRC must establish that arrangements fall within only one of those descriptions for the requirement at s 306(1)(a) to be met. In these proceedings, the Prescribed Description Regulations are to the version that was in force at the time of the commencement of the arrangements during the 2017-18 tax year.

In relation to ‘notifiability’, in Curzon Capital, at [47], Judge Poole said this:

“…it is clearly correct to apply the test of “notifiability” as it stood at the time when the duty to notify the Arrangements specified in the application would have first arisen, if they were notifiable.”

In Premier Picture, Judge Beare, similarly, said this:

“…whether or not arrangements…are, or are to be treated as, notifiable should be determined by reference to the legislation as it stood in March 2009, when the first set of arrangements arising pursuant to the implementation…were implemented, whilst whether or not arrangements arising pursuant to the implementation…are, or are to be treated as, notifiable should be determined by reference to the legislation as it stood …, when the first set of arrangements…were implemented.”

A “tax advantage” is defined at s 318 FA 2004 as:

“advantage”, in relation to any tax, means –

(a)

relief or increased relief from, or repayment or increased repayment of, that tax, or the avoidance or reduction of a charge to that tax or an assessment to that tax or the avoidance of a possible assessment to that tax,

(b)

the deferral of any payment of tax or the advancement of any repayment of tax, or

(c)

the avoidance of any obligation to deduct or account for any tax”.

In IRC v Parker [1966] AC 141, Lord Wilberforce said this as to the meaning of the phrase ‘tax advantage’, as it was used in s 43(4)(g) of the Finance Act 1960, which defined a tax advantage in these terms:

“a relief or increased relief from, or repayment or increased repayment of, income tax, or the avoidance or reduction of an assessment to income tax or the avoidance of a possible assessment thereto, whether the avoidance or reduction is effected by receipts accruing in such a way that the recipient does not pay or bear tax on them, or by a deduction in computing profits or gains.”

That definition is not identical to that provided by s 318 FA 2004, but it is very similar. At p 178 Lord Wilberforce said (as quoted by Judge Mosedale in Hyrax):

“The paragraph, as I understand it, presupposes a situation in which an assessment to tax, or increased tax, either is made or may possibly be made, that the taxpayer is in a position to resist the assessment by saying that the way in which he received what it is sought to tax prevents him from being taxed on it; and that the Revenue is in a position to reply that if he had received what it is sought to tax in another way he would have had to bear tax. In other words, there must be a contrast as regards the "receipts" between the actual case where these accrue in a non-taxable way with a possible accruer in a taxable way, and unless this contrast exists, the existence of the advantage is not established.”

In considering whether there is a ‘tax advantage’, whilst I am not bound by the decision, I endorse the comments made by Judge Mosedale in Hyrax, as follows:

“180.

The parties did not agree on the implications of this definition. HMRC’s position was that it should be understood to mean what Lord Wilberforce had said ‘tax advantage’ meant in the case of IRC v Parker [1966] AC 141:

…

186.

I think Lord Wilberforce’s definition of ‘tax advantage’ is therefore applicable to the 2004 legislation …it is plain on the face of s 318 that ‘tax advantage’ refers to a contrast between the actual (or expected) tax effect of the arrangements and the tax position that would have existed but for the arrangements.

187.

Words must be construed in accordance with Parliament’s intent and, unless it appears otherwise, that means they should be construed in accordance with their natural and ordinary meaning. The natural and ordinary meaning of ‘tax advantage’ in s 318 is that it refers to a contrast in tax liability between one position and another that would otherwise have existed. That wide construction seems in accordance with Parliament’s intent for certain arrangements (as defined) which involved a tax advantage to be notifiable.

…

194.

And, as I have indicated above at §§189-190, Mr Venables did not accept that the arrangements could result in a tax advantage because it was his case that there was no comparator situation with a greater tax liability. It was the same point he made on tax avoidance, which was that a scheme user was not in the same legal position if they used the scheme compared to the position if they had not used it. If they did not use the scheme, they had their salary as cash in hand which added to their overall wealth; if they used the scheme, they lost the greater part of the salary and received instead cash in hand which (said the respondents) might give them equivalent (actually, increased) liquidity but did not add to their overall wealth because it had to be repaid.

195.

I accept Mr Venables’ point that the citation from Parker does not expressly deal with the situation where the contrast situation is not legally identical to the actual situation in point. That is not surprising as the situation did not arise in that case where, either way, the taxpayer got cash in hand without any repayment obligation. It did not arise on the facts of Root2Tax Ltd either, as under the scheme in that application, the scheme user received cash in hand in the form of winnings, which there was no obligation to repay. So it does not appear that this point has been considered before.

196.

It is a matter of statutory construction. The statute itself does not refer to a contrast situation; it is merely implicit because the statute talks of relief/avoidance/reduction, all of which terms indicate that there would be a contrast situation without the relief/avoidance/reduction. The statute therefore does not define the contrast situation: it does not expressly state whether the contrast situation must be legally or only economically, identical or only similar, to the actual situation which arises.

197.

I have said that the statute should be interpreted in line with Parliament’s presumed intent which includes assuming Parliament intended (a) that the legislation would be effective in achieving its aim and (b) that where a person would be penalised for noncompliance, it would be clear to them what obligation was being imposed.

198.

The aim of the legislation was clearly to combat tax avoidance. It is well understood (see §§164-166) that there may be tax avoidance where a person adopts a scheme which puts them in a similar economic position to the non-scheme position, but with a lower tax liability. To interpret ‘tax advantage’ as requiring the contrast situation only to be one where the scheme user was in an identical legal position to the one actually used would be to largely deprive the legislation of much of its effect. It is obvious the objective of tax avoidance is to put the avoider into an economically similar position (but with less tax) than he would otherwise be in, and so it seems obvious to me that Parliament intended the contrast situation to include those that were merely economically similar to the actual situation. Parliament intended the legislation to effectively combat tax avoidance.

199.

While I accept that the legislation is penal and Parliament must therefore have intended the meaning of ‘tax advantage’ to be clear, I think that it is clear that Parliament intended to refer to economically similar contrast situations (as well as legally identical ones). A layman, including promoters and users of the scheme, when considering a scheme would consider its economic reality and not its legal form and should understand ‘tax advantage’ in the same way.

200.

In conclusion, I find that the scheme gave, or was expected to give, rise to a tax advantage because it was intended to avoid or reduce the charge to tax on salary which would otherwise have been received by scheme users, had they not adopted the scheme and received equivalent sums in an economically similar, but legally distinct form, of small salary and large loans which were not expected to be repaid (at least not in their lifetime) ...”

Judge Mosedale concluded that although the definition of ‘advantage’ does not set out the need to carry out a comparison, it is implicit in the use of the word ‘advantage’. This was recognised by Judge Beare in Premiere Picture, where he referred to Parker LJ’s decision in IRC v Trustees of the Sema Group Pension Scheme [2002] EWCA Civ 1857 (‘Sema’).

Judge Beare’s analysis in Premiere Picture, at [73], was as follows:

“I do not read [IRC v Parker] as limiting the comparison which is required to be made to one involving a transaction in a similar legal form or even one giving rise to similar economic effects... Instead, as is made clear by the extract from Jonathan Parker LJ’s decision in Sema ... It is perfectly possible for a taxpayer to obtain a tax advantage from entering into a transaction where the taxpayer’s tax position as a result of so doing is more favourable than that in which it would have been had the taxpayer done nothing.”

The extract from Sema referred to by Judge Beare is with regard to Parker LJ’s consideration of Aldous J’s observation about the meaning of the words ‘tax advantage’ in another statutory context, where he said this:

“the words “tax advantage” ... presuppose that a better position has been achieved. However, I respectfully differ from him when he goes on to answer the question “An advantage over whom or what?” by saying: “advantage over persons of a similar class” ... In my judgement, the simple answer to that question is that a better position has been achieved vis a vis the Revenue.”

As noted by Judge Mosedale, the use of terms such as “reduction of a liability” reinforces this conclusion. To know if there is a reduction in a liability, one must know that there is a potential liability which is reduced.

Pursuant to s 306(1)(b), a ‘notifiable arrangement’ is an arrangement which “enable[s], or might be expected to enable, any person to obtain an advantage in relation to [income tax]”. There is no dispute that income tax, corporation tax and capital gains tax are “prescribed”.

In Curzon Capital, Judge Poole observed, at [49], in relation to the expression “might be expected to enable” a tax advantage (at s 306(1)(b)) that:

“It seems to me that this question must be considered in the light of the policy behind the provisions in general, and that policy would be stultified if a detailed examination had to be carried out into the robustness of any scheme in order to form a view as to whether, from the point of view of some notional observer with particular attributes, it “might be expected to enable” a tax advantage to be obtained; the better view in a case such as the present is, I think, that if the arrangements are presented in such a way as to claim that a tax advantage will (or may) flow from using them, then unless the claim is clearly ridiculous, it can fairly be said that the arrangements “might be expected to enable” the advantage to be obtained.”

In White Collar Financial, at [37(3)], Judge Morgan said this:

“37.

...

(2)

As regards s 306(1)(b), for the reasons already set out at (1) the arrangements ‘enable, or might be expected to enable, any person to obtain an advantage in relation to’ income tax (being a tax which is prescribed in relation to arrangements falling within reg 10).

(3)

As regards s 306(1)(c), it is plain that the tax advantage was the main benefit which was expected to arise from the arrangements. There is no discernible benefit for a participant in entering into arrangements of this type other than the expected generation of the tax advantage.”

In assessing the application of s 306(1)(b), the legislation imposes an ‘objective test’. In Root2 Tax (HC), Whipple J confirmed that the test includes an objective element in the words “might be expected to...”. I also note (as have other similar cases) that the words “might be” are at the lower end of the range of objective thresholds used in legislative drafting.

Whether it might be expected that one of the main benefits of the arrangements is the obtaining of a tax advantage is to be assessed from the viewpoint of an “informed observer” who has studied the arrangements.

In Hyrax, Judge Mosedale considered the “main benefit”, in the context of s 306(1)(c). As to the third condition for arrangements to be notifiable arrangements, Judge Mosedale said this:

“The third condition for notifiable arrangements

107.

The third condition for arrangements to be notifiable arrangements is where the arrangements:

(c)

are such that the main benefit, or one of the main benefits, that might be expected to arise from the arrangements is the obtaining of that advantage.’

108.

I find that the main benefit that might be expected to arise from the Delta arrangements was the obtaining of the tax advantage referred to above. This is obvious from the evidence such as the marketing material which made the tax advantage explicit. In any event, there is no other rational reason for why anyone would implement a convoluted and expensive set of arrangements which left them with a legal (if economically unreal) obligation to repay a sum that they would otherwise have received as salary, save for the expected tax advantage. It seems an obvious and logical inference that the scheme was implemented by scheme users because of the desire to obtain for those persons who controlled the scheme users the tax advantage that was at the heart of the scheme. Objectively speaking, the main benefit that might be expected to arise from the arrangements would be the tax advantage.”

In Premiere Picture, at [82], Judge Beare said this:

“82.

As regards the first of these points, I would observe that the mere fact that arrangements may have a commercial purpose as one of their purposes does not mean that the arrangements cannot also have the securing of a tax advantage as one of their main purposes – see Lightman J in IRC v Trustees of the Sema Group Pension Scheme [2002] EWHC 94 (Ch), [2002] STC 276, (2002) 74 TC 593 (‘Sema HC’) at para [48] and Rimer LJ in Lloyds TSB Equipment Leasing (No 1) Ltd v Revenue and Customs Comrs [2014] EWCA Civ 1062, [2014] STC 2770 (at [65]). In each case, if there is more than one purpose, it is a question of weighing up the relative significance of the various purposes to determine which of them amount to a main purpose …”

The FtT decisions below, similarly, concerned HMRC’s application for an order under s 314A or, in the alternative, under s 306A FA 2004 that the arrangements are, or are to be treated as, ‘notifiable arrangements’ within the meaning of s 306(1) FA 2004, and that their ‘main benefit’ was to enable a participant to obtain a ‘tax advantage’. Once again, they are not binding on me, but I consider them to be persuasive:

In Opus Bestpay, at [52], Judge Morgan said this:

“52.

On the points set out at [51]:

…

(2)

For the purposes of determining whether there are notifiable proposals or arrangements, the question is not whether the arrangements involve tax avoidance but whether an informed observer (having studied the arrangements) would conclude that the main purpose of the arrangements was to enable a participant to obtain a tax advantage which specifically includes an advantage in the form of the deferral of any payment of income tax. As already set out, in my view, there can be no doubt that such an observer would conclude from the design and effect of the arrangements that their main purpose was to enable the participants to defer paying income tax on the sums received for their work (if not to avoid tax altogether). There is no other discernible commercial reason for the use of the deferral mechanism under the services contract and the loan.”

At [47(3)], Judge Morgan said this:

“(3)

As regards s 306(1)(c), it is plain that the tax advantage was the main benefit which was expected to arise from the arrangements. There is no discernible benefit for a participant in entering into arrangements of this type other than the expected generation of the tax advantage.”

The absence of any other discernible benefit is, therefore, relevant.

The definition of a “promoter” is set out in s 307 FA 2004. The definition states that a person is a promoter in relation to a ‘notifiable proposal’, if, in the course of a “relevant business”, the person makes the notifiable proposal available for implementation by other persons. It also states that a person is a promoter in relation to ‘notifiable arrangements’, if he is a promoter in relation to a notifiable proposal which is implemented by those arrangements or if, in the course of a relevant business, he is to any extent responsible for the design of the arrangements, or the organisation or management of the arrangements. The section also provides that a person is an introducer in relation to a notifiable proposal if the person makes a marketing contact with another person in relation to the notifiable proposal. The term ‘relevant business’ includes any trade, profession or business which involves the provision to other persons of services relating to taxation.

In Curzon Captial, Judge Poole summarised the three routes to becoming a ‘promoter’ in relation to ‘arrangements’:

“83.

So there are essentially three routes to becoming a promoter in relation to “arrangements” (the relevant issue in these proceedings), all contained in section 307(1)(b), which could be summarised as follows:

(1)

By making, in the course of a “relevant business”, a “firm approach” to another person in relation to the notifiable proposal which is implemented by the arrangements, with a view to making the notifiable proposal available for implementation by the person so approached, or by any other person.

(2)

By making, in the course of a “relevant business”, the notifiable proposal which is implemented by the arrangements available for implementation by other persons.

(3)

By being responsible to any extent, in the course of a “relevant business”, for the design, organisation or management of the arrangements.”

Judge Poole further held that the phrase “services relating to taxation” is sufficiently broad to cover the activity of administering a tax avoidance scheme. In Curzon Capital, HMRC failed to secure such an order because the respondent was not a ‘promoter’. HMRC did not argue that Curzon was, to some extent, responsible, for the organisation and management of the arrangements, but disavowed it as a basis for their application.

Section 307 FA 2004 provides that:

“307 Meaning of “promoter”

(1)

For the purposes of this Part a person is a promoter—

(a)

in relation to a notifiable proposal, if, in the course of a relevant business, the person (“P”)—

(i)

is to any extent responsible for the design of the proposed arrangements,

(ii)

makes a firm approach to another person (“C”) in relation to the notifiable proposal with a view to P making the notifiable proposal available for implementation by C or any other person, or

(iii)

makes the notifiable proposal available for implementation by other persons, and

(b)

in relation to notifiable arrangements, if he is by virtue of paragraph (a)(ii) or (iii) a promoter in relation to a notifiable proposal which is implemented by those arrangements or if, in the course of a relevant business, he is to any extent responsible for—

(i)

the design of the arrangements, or

(ii)

the organisation or management of the arrangements.

(2)

In this section "relevant business" means any trade, profession or business which—

(a)

involves the provision to other persons of services relating to taxation.”

As regards, s 307(1)(a)(iii) and the requirement to make the proposal “available for implementation”, in Smartpay, at [41], Judge Malek said this:

“To my mind ‘makes available’, in this context, means to ‘be able to be used’ or ‘to put at someone’s disposal’. There is no requirement, in my mind, to ensure that a scheme user, if s/he wants to, is able to use it”

In Hyrax, Judge Mosedale concluded that Hyrax was a promoter because it made the notifiable proposal available for implementation by the scheme users as a result of agreeing to be the counterparty to all the necessary contracts. She then addressed the management and organisation issue and concluded that, on the facts before her, as Hyrax was the counterparty and the evidence showed that information on the arrangements had been obtained from Hyrax personnel, it was consistent with the likely scenario that Hyrax also managed and organised the arrangements. She noted, in particular, that no evidence had been led by the respondents in that case to counter that natural inference. When considering whether two other companies were also promoters, she was satisfied that there was no evidence that they were responsible for the organisation and management of the arrangements. At [295] and [303], Judge Mosedale held that in order to meet the conditions in s 307(1)(a)(iii), the person must have been able to ensure that a scheme user who wanted to use the arrangements would be able to do so.

In respect of s 307(2) FA 2004, at [90] to [91] of the decision in Curzon Capital, Judge Poole said this:

“Section 307(2) requires an assessment of the nature of the overall trade, profession or business through which the relevant services were provided (and whether that trade, profession or business involves the provision of services relating to taxation), rather than the nature of the specific activities which took place ... [T]he phrase ‘services relating to taxation’ is in my view sufficiently broad in meaning to cover the activity of administering a tax avoidance scheme, even when doing so without any clear knowledge of the detailed way in which it is intended to work”.

In EDF Tax, the application was served on the respondent on the basis that, in HMRC’s view, as stated in the application, it was a promoter of the arrangements.

The wide range of the activities included within s 307, together with the broad scope of the term “in relation to”, means that any trade, profession or business which involves any of those activities in relation to notifiable arrangements will, by definition, involve the provision of services relating to taxation. It does not matter what else the business does, or how it describes or advertises its services. The activities necessary to identify a promoter of notifiable arrangements means that those activities are taking place in the course of a relevant business.

In respect of whether there was a ‘tax advantage’ pursuant to s 306(1)(b), I am satisfied that categories (a) and (c) of the definition of tax advantage’ in s 318 FA 2004 apply to the Industria Arrangements. This is because what was gained via the arrangements was a reduced charge to income tax, which would have otherwise been payable by scheme users, and the avoidance of any employer obligations to account for tax under PAYE procedures. Whilst there is no evidence of any loans having being repaid, it is said that the loans were secured against any future bonuses paid to users under the terms of their contract of employment with Industria. In the event that this did happen, or was actually intended to happen, the arrangements still enabled, or might be expected to enable, any person to obtain a tax advantage by reason of a deferral; which is still a ‘tax advantage’ (pursuant to category (b) of the definition of “tax advantage” in s 318 FA 2004).

By contrasting the position of scheme users before and after entering into the Industria Arrangements, the arrangements gave rise to a tax advantage by way of reducing income tax and NICs liabilities, which would otherwise be payable by scheme users if they had not used the arrangements. Furthermore, evidence from scheme users demonstrates that the arrangements were sold on the basis of such a tax advantage. The arrangements enabled, or might have been expected to enable, users to obtain remuneration effectively free of tax and NICs liabilities, thereby giving users both income tax and NICs advantages as follows:

Accordingly, therefore, any person using the Industria Arrangements would have obtained a tax advantage. I find that there is considerable force in HMRC’s submission that such advantage is virtually self-evident as few people would otherwise be willing to work their way into substantial repayable debt and have their employer effectively retain a substantial proportion of their gross contract value. Moreover, within the form AAG1, the Liquidators provided the following explanation:

“[a] tax advantage arose as the loan element was not ‘earnings’ and therefore not subject to PAYE or NIC.”

In respect of s 306(1)(c), and the ‘main benefit’, I am satisfied that as in Hyrax, the Industria Arrangements were, as submitted by HMRC, “a convoluted and expensive set of arrangements which left users with a legal – albeit economically unreal - obligation to repay a sum that they would otherwise have received as salary, save for the expected tax advantage”. Although use of a standard umbrella company might confer incidental administrative benefits - such as outsourcing invoicing and same day payment - there is no evidence from the documentation of any significant, or material, non-tax related advantages of participating in the arrangements.

I have considered Officer Bontempo’s analysis of the employment history of users, which showed a pattern of leaving employment with Industria and finding more stable, and significantly higher paid, employment elsewhere. There is no evidence of security of employment offered by Industria. In any event, the fact of some other commercial purpose does not preclude the conclusion that the main benefit was obtaining a tax advantage. The requirement that the Industria Arrangements be made available for implementation by more than one person was met because by December 2019, there were 524 users in Industria’s PAYE system reference “475/WB66760”.

I am satisfied that the advantage of providing employee benefits via these arrangements was that no tax and NICs were deducted from the payments made to users pursuant to the loan agreements. Beyond reducing the tax and NICs otherwise payable, there was no other reason for an individual to enter into arrangements that would likely pay them a considerably smaller salary than their previous employment, replace a significant part of their income with a substantial repayable loan and unspecified discretionary bonus, and require them to relinquish up to approx. 15% of their gross contract value to their employer. Otherwise, a potential user would opt for a standard umbrella provider charging a lower fee (or an amount economically equivalent to a fee) and would receive the same benefits in return, with the exception of the increased returns from the services they carry out. Accordingly, the main benefit of using the arrangements was obtaining the tax advantage.

It must be the promoter, in this case Industria, who makes the notifiable proposal available. In respect of s 307, and whether Industria was a ‘promoter’, at para. 13 of Mr Radford-Fragoso’s witness statement, he states that Industria did not design the Industria Arrangements. He adds that they were designed by Mr Adrian Sacco, who ran Calligraphy. HMRC however rely upon s 307(1)(a)(iii), and the opening words of s 307(1)(b), because Industria made a notifiable proposal (i.e., a proposal for the arrangements) available for implementation by users. Email correspondence obtained by HMRC shows Industria communicating, directly, with users and agencies to make the arrangements available.

At para. 22 of his witness statement, Mr Radford-Fragoso claimed that he “believed” the organisation and management of the arrangements was done by Calligraphy. However, he does not explain how this could be, given that he said only that Calligraphy provided the ‘loan’ agreements (and not the employment contracts), and he did not identify any organising or managing actually done by Calligraphy. On the available evidence, the Industria Arrangements were arranged and managed by Industria.

I am satisfied that Industria was a ‘relevant business’. By making a proposal for the arrangements available for implementation, organising and managing the arrangements, and carrying out all of the activities in the course of their business, Industria was providing services relating to taxation. Furthermore, Industria sent out the contracts of employment and loan agreements for users to sign, and then countersigned those documents. The reasonable conclusion is that in doing so, Industria made the decision to accept applications as no one else was in a position to do so. The contracts of employment and loan agreements were key in the arrangements giving rise to the tax advantage.

Industria did all of the above for the duration of each user’s use of the arrangements, whether that was for weeks or months. Of the users HMRC have identified, only one (T Barry) was with Industria for more than a year. The arrangements could only give rise to a tax advantage as long as users continued to provide services to end-user clients and, consequently, Industria continued receiving payments pursuant to invoices in connection with those services. The issuing of invoices, and the receipt and processing of payments by Industria (including making salary payments and calculating and making payments under loan agreements to users) were, therefore, key components of the arrangements without which no tax advantages would be obtained, otherwise those tax advantages would cease.

The AAG1 form submitted by the Liquidators describes Industria as the “scheme promoter”. I am satisfied that Industria was a promoter of the arrangements, pursuant to s 307(1)(b)(ii), on the basis that in the course of its business it was responsible for the organisation, or management, of the arrangements. Even if another party was responsible for the design of the scheme and/or involved in running the scheme as a result of these arrangements being an “off the shelf” scheme franchised to several UK companies, that would not alter Industria’s involvement. For the Industria Arrangements to be ‘notifiable arrangements’; which means that they fall within one of the prescribed descriptions or ‘hallmarks’ in the Prescribed Description Regulations.

At the relevant time, the Prescribed Description Regulations prescribed different ‘Descriptions’ of arrangements, often referred to in HMRC Guidance and in practice as “hallmarks”. In order to satisfy s 306(1)(a) FA 2004, ‘arrangements’ need to fall within only one of these Descriptions. If none of the hallmarks apply, then the disclosure regime has nothing to latch on to. The legislation, and the hallmarks in the Prescribed Descriptions Regulations, must be read as a whole for the purposes of the DOTAS regime.

The AAG1 form submitted by the Liquidators identified the main applicable regulation as “Regulation 18: Employment Schemes”, i.e., Description 8.

HMRC submit that the relevant hallmarks, in relation to the Industria Arrangements, are as follows:

In further amplification of their submissions, HMRC submit that the Industria Arrangements meet the hypothetical test set out in reg. 8(1), Description 3, of the Prescribed Descriptions Regulations; namely that it might reasonably be expected that Industria, as a promoter of the arrangements, would be able to obtain a premium fee (or an amount economically equivalent to a fee) from at least one hypothetical client. HMRC further submit that it is reasonable to expect that the provision of standardised documents, structures, transactions and pre-arranged terms for entering into the transactions forming part of the arrangements would enable a promoter (or somebody connected with them) to command a premium fee (or an amount economically equivalent to a fee).

Further, HMRC submit that the Industria Arrangements, being a standardised tax product, fell within reg. 10, Description 5. The Industria Arrangements did not fall within the categories specified in reg. 11 (being substantially the same arrangements made available prior to 1 August 2006 or any of the other categories listed therein) and, therefore, were not exempt from being prescribed under reg. 10. Further or alternatively, HMRC submit that the Industria Arrangements fall within reg. 18, Description 8, as this was the hallmark identified by the Liquidators in the AAG1 form. Further or alternatively, HMRC submit that the Industria Arrangements are a financial product falling within reg. 19, Description 9. HMRC, therefore, identified at least four hallmarks that were engaged. HMRC must establish that the Industria Arrangements fell within only one of those descriptions for the requirement at s 306(1)(a) FA 2004 to be met.

I proceed to consider these in turn:

A “premium fee” is “a fee chargeable by virtue of any element of the arrangements - including the way in which they are structured - from which the tax advantage expected to be obtained arises, and which is (a) to a significant extent attributable to that tax advantage, or (b) to any extent contingent upon the obtaining of that tax advantage as a matter of law”. This test is ‘hypothetical’ and ‘objective’.

The premium fee hallmark requires me to decide whether the arrangements are:

“8 Description 3: Premium Fee

(1)

…such that it might reasonably be expected that a promoter or a person connected with a promoter of arrangements that are the same as, or substantially similar to, the arrangements in question, would, but for the requirements of the Regulations, be able to obtain a premium fee from a person experienced in receiving services of the type being provided.

But arrangements are not prescribed by this regulation if—

(a)

no person is a promoter in relation to them; and

(b)

the tax advantage which may be obtained under the arrangements is intended to be obtained by an individual or a business which is a small or medium-sized enterprise.

(2)

For the purposes of paragraph (1), and in relation to any arrangements, a “premium fee” is a fee chargeable by virtue of any element of the arrangements (including the way in which they are structured) from which the tax advantage expected to be obtained arises, and which is—

(a)

to a significant extent attributable to that tax advantage, or

(b)

to any extent contingent upon the obtaining of that tax advantage as a matter of law.”

The qualification in reg. 8(1) (“but for the requirements of the Regulations”) is irrelevant to the Penalty Application because it simply means that it is no defence for a taxpayer to argue that a user would be reluctant to pay the premium fee (or an amount economically equivalent to a fee) because of an obligation to disclose use of the arrangements: AML Tax (UK) Ltd & Anor. The hallmark does not require that a premium fee is paid; only that it might reasonably be expected that a promoter of the same, or substantially similar, arrangements would be able to obtain such a fee from a person experienced in receiving services of the type being provided.

Judge Mosedale in Hyrax (at [214]) and Judge Poole in Curzon Captial (at [57]) both indicated that the fact that, in real life, the promoter takes a cut from the gross fee paid for the scheme users’ services is good evidence that a promoter of substantially similar arrangements will be able to obtain a fee from those arrangements. Hyrax considered the amounts retained by the promoter in the following terms:

“214.

It seems to me to be obvious that Hyrax was able to take a cut from the gross fee paid for the scheme user’s services; its ability to take a percentage of the gross payment is evidence that, instead of a cut, it would have been able to take a fee. Whether paid the same amount as a % of the gross earnings or as a fee, the cut or fee are economically the same to a middleman, as Hyrax was; the fact it was actually able to earn an amount economically the same as a fee is good evidence that it might reasonably be expected that a promoter of substantially similar arrangements would be able to obtain a fee from the arrangements.

...

221.

Hyrax’ cut was a % of the gross contract value of the contract for the scheme user’s services. The greater the contract value, the greater the expected tax saving (as tax is a % of earnings), and therefore Hyrax’ cut increased in line with the expected tax saving. It was clearly charged as a % of the contract value (and therefore the expected tax saving) and did not reflect the amount of work involved: the evidence indicated that the work carried out by Hyrax would be roughly equivalent for all scheme users. But the charges would depend on the contract value.

222.

It seems fair to say that the charge was to a significant extent attributable to the expected tax advantage as there is no other way of explaining why it would be charged as a % of the contract value; Hyrax was in effect splitting the expected tax saving with its scheme user. In conclusion, I find that a promoter of substantially similar arrangements would be able to obtain a premium fee.”

Judge Mosedale considered that the key issue is whether the ability to take a percentage cut is evidence that, instead of a cut, the respondent would have been able to take a fee. The fact that the respondent was able to earn a 15% cut, being economically the same as a fee, is good evidence that it might reasonably be expected (the hypothetical, objective, test) that a promoter of substantially similar arrangements would be able to obtain a fee from the arrangements.

In Curzon Capital, Judge Poole said this, at [58] to [59]:

“58.

Of course, the question to be answered is not whether there was a premium fee actually paid in respect of the Arrangements, it is whether ‘it might reasonably be expected that a promoter ... would be able to obtain a premium fee ...’; however, the fact that a large number of individuals did in fact pay what I consider to be premium fees for the use of the Arrangements is clearly a strong indicator that a notional promoter of these (or substantially similar) arrangements ‘might reasonably be expected ... [to] be able to obtain a premium fee’ from a notional ‘person experienced in receiving services of the type being provided’. Of course, there was no evidence before me as to whether the participants in the Arrangements were in fact ‘experienced in receiving services of the type being provided’, so this cannot be regarded as definitive.

59... The general presentation of the Arrangements, including the level of detail provided and their fulsome endorsement by specialist leading counsel, is clearly directed to the serious potential scheme user and, as such, it would be reasonable to expect that a premium fee would be obtainable from a person experienced in receiving services of the type being provided.”

Judge Poole concluded that the marketing material, and the availability of counsel’s opinion, showed that the arrangements were being aimed at people who were experienced scheme users.

In Redbot Tax, at [151], Judge Hyde said this:

“In the absence of evidence to the contrary from the Respondent, we find based on the nature of the product and the values of the Transactions, that the users of Volatility would qualify as sophisticated purchasers for the purposes of the test in paragraph 8 and that the fee they paid is a useful comparator (Curzon Capital at [58]- [59]). Accordingly, we find that the promoter would in the hypothetical circumstances described in paragraph 8 be able to charge between 4 and 5.5% of the notional sum. Further, that fee is a premium fee as it is attributable to the tax advantage that might be obtained.”

In EDF Tax, at [116], Judge Mosedale said this:

“... it appeared as if the same amount of work was done by EDF in all four the sample cases; they all received substantially the same letters and executed substantially the same deeds. It appeared to have been an ‘off-the-shelf’ product with minimum individual tailoring. Therefore, if the fee was chargeable by virtue of the amount of work undertaken, the users would have been all asked for a similar absolute amount of fees. Instead, the fees differed radically...”

In AML Tax, at [101] to [107], Judge Bowler said this:

“103.

... it is clear that the hallmark does not require that a premium fee is paid; only that it might reasonably be expected that a promoter of the same or substantially similar arrangements would be able to obtain such a fee from a person experienced in receiving services of the type being provided.

104.

In this case a fee was paid. Generally speaking the evidence shows a fee of 8% of the Premium which was equivalent to the amount of the loan in each case where the Annuity...

105.

The fee was paid for the Annuity Arrangements to be put in place. It has not been suggested that it was paid for anything else and, as we have concluded above, the Annuity Arrangements are arrangements from which a tax advantage is expected to be obtained.

106.

The fee was chargeable by virtue of an element of the Annuity Arrangements from which the tax advantage expected to be obtained arose. The fees were generally described as 8% of “the amount to be extracted from the company”, except in the case of EMM when it was stated to be £25,250 of what was described as “the remuneration payment”. Furthermore, in each case the amount to be extracted from the company, whether involving a loan or not, was reflected in the amount of the Premium.

107.

We also conclude (in a similar way to Judge Mosedale in Hyrax) that the fee was to a significant extent attributable to the expected tax advantage as there is no other way of explaining why it was charged by reference to the value of the amount to be extracted from the company or remuneration payment. The fee was intrinsically linked to the advantage of being able to pay the sum to the individual with a reduction in tax.”

In AML Tax (UK) Ltd & Anor, Judge Popplewell granted HMRC’s application under the DOTAS rules, holding that a ‘split contract’ scheme constituted notifiable arrangements and that AML was a promoter of those arrangements. He said this, at [115] to [116]:

“... the phrase has been inserted to avoid a tautological get out of jail card for a promoter ... The expression “but for the requirements of these Regulations” is tantamount to saying, “but for the obligation to disclose under the DOTAS regime”. This prevents a promoter from defending a position that an arrangement is not subject to this hallmark, and thus is non- disclosable, on the basis that the reasonably experienced purchaser of a tax scheme would not pay a premium fee because there is an obligation to disclose under DOTAS. Even if a premium fee is actually paid. The inclusion of the phrase mentioned above simply takes this defence away from the promoter, so that when considering whether the reasonable purchaser of the same or similar arrangements would pay a premium fee, one considers it on the basis that there is no obligation to disclose those arrangements under DOTAS ...”

In relation to the Industria Arrangements, the invoices, timesheets, payslips and Letters of Credit Advice issued by Industria, as well as users’ bank statements for the corresponding periods, all indicate that, after deductions, Industria retained around 13% to 15% of users’ gross contract values. The percentage of the gross contract value withheld by Industria appears to correlate with the percentage of the premium set out in the third schedule of the loan agreements entered into by users with Industria. The Industria Arrangements, therefore, meet the hypothetical test set out in reg. 8(1); namely that it might reasonably be expected that Industria, as a promoter of the arrangements, would be able to obtain a premium fee (or an amount economically equivalent to a fee) from at least one hypothetical client.

Where users were expected to receive net pay after tax and NICs of 80%, an objective bystander might reasonably expect the promoter of the arrangements to be able to obtain a fee (or an amount economically equivalent to a fee) which is, to a significant extent, attributable to the tax advantage which users expect to obtain from the arrangements. This is supported by the fact that Industria retained up to approximately 15% of users’ gross contract value each pay cycle. That retention is, economically, the same as a fee and demonstrates that Industria could have charged a premium fee (or an amount economically equivalent to a fee). Whilst there may be some incidental administrative benefits on account of transferring invoicing and accounting responsibilities to Industria, it is reasonable to infer that the reason users agreed to Industria withholding up to 15% of the income they generated was attributable, to a significant extent, to the tax advantage which users expected to obtain from the arrangements.

By taking part in the arrangements, users consented for Industria to withhold, and retain, up to approximately 15% of their gross contract value. As such, the amounts withheld were paid out of income generated by users’ economic activities and, ultimately although indirectly, at users’ expense. The amounts withheld by Industria were determined by reference to the amounts put through the scheme, or charged based on users’ contract value with end-user clients. The cut retained by Industria did not relate, to any great extent, to the volume or complexity of work undertaken by Industria, and did not reflect the amount of time, effort or risk to Industria.

I am satisfied that the value of the amounts put through the scheme determined the amount of the tax advantage users expected to obtain from the Industria Arrangements. The tax advantage that was expected to arise was the avoidance of a charge to tax (or repayment of that tax) as a consequence of users receiving most of their cash rewards in respect of the services provided to end-user clients in the form of ‘loan’ payments. These payments were not employment income under the arrangements and were not liable to tax or NICs. There is no evidence to support a finding that any loans have been repaid, or that any users were in practice expected to repay their loans. Accordingly, the expected outcome of the arrangements was that users received cash payments to the value of approximately 80% of the income generated by their economic activities with no, or no significant, tax or NICs payable by their employers, or by them, and with no practical prospect of being required to repay funds borrowed.

As the amount retained by Industria was determined by reference to the contract value, the greater the amount awarded through the arrangements, the greater the expected tax saving (as tax is a percentage of earnings). Therefore, Industria’s cut increased in line with the expected tax saving. Put another way, Industria were, effectively, splitting the tax saving with scheme users. There were no commercial benefits or other reasons for implementing the scheme. Most, or all, of the amounts withheld was attributed to the tax advantage to which the transactions would purportedly give rise. The amount withheld by Industria shows the size of fee (or an amount economically equivalent to a fee) that could have been obtained.

I find that there is considerable force in HMRC’s submission that it is reasonable to expect that the provision of standardised documents, structures, transactions and pre-arranged terms for entering into the transactions forming part of the arrangements would enable a promoter (or somebody connected with them) to command a premium fee (or an amount economically equivalent to a fee). A scheme user by the name of ‘T Barry’ stated in a letter to HMRC that:

“...though I welcomed the opportunity to maximise my income I would never want to be in a position of acting illegally to avoid taxation.”

As to whether a premium fee (or an amount economically equivalent to a fee) could be obtained from “a person experienced in receiving services of the type being provided”, although many of the users may have been unaware that the Industria Arrangements constituted tax avoidance, the arrangements could have been marketed to experienced users who, for the reasons outlined above, would have reasonably paid a premium fee (or an amount economically equivalent to a fee) for the arrangements.

I am satisfied that an objective bystander might reasonably expect Industria to have been able to obtain a fee (or an amount economically equivalent to a fee) which was to a significant extent attributable to the tax advantage which the users expected to obtain from the Industria Arrangements. The above constitutes a premium fee (or an amount economically equivalent to a fee), pursuant to reg. 8(2)(a), and the arrangements therefore fall within Description 3.

There are two versions of the standardised tax products hallmark, which are set out in reg. 10. The basic criteria set out in these two versions are similar, but not identical. Both versions are relevant as reg. 10 needs to be read in conjunction with reg. 11, and reg. 11 was different where arrangements were first made available before 22 February 2016; compared with where those arrangements were made after that date. Where arrangements were made before that date, they were ‘grandfathered’ if it could be shown that they were the same, or substantially the same, as arrangements which were first made available for implementation before 1 August 2006. The basic requirements for arrangements which were made available from 23 February 2016 to date are set out below.

Under reg. 10 of the Prescribed Descriptions Regulations, it is necessary for HMRC to show that the Industria Arrangements are a “product”. Regulation 10 provides that:

“(1)

Subject to regulation 11, arrangements are prescribed if a promoter makes the arrangements available for implementation by more than one person and the conditions in paragraph (2) are met.

(2)

The conditions are that an informed observer (having studied the arrangements and having regard to all relevant circumstances) could reasonably be expected to conclude that –

(a)

the arrangements have standardised, or substantially standardised, documentation—

(i)

the purpose of which is to enable a person to implement the arrangements;

(ii)

the form of which is determined by the promoter; and

(iii)

the substance of which does not need to be tailored, to any material extent, to enable a person to implement the arrangements;

(b)

a person implementing the arrangements must enter into a specific transaction or series of specific transactions;

(c)

the transaction or series of transactions is standardised, or substantially standardised, in form; and

(d)

either the main purpose of the arrangements is to enable a person to obtain a tax advantage or the arrangements would be unlikely to be entered into but for the expectation of obtaining a tax advantage.”

Arrangements are “standardised” if, as between the documentation by which different participants enter the arrangements, there is “little variation, apart from dates, names, amounts and similar details, from one iteration to another”; and where it is, “apparent that the documentation required minimal tailoring to each user”. There is some duplication, or at least similarity, between paras (b) and (c) of s 306 (1) and reg. 10(2)(d).

In respect of the word “determined” in reg. 10(2)(a)(ii), this indicates that Description 5 is intended to cover documentation that may have originated elsewhere, and was adopted by the promoter. It is sufficient if a promoter ‘determined’ the relevant documentation.

In Opus Bestpay, at [47], Judge Morgan held that:

“47.

As HMRC submitted:

(1)

…:

(a)

For the purposes of reg 10(2), the arrangements are a product on the basis that:

(i)

The arrangements were implemented under standardised, or substantially standardised, documentation…the arrangements were offered to potential participants as a finished product; the participant entered into the services contract and the loan agreement at the same time. To secure the loan all the participants needed to do was to sign the agreement.

(ii)

It is plain from the design of the arrangements and the marketing materials relating to them…that the purpose of the standardised or substantially standardised documentation was to enable the client…to implement the arrangements as a set or series of transactions under which he could provide his services but receive the bulk of the relevant fee in a form which was considered to be non-taxable, namely, by way of a loan.

(iii)

It is reasonable to infer from the totality of the evidence set out above that the form of the documentation was determined by OBL as the promoter, and, for the reasons already given, the documentation was not tailored, to any material extent, to reflect the circumstances of the client.

(iv)

The participants entered into a specific transaction or series of transactions that, for the reasons already set out, were standardised, or substantially standardised in form.

(b)

The arrangements are a tax product within the meaning of reg 10(3) on the basis that it would be reasonable for an informed observer (having studied the arrangements) to conclude that the main purpose of the arrangements was to enable a client (the participant) to obtain a tax advantage, as defined in s 318(1) specifically to include the deferral of any payment of tax:

(i)

The tax advantage constituted the receipt of the majority of the monies relating to the provision of the participants’ services in the form of a ‘loan’ which was not expected to attract income tax (or national insurance contributions) on the basis that the monies did not comprise taxable earnings for those purposes (at least at the time of receipt).

(ii)

The marketing materials plainly set out that tax on the income which was deferred under the services contract was deferred and may be reduced or avoided altogether depending on when the deferred income was paid thereby increasing a participant’s ‘take home’ pay...

(iii)

There is no discernible purpose of the arrangements other than to enable participants who entered into them thereby to obtain an income tax deferral if not an absolute saving. It is not apparent what benefit the participant could gain from the arrangements other than the expectation of this tax advantage...

(c)

The arrangements are a standardised tax product on the basis that the promoter made the arrangements available for implementation by more than one other person (meaning other than the client) …

(2)

As regards s 306(1)(b), for the reasons already set out at (1) the arrangements ‘enable, or might be expected to enable, any person to obtain an advantage in relation to’ income tax (being a tax which is prescribed in relation to arrangements falling within reg 10).

(3)

As regards s 306(1)(c), it is plain that the tax advantage was the main benefit which was expected to arise from the arrangements. There is no discernible benefit for a participant in entering into arrangements of this type other than the expected generation of the tax advantage.”

In another one of her decisions (White Collar Financial, at [37(1)(b)]), Judge Morgan said this:

“37.

I am satisfied that the evidence set out above establishes that the conditions for the tribunal to make an order under s 314A are met:

(1)

The requirements of s 306(1)(a) are met on the basis that the arrangements fall within reg 10 as a standardised tax product:

(a)

The arrangements are a product on the basis that

(i)

WCL, as the promoter (see (4) below), determined the form of a series of standardised documents the purpose of which was to enable the participants to implement the arrangements,

(ii)

the documents were not tailored to any material extent to reflect the circumstances of the participants, and

(iii)

the participants entered into a specific transaction in a standardised form given WCL made the arrangements available for implementation by more than one person (see (c) below). As set out in the correspondence in the bundles, WCL explained the effect of the arrangements to the participants face to face and, it appears, gave the participants access to an online gateway which enabled them to enter into the arrangements under standardised documents as the participants in fact did.

(b)

It would be reasonable for an informed observer (having studied the arrangements) to conclude that the main purpose of the arrangements was to enable a participant to obtain a tax advantage:

(i)

The tax advantage constituted the receipt of up to 85% of the monies relating to the provision of the participants’ services in the form of a ‘loan’ which the participants did not expect to repay and which was not expected to attract income tax (or national insurance contributions) on the basis that the monies did not comprise taxable earnings for those purposes (at least at the time of receipt).

(ii)

There is no discernible purpose of the arrangements other than to enable participants who entered into them thereby to obtain an absolute income tax saving or at least an income tax deferral.

(c)

WCL plainly made the arrangements available for implementation by more than one person.

(2)

As regards s 306(1)(b), for the reasons already set out at (1) the arrangements ‘enable, or might be expected to enable, any person to obtain an advantage in relation to’ income tax (being a tax which is prescribed in relation to arrangements falling within reg 10).

(3)

As regards s 306(1)(c), it is plain that the tax advantage was the main benefit which was expected to arise from the arrangements. There is no discernible benefit for a participant in entering into arrangements of this type other than the expected generation of the tax advantage.

(4)

WCL was a ‘promoter’ in relation to the relevant arrangements within the meaning of s 307 on the basis that:

(a)

It was a promoter in relation to a notifiable proposal on the basis that it made a proposal for arrangements (which, if entered into, would be notifiable arrangements) available for implementation by the participants in the course of its business which involved providing services relating to tax to those persons (for the purposes of s 307(1)(a)).

(b)

It was a promoter in relation to notifiable arrangements, as it was a promoter in relation to a notifiable proposal which was implemented by those arrangements (for the purposes of s 307(1)(b)).

(c)

I note that the evidence indicates that the participants were sold the tax planning structure by WCL in person at their offices and received the standardised documents from WCL online and that WCL operated a referral scheme whereby it paid existing clients who referred new clients to WCL a fee of £500 for each referral.”

Root2Tax was concerned with the question of whether certain arrangements were notifiable under the DOTAS regime. The key areas of dispute were whether the arrangements in particular answered the description of ‘standardised tax product’ (applying the same version of that description in the Prescribed Description Regulations), and whether the arrangements in question enabled, or might be expected to enable, any person to ‘obtain an advantage in relation to any tax ...’. A separate issue concerned whether the arrangements in that case showed another of the ‘hallmarks’ in the Prescribed Description Regulations. The FtT held that:

“It is clear… that the relevant notifiable arrangements were those relating to the specific partnership. The promoter had a duty to notify when he first became aware of any transaction forming part of the particular arrangements for each specific partnership but not on each occasion that an individual joined the specific partnership. The “notifiable arrangements” were the specific partnership structure and not each individual’s use of it…”

Following consideration of Root2Tax in the High Court, Judge Mosedale said this in Hyrax, at [141]:

“141.

I note in passing that Whipple J in R (on the application of Root2 Tax Ltd)
v First-Tier Tribunal (Tax Chamber) [2018] EWHC 1254 (Admin) said at [14] that the arrangements to be considered included everything up to the final stage, which in that case included the receipt of winnings. In this application, the arrangements included not only the payment of the loans but the passing of the right to repayment to the EFRBS, and the expectation that neither Hyrax j nor the EFRBS would ask for the loans to be repaid. These were all part of the arrangements as they must have all been part of the scheme user’s expectations. If they were not, no rational person would have entered into the scheme. In any event, it was the basis on which the scheme was promoted (in the colloquial sense) (see [78]).”

In Curzon Capital, Judge Poole considered reg. 10(2)(a)(ii) as follows:

“...The legislation clearly contemplates that any given set of arrangements can have more than one promoter, and it would be odd indeed (and contrary to the underlying policy of the legislation) if that fact precluded reg. 10 from applying because of the reference to ‘the promoter’ in reg 10(2)(a)(ii). If it is the case, that some person has been responsible, in the course of a relevant business, for the design of the arrangements then that person is clearly a promoter of the arrangements and if that person has determined the form of the documents (as I am satisfied is the case here) then reg 10(2)(a)(ii) is satisfied.”

At [36], Judge Poole said this:

“36.

As recorded in Root2Tax at [35], the first of the disputed issues did not detain the Tribunal for long:

‘Although, in his skeleton argument, Mr Way [counsel for the Respondent] disputed HMRC’s claim that the Alchemy scheme is a standardised tax product he did not pursue the argument orally with any vigour. It will be apparent from what I have already said that I agree with Ms Nathan [counsel for HMRC] on this point. Even a cursory perusal of the documents shows a recurring pattern with little variation, apart from dates, names, amounts and similar details, from one iteration to another. It is also apparent that the documentation required minimal tailoring to each user.’”

In Hyrax at [246], Judge Mosedale considered who determined the form of the documents and found that”

“...it seems a reasonable inference that the person who drafted the documents did so on behalf of and on the instructions of Hyrax; this is because Hyrax was the counter-party to most of them and was the entity at the heart of the scheme, and the documents were in standard form so were clearly not dictated by the scheme users. As I find they were drafted on behalf of Hyrax, it is a reasonable inference, and therefore, I find, that Hyrax determined the form of them.”

As regards reg. 10(2)(d) and the ‘tax advantage’ requirement, where arrangements allowed participants to receive a percentage of the payments relating to their services in the form of a loan that was not expected to be repaid and where such receipt was on the basis that the payments did not comprise taxable earnings for income tax purposes, this was the main purpose of the arrangements.

The Industria Arrangements did not fall within the categories specified in reg. 11 (being substantially the same arrangements made available prior to 1 August 2006 or any of the other categories listed therein) and, therefore, were not exempt from being prescribed under reg. 10.

At para. 20 of his witness statement, Mr Radford-Fragoso claimed that “Industria did not determine the form of the documents used for the “arrangements”. He said that the “form of the employment contract was provided by Outsource Ltd, which provided staff for Industria [and the] form of the loan agreement was provided by [Calligraphy Limited (“Calligraphy”)]”.

The evidence obtained by HMRC from scheme users (as included in the bundle) demonstrates that the Industria Arrangements were substantially similar in relation to each of the users. Users had to enter into a series of specific transactions. The form of that series of transactions was standardised, or substantially standardised (e.g., every user entered into a contract of employment and a loan agreement with Industria). Furthermore, the standardised documentation was not tailored to any material extent to suit the individual circumstances of the different users.

In respect of the contracts, users were required to sign a contract with Industria. The point of contact in all of the contracts is “Henry Radford” or “Harry Radford”. Industria sent the contracts to users via the online signing service, EchoSign. The electronic “history” for the contracts indicates that the documents were created by “INDUSTRIA Umbrella Limited (contracts@industriapaye.co.uk)”, emailed to users for e-signing and then emailed to ‘INDUSTRIA Umbrella Limited (contracts@industriapaye.co.uk)’ for e-signing. The basic wage rate is set out in Schedule 2, rather than Schedule 1 (as referred to in para. 9.1 of the contracts), and this error appears in each contract. The terms of the contracts were identical and only differed in relation to the user’s personal details, employment capacity and dates.

One scheme user provided a copy of a contract of employment, which differed from the others in relation to payment (3.1-3.6), holidays (4.1-4.6) and has more detail in relation to the reimbursement of expenses (3.7-3.8). The contract was signed by the scheme user and Industria on 29 January 2018 and is within the period of time the other contracts were signed. The scheme user’s bank account transaction history indicates that this is the only example held by HMRC where expenses make up a regular part of the payments received by user and so that may account for the difference.

In respect of the loan agreements, the terms of the agreements were identical and only differed in relation to the user’s personal details, contract date and amount of the loan premium; which varied between 13% and 19% and was the lesser of that percentage of the Principal Sum (being up to £250,000), or that percentage of the amount drawn down from the Principal Sum in the first year.

Following execution of the above standardised documents, each scheme user was placed into Industria’s PAYE system “reference 475/WB66760” where they received their salary payments and payments in the form of a loan pursuant to the loan agreements. I accept HMRC’s submission that it is reasonable to infer from the fact that the above documents were issued and countersigned by Industria that the form of the series of ‘standardised documents’, which were integral to the series of standardised transactions that scheme users enter into, was determined by Industria.

In respect of the claim that Industria did not determine the form of the documents used for the arrangements, I am satisfied that even if the documentation in this matter was copied from documentation used by other schemes, the documents were nevertheless drafted on behalf of Industria, and selected by Industria. Accordingly, Industria ‘determined’ their form. I am satisfied that the form was not dictated by the scheme users. It is also clear that the purpose of the above documents and transactions was to enable the implementation of the arrangements by scheme users.

In relation to reg. 10(2)(d), I am satisfied that an informed observer (having studied the arrangements and having regard to all relevant circumstances) would conclude that the main purpose of the arrangements was to enable a person to obtain a tax advantage, and that the arrangements would be unlikely to be entered into but for the expectation of obtaining a tax advantage; namely users receiving cash payments free of tax and NICs liabilities in respect of the services they provide to end-user clients. One scheme user named ‘S Dempsey’ indicated in correspondence to HMRC, in relation to his use of the Industria Arrangements, that:

“My motivation for using this Umbrella was to maximise my take home pay within HMRC guidelines.”

An informed observer would recognise that a contract value being paid via a salary of £300 (subject to tax and NICs) and a second payment described as a ‘loan’ (not subject to tax and NICs) to achieve an overall tax rate of return of approximately 80%, resulted in users obtaining a tax advantage. I am satisfied that no rational person would enter into such arrangements if they expected to have to repay the loans or advances. There are far more straightforward ways of providing employee benefits. The only advantage of providing employee benefits via these arrangements was that no tax and NICs were deducted from the payments made to users pursuant to the loan agreements. Otherwise, a potential user would opt for a standard umbrella provider charging a lower fee, or an amount economically equivalent to a fee.

Description 8 of reg.18 provides that:

“(1)

Arrangements are prescribed if—

(a)

Conditions 1 and 2 are met and Condition 3 is not met; or

(b)

Conditions 1, 2 and 3 are met and at least one of Conditions 4 and 5 is met.”

Regulation 18 further provides, in relation to Conditions 1, 2 and 3, that:

“(2)

Condition 1 is met if the arrangements involve at least one of the following—

(a)

a relevant third person taking a relevant step under section 554B;

(b)

any person taking a relevant step under section 554C or 554D; or

(c)

B taking a step under section 554Z18 or 554Z19.

(3)

Condition 2 is met if the main benefit, or one of the main benefits, of the arrangements is that an amount that would otherwise count as employment income under section 554Z2(1) is reduced or eliminated.

(4)

Condition 3 is met if, by reason of at least one of sections 554E to 554X or regulations made under section 554Y, Chapter 2 of Part 7A does not apply.

In Countrywide Partners, at [155] to [157], Judge McNall said this:

“155.

Condition 1 is met if the arrangements involve "any person taking a relevant step under ITEPA 2003 section 554C": 18(2)(b).

156.

I consider that Condition is met:

(1)

There is a relevant arrangement for rewarding employees under ITEPA s 554A;

(2)

The Appellant is the employer, and, as such, is 'any person' for the purposes of Condition 1;

(3)

The Appellant takes a 'relevant step', within the meaning of ITEPA s 554C(1)(a), namely the payment of a sum of money to a Scheme User, when the Appellant makes a payment pursuant to the Loan Agreement to the Scheme User.

157.

Condition 2 is met if the main benefit, or one of the main benefits, of the arrangements is that an amount that would otherwise count as employment income under ITEPA s 554Z2(1) is reduced or eliminated.”

In Greenwich Contracts, at [97], Judge Sukul stated (concerning Condition 2 of this hallmark) that:

“97 …It requires the main benefit, or one of the main benefits, of the arrangements is that an amount that would otherwise count as employment income is reduced or eliminated.”

This was the hallmark identified by the Liquidators in the AAG1 form.

I am satisfied that the requirement at reg. 18(2)(b) is met. Regulation 18(2)(b) does not require that the person taking the step under ss 554C or 554D ITEPA be a ‘third-party’ (c.f. reg. 18(2)(a)).

In respect of ‘Condition 1’, firstly, Industria is the employer and, as such, is “any person” for the purposes of Condition 1. Secondly, Industria is “any person”, within the meaning of reg. 18(2)(b), because the source of the amounts paid to users by Industria, in the form of loan payments was, ultimately, derived from the services users provided to end-user clients via contracts made between Industria and agencies or end-user clients, and between agencies and end-user clients. The amounts paid in the form of loan payments under the loan agreements were calculated by reference to the amounts invoiced in respect of the services users provided to end-user clients. Thirdly, Industria took a ‘relevant step’, pursuant to s 554C(1)(a) ITEPA, by paying users sums of money in the form of a salary and making further payments to the same individuals in the form of loans under loan agreements. Either of these steps, alone, is sufficient to satisfy Condition 1 (by virtue of reg. 18(2)(b)).

In respect of ‘Condition 2’, the requirement was met because one of the main benefits of the Industria Arrangements was that an amount which would otherwise count as employment income under s 554Z2(1) ITEPA was reduced, or eliminated. The users of the arrangements were, effectively, rewarded by receiving a significant proportion of their remuneration in the form of loan payments, rather than income on which tax and NICs would be payable (either under s 62 or pursuant to s 554Z2(1)).

It is essential to the effectiveness of the arrangements in obtaining the expected tax advantage that the amounts users receive in the form of loan payments do not count as employment income by virtue of Chapter 2, Part 7A ITEPA. I find that the reason why the loans to employees were paid to them by Industria, and not by a third person, was to prevent Part 7A from applying to the loans. Part 7A ITEPA applies in relation to the value of relevant steps taken by relevant third persons. In this application, relevant third persons include Industria as employer, agencies and end-user clients. At a minimum, relevant steps have been taken when scheme users enter into the arrangements with Industria under which users are rewarded for services provided directly to third parties via the chain of entities.

Beyond reducing the amount otherwise chargeable as employment income, there is no other reason for an individual to enter into an employment contract that is likely to pay them a considerably smaller salary than their previous employer, replace a significant part of their income with a substantial repayable loan and an unspecified discretionary bonus, and require them to relinquish up to 15% of their gross contract value to their employer. The documents obtained by HMRC do not indicate that the loans were in practice repayable either in cash or by offset against future bonuses, nor that the entitlement to bonuses actually crystallised.

As for ‘Condition 3’, none of the exclusions in ss 554E to 554X ITEPA, or the regulations made under s 554Y ITEPA, prevent Industria from engaging Chapter 2 of Part 7A ITEPA and, as such, Condition 3 is not met. Since Conditions 1 and 2 are met and Condition 3 is not met, the Industria Arrangements also fall within Description 8.

Regulation 19(1) provides that arrangements are prescribed if ‘Condition 1’ is met and it would be reasonable to expect an informed observer to conclude ‘Condition 2’ is met, and either ‘Condition 3’ or ‘Condition 4’ is met. The conditions are as follows:

“(2)

Condition 1 is that the arrangements include at least one financial product specified in reg. 20(1) (a “specified financial product”).

(3)

Condition 2 is that the main benefit, or one of the main benefits, of including a specified financial product in the arrangements is to give rise to a tax advantage

...

(5)

Condition 4 is that the arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained.”

In this case, Conditions 1, 2 and 4 are met. I am satisfied that ‘Condition 1’ is met as the Industria Arrangements included at least one financial product; namely the loan agreements entered into by users with Industria, which, effectively, created loans owed by employees to their employer and funded from future unearned bonus payments.

In respect of ‘Condition 2’, I am satisfied that the Industria Arrangements met the requirements because one of the main benefits of including the loan agreements in the arrangements was to give rise to a tax advantage. More specifically, users derived clear tax and NICs advantages on account of receiving a large proportion of their remuneration in the form of loan payments pursuant to the loan agreements, rather than income on which tax and NICs would have been payable. There is no reason for an individual to forego a large proportion of their income in exchange for a repayable loan backed by an uncertain and undefined bonus, other than to obtain a tax advantage.

The requirements of ‘Condition 4’ are also met because the Industria Arrangements involved one or more contrived, or abnormal, steps without which the tax advantage could not be obtained. In particular, it was abnormal for:

I am satisfied that other than to seek a tax advantage, there was no reason for the steps to be structured in this artificial and complex way, with the employee having no power to direct the employer to apply the fees - or an amount economically equivalent to fees - in any other way.

Having concluded that the arrangements fall within a ‘Description’ prescribed by the Prescribed Descriptions Regulations, that they enabled, or might be expected to enable, any person to obtain an advantage in relation to any tax that is so prescribed in relation to arrangements of that description, and are such that the main benefit, or one of the main benefits, that might be expected to arise from the arrangements is the obtaining of that advantage, I am satisfied that the  arrangements were notifiable arrangements within the meaning of s 306(1) FA 2004.

Where a scheme is notifiable, the promoter is required to provide specified information to HMRC. As considered earlier, the obligation to notify normally accrues within five days of the marketing of the scheme, or the making of the scheme available for implementation. HMRC may issue an SRN. If so, the promoter is required to pass the SRN on to the scheme users who, in turn, are obliged to notify HMRC of their use of the scheme. They do this normally by including the SRN upon their tax return. This enables HMRC to identify the users of a particular scheme. I am satisfied that the Industria Arrangements were notifiable. I have found that Industria was a promoter of the arrangements, and that Industria failed to notify the arrangements.

Following Burgess & Brimheath, HMRC have the burden of showing that the conditions for a penalty are satisfied. The burden is satisfied where HMRC demonstrate that there has been a failure to comply with s 308(3) FA 2004; and the period until which the failure to comply has continued. I find that HMRC have done so. I am satisfied that the loan arrangements were a key feature of the Industria Arrangements. HMRC’s case relies on the documentation and the documentation is, I find, revealing. That is one reason why I have found, relatively extensive facts, and quoted from the documentation. If a promoter fails to comply with s 308(3) FA 2024, then they are liable to a penalty. The section contains detailed provisions regarding how that penalty is to be calculated.

The burden of proof is on Industria to establish, with evidence and on the balance of probabilities, that there was a reasonable excuse for its non-compliance. In Perrin, the UT set out a four-step process for the FtT to apply when considering whether a person has a reasonable excuse. At [71] to [75], the UT said this:

“70.

Assuming that hurdle to have been overcome by HMRC, the task facing the FTT when considering a reasonable excuse defence is to determine whether facts exist which, when judged objectively, amount to a reasonable excuse for the default and accordingly give rise to a valid defence. The burden of establishing the existence of those facts, on a balance of probabilities, lies on the taxpayer...

71.

In deciding whether the excuse put forward is, viewed objectively, 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 relevant time or times (in accordance with the decisions in The Clean Car Co and Coales).

…

73.

Once it has made its findings of all the relevant facts, then the FTT must assess whether those facts (including, where relevant, the state of mind of any relevant witness) are sufficient to amount to a reasonable excuse, judged objectively.

...

75.

It follows from the above that we consider the FTT was correct to say (at [88] of the 2014 Decision) that “to be a reasonable excuse, the excuse must not only be genuine, but also objectively reasonable when the circumstances and attributes of the actual taxpayer are taken into account.”

The UT further set out the way to test reasonable excuse, at [81], as follows:

“81.

When considering a ‘reasonable excuse’ defence, therefore, in our view the FTT can usefully approach matters in the following way:

(1)

First, establish what facts the taxpayer asserts give rise to a reasonable excuse (this may include the belief, acts or omissions of the taxpayer or any other person, the taxpayerʼs own experience or relevant attributes, the situation of the taxpayer at any relevant time and any other relevant external facts).

(2)

Second, decide which of those facts are proven.

(3)

Third, decide whether, viewed objectively, those proven facts do indeed amount to an objectively reasonable excuse for the default and the time when that objectively reasonable excuse ceased. In doing so, it should take into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times. It might assist the FTT, in this context, to ask itself the question ‘was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?’

(4)

Fourth, having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time (unless, exceptionally, the failure was remedied before the reasonable excuse ceased). In doing so, the FTT should again decide the matter objectively, but taking into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times.”

In the present case, initial correspondence from HMRC to Industria in April 2019 asked why the arrangements had not been notified. There was no satisfactory, or substantive, response regarding DOTAS notifiability and it was only once the Liquidators were appointed in June 2021 (over two years’ later) that a notification was finally made. Industria, via its Liquidators, has not sought to contest the action taken by HMRC. Whilst Mr Radford-Fragoso’s witness statement has been considered, he no longer has standing in these proceedings. In summary, I have very little evidence as to what Industria did in relation to the issue of whether a reasonable excuse has been established.

The correspondence between HMRC and Industria (and Mr Radford-Fragoso as the sole director) from April 2019 onwards made it clear that HMRC believed that the arrangements were notifiable. Based on the information and documents held by HMRC, the limited responses received from Industria to HMRC’s correspondence, Industria did not have a reasonable excuse for not notifying the arrangements prior to entering into creditors’ voluntary liquidation. In any event, Industria (through its Liquidators) does not oppose the Penalty Application. As such, it does not advance any reasonable excuse arguments.

In short, the penalty for breaching s 308(3) is capped at a sum equal to £600 for each day during the period, beginning with the day after the deadline for providing the information and ending on the earlier of the day on which the penalty is determined or the last day before the failure ceases. However, that is only a cap and the actual penalty must be arrived at taking into account “all relevant circumstances”: s 98C(2ZB). The maximum penalty may be raised to £1,000,000 if this is considered appropriate. Taking s 98C(2ZB) in isolation, consideration is given to the desirability of an amount that is appropriate to deter Industria, and others, from a similar failure to notify similar arrangements in the future, having particular regard to the fees (or an amount economically equivalent to fees) received in connection with the notifiable arrangements, as defined by s 98C(2ZB)(a).

I have considered all of the factors and weighed all relevant circumstances in the balance.

The steps for calculation of the penalty are as follows:

In respect of ‘Step 1’, in IPS Progression, at [76], the tribunal explained its penalty decision thus:

“76.

In determining the amount of the penalty, the Tribunal must take account of all relevant considerations (s 98C(2ZB) TMA).

(1)” [The] usual considerations which apply when the imposition of a tax penalty is in question, include[e] such matters as the reasons for non-compliance, the extent to which the position has been remedied, the gravity and duration of the non-compliance, the presence of aggravating or mitigating factors, the availability of other methods for HMRC to recover the tax at risk (most obviously by making an assessment, if necessary on a best of judgment basis), and generally the need to achieve a fair and proportionate outcome, having regard to the interests of the public purse and the general body of taxpayers as well as the circumstances of the non-compliant taxpayer himself” (Revenue and Customs Commissioners v Tager [2018] EWCA Civ 1727, [2018] STC 1755 (“Tager”) at [88], [111], [112]).

(2)

When determining a penalty for non-compliance with s 308(3) FA 2004, the Tribunal is required by s 98C(2ZB) TMA to have regard also to “the desirability of its being set at a level which appears appropriate for deterring the person, or other persons, from similar failures to comply on future occasions”. This provision states that this is a matter to be considered, but not that this is to be the sole or overriding consideration.

(3)

Section 98C(2ZB) TMA states that the Tribunal shall consider “in particular” the amount of fees received by the promoter in connection with the notifiable arrangements. However, it states that this is to be considered “in particular” as an aspect of the matter referred to in the immediately preceding sub-paragraph. The words “in particular” do not indicate that the matter referred to in the immediately preceding sub-paragraph is itself to be given greater weight than would otherwise be the case in the overall balancing exercise.

(4)

Section 98C(2ZB) TMA does not state that a penalty for a failure to comply with s 308(3) FA 2004 should be set at a level equivalent to the total amount of fees received by the promoter in connection with the notifiable arrangements, subject to the maximum of £600 per day. If the legislation had intended this, it could have said so. Section 98C(2ZB) TMA states merely that the fees received by the promoter in connection with the notifiable arrangements is a particular consideration in determining what level of penalty will deter similar failures to comply in future. It reflects the obvious reality that a relatively small penalty is unlikely to deter future non-compliance if a promoter is receiving very large amounts of fees in connection with the notifiable arrangements. However, this provision does not suggest that promoters will necessarily be undeterred by any penalty that is less than the total amount of the fees that they have received.

(5)

There could for instance be cases where a promoter receives very large fees, from which it makes only a very small profit due to very high overheads. In such a case the Tribunal would be entitled to take into account that a penalty at a given level will have a larger deterrent effect than if the whole of the fees represented profit. The fact that s 98C(2ZB) TMA requires the Tribunal to consider the amount of the fees received by the promoter does not mean that it precludes the Tribunal from also taking into account the amount of profit made from those fees.

(6)

Section 98C(2ZC) TMA empowers the Tribunal to impose a penalty in excess of the normal maximum, up to an overall maximum of £1 million, in cases where the maximum penalty “appears inappropriately low after taking account of [all relevant] considerations”. This provision does not state that the penalty must or should ordinarily be increased beyond the normal maximum by reason alone, for instance, that the normal maximum penalty would be less than the amount of the fees received by the promoter.

(7)

Section 98C(2ZC) TMA still reflects the general consideration that penalties must always remain proportionate (see also Lindsay v Customs and Excise [2002] EWCA Civ 267 and Le Roux Zeeman & Ors v HM Revenue and Customs [2020] EWHC 794 at [73]- [97]). Section 98C(2ZC) TMA is reserved for the most serious cases, where the normal £600 daily penalties would be inadequate even if imposed at the maximum level. Even in such cases, this provision still does not allow for unlimited penalties. It simply sets a higher maximum. Contrary to what HMRC suggest, it is not possible to draw from this provision a simple proposition that “a penalty in seven figures is not unacceptable to Parliament”. On the other hand, it is also not possible to draw from this provision a proposition that all penalties for non-compliance with s 308(3) FA 2004 should be capped at £1 million, even if the normal maximum £600 daily penalties would add up to a total maximum of more than £1 million. If the legislation had intended this, it could have said so.

(8)

The penalty under s 98C TMA only penalises the failure to provide HMRC with prescribed information as required by s 308(3) FA 2004. It does not penalise any tax avoidance as such, and does not as such penalise any other non-compliance with tax law, such as a failure to deduct correct amounts of PAYE and National Insurance from payments to employees. The penalty is not intended to be a proxy for the recovery of any unpaid tax (Tager at [90], [111], [112]). However, the wider consequences of the failure to comply with s 308(3) FA 2004, if known, may nonetheless be relevant to determining the quantum of the penalty.

(9)

The Tribunal's approach must simply be to determine an overall amount of penalty within the penalty range that is fair and proportionate in all the circumstances, taking account of all relevant considerations.

(a)

All else being equal, 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. Deterring a person who has been non-compliant for six months from future non-compliance will not necessarily require a penalty of twice the amount required to so deter a person who has been non-compliant for three months. It would therefore be wrong in principle to determine first what would be the appropriate daily penalty in the range between zero and £600, and then simply to multiply that amount by the number of days in the period of default.

(b)

It would certainly be wrong to take as a starting point the maximum penalty, and to impose a penalty at this maximum level unless there is some reason not to do so. The Tribunal cannot accept the HMRC argument that in this case “there is no particular reason why the penalty should be less than the maximum allowed by the statute”.

In Hyrax (No. 2), at [300] to [307], Judge Scott said this:

“300.

Mr McDonnell argued that the quantum of penalty should be relatively modest and that the penalty sought by HMRC was excessive not least because Hyrax was a relatively small company with a low income. That did not sit well with his arguments on the scale of the business in HRT. In our view the two must be considered conjunctly when looking at the question of penalty. It was those involved in Hyrax who decided to put almost all the income and expenditure through HRT.

301.

As we have explained at paragraph 25, Judge Mosedale found that Hyrax retained 18.5% which was effectively them splitting the tax saving with the scheme user. HMRC have calculated that the gross receipts in the period were £37,608,000 which is approximately 18.26% which is broadly consistent with that finding. That means that the tax saving was a very significant figure.

302.

We are not persuaded by Mr McDonnell’s unsupported assertion that HMRC should have been able to recover the tax that was at risk. Yes, they might be able to impose loan charges assessments etc on individual taxpayers but that would be time consuming, labour intensive and expensive. Although HMRC were aware, in very general terms, from the end of 2014 that Hyrax were involved in what they suspected was a tax avoidance scheme, because it was not notified and because HMRC had to have recourse to the Tribunal there was a considerable elapse of time. It would be disproportionate to have to pursue more than a thousand taxpayers (We note that at one point Joanne Macnamara misled HMRC by suggesting that there were only hundreds of taxpayers involved (see paragraph 161 above)).

303.

We accept HMRC’s argument that the penalty imposed should act as a deterrent. It should certainly do so to deter others from deliberately setting up a company with a sole director who can at best be described as displaying Nelsonian acuity in regard to the company’s affairs. It should also act to 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.

304.

We do not accept that the question as to whether the Hyrax arrangements were notifiable was extremely complex and therefore that was a reason for non-compliance. Sir Duncan Ouseley rightly described it as being a “rigmarole”.

305.

The Hyrax arrangements had ceased to operate before the matter reached the Tribunal so no remedial action was possible.

306.

We have considered all of the factors identified in Tager and weighed all relevant circumstances in the balance. We are particularly mindful of the fact that David Gill sought to hide behind Joanne Macnamara whilst at all times being actively involved.

307.

We find that this was a very serious matter and the statutory maximum penalty is appropriate. The statutory maximum penalty for the period 9 April 2014 to 5 March 2019, being 1,791 days at £600 per day totals £1,074,600.”

In his witness statement, at para. 23, Mr Radford-Fragoso said that:

“Industria did not make anything close to £2.6m in profit over the course of its life”

He further claimed that the:

“service providers who provided the staff to Industria and Calligraphy who designed the ‘arrangements’ were the main beneficiaries”.

However, he did not suggest an alternative estimated profit figure for Industria. Rather, at para. 24, he merely said that he “received remuneration of c.£60,000 per year”.

It is the fees (or an amount economically equivalent to fees), not profits earned by the promoter, that the tribunal is called on to have regard to (in particular) when determining the amount of the penalty (s 98C(2ZB)(a)). As HMRC do not hold direct evidence of the income earned by Industria, the earnings have been estimated by applying the average rate of fees (or an amount economically equivalent to fees) retained by Industria to the turnover as declared on Industria’s VAT returns. For the period from November 2017 to March 2020, during which time the arrangements were in place and as supported by the RTI data held by HMRC, the total VAT output for Industria was £17,193,092. Industria retained approximately 15% of users’ gross contract values for the work they performed on behalf of end-users. This means that Industria retained at least £2,578,963 (being 15% of £17,193,092), representing their split of the tax advantage enjoyed by individual users of the Industria Arrangements.

Therefore, ‘Step 1’ produces a penalty amount - having no regard to the statutory maximum at s 98C(1)(a)(i) - of £2,578,963.

In respect of ‘Step 2’, pursuant to s 98C(1)(a)(i) and (2)(a) TMA, a person who fails to comply with s 308(3) FA 2004 shall be a liable to a penalty not exceeding £600 for each day during the initial period. In accordance with s 98C(2ZA) TMA, HMRC invite the Tribunal to proceed on the basis that the initial period in this matter commenced on 15 November 2017 and, for the purposes of the Penalty Application, HMRC accept that it ceased on 23 June 2021. The statutory maximum penalty, calculated as 1,316 days at £600 per day, is £789,600.

In relation to ‘Step 3’, if the suggested penalty amount at ‘Step 1’ exceeds the statutory maximum at Step 2, then Step 3 does not apply.

In relation to ‘Step 4’, as the penalty amount at Step 1 exceeds the statutory maximum at Step 2, and the statutory maximum does not exceed £1,000,000, then ‘Step 7’ applies. By virtue of s 98C(2ZC), the Tribunal may determine a penalty not exceeding £1,000,000.

In relation to ‘Step 5’, the suggested penalty amount in ‘Step 1’ exceeds the statutory maximum at Step 2, but Step 2 does not exceed £1,000,000, then Step 5 does not apply.

In relation to ‘Step 6’ as the suggested penalty amount in ‘Step 1’ exceeds the statutory maximum penalty in Step 2, and exceeds £1,000,000, ‘Step 6’ does not apply.

In relation to ‘Step 7’, s 98C(2ZC) gives the Tribunal the option of increasing the penalty to an amount not exceeding £1,000,000 where it is considered that the maximum amount based on the daily rate is inappropriately low. Section 98C(2ZB) TMA provides that in determining the amount of the penalty, various considerations will be taken into account, including deterrence to other persons from similar failures to comply in the future, particularly with regard to any fees received or likely to have been received by the promoter in connection with the arrangements.

In this case, HMRC submit that the Tribunal should consider increasing the penalty on account of the fact that the fees (or an amount economically equivalent to fees) earned by Industria from the arrangements equate to an estimated £2,500,000. HMRC contend that a penalty at the statutory maximum calculated at Step 2 (or less) would not be sufficient to act as a warning to other promoters of similar schemes (of which there are said to be many) from failing to notify schemes and, thus, preventing HMRC from obtaining early information about tax avoidance schemes, those who use them and those who promote them to consider if action needs to be taken to protect users and the public purse.

The tax saving in the present case was a very significant figure. The question as to whether the Industria Arrangements were notifiable was not complex and, therefore, that was not a reason for non-compliance. The subject-matter is a scheme which fits the statutory definition of ‘tax avoidance’. Scheme promoters must notify their arrangements under the DOTAS Regulations. The forms used for that notification enable promoters to describe their scheme and set out facts upon which they rely in order to persuade HMRC that the scheme is effective and not tax avoiding. The documentation shows that Industria earned a high-level of fees for its promotion of the Industria Arrangements. In some instances, this was 15% of users’ gross contract value. The fees earned by Industria from the arrangements equate to an estimated c. £2,500,000. This was a very serious matter and I am satisfied that a penalty of £1,000,000 is appropriate. The penalty is, therefore, determined in that sum.

As held by Judge Scott in Hyrax (No. 2), at [303], the penalty imposed should act as a deterrent. It should do so to deter others from deliberately setting up a company with a sole director who could, at best, be described as displaying Nelsonian acuity in regard to the company’s affairs. It should also act to deter those who relied only on the advice of the promoter of the tax avoidance scheme and a promoter who makes large sums of money from it.

The fact that Industria ceased to trade, went into liquidation, or that the Liquidators were appointed does not excuse the initial failure to notify, nor does it prevent the penalty from continuing to apply to Industria. The Industria Arrangements had ceased to operate before this matter reached the Tribunal, so no remedial action was possible. I have considered all of the factors identified in Tager and weighed all relevant circumstances in the balance.

The Penalty Application was made on 11 March 2022. HMRC invite the Tribunal to proceed on the basis that the ‘trigger date’ under s 308 was the latest date between 9 May 2017 (when Industria was incorporated) and 7 November 2017 (being the date of the earliest contract of employment and loan agreement held by HMRC); thereby giving Industria the benefit of the doubt. Even the earliest possible ‘trigger date’ (i.e., 9 May 2017) was applied, the s 308(3) breach would still have occurred less than six years before the Penalty Application and, therefore, within the prescribed period for making a penalty application (under s 103(4) TMA).

At para. 11 of his Grounds of Appeal, Mr Radford-Fragoso argued that Officer Bontempo, who made the Penalty Application, was not authorised to do. Officer Bontempo is a Grade 7 Officer and I am satisfied that he was authorised to commence the Penalty Application. As a Grade 7 Officer, he is above Higher Officer rank.

I hold that Industria:

Having regard to all of the findings and conclusions above, I am satisfied that a penalty of £1,000,000 applies.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.