Matthew Smith v The Commissioners for HMRC

Matthew Smith (MS) is appealing Follower Notice Penalties of £42,369.80 issued by HMRC on 14 August 2019 (the FNPs) in respect of the tax years 2004/05 to 2007/08 (the Relevant Tax Years).

With the consent of the parties, the form of the hearing was video using the Teams video platform. The documents to which we were referred are contained in a hearing bundle of 1221 pages, a supplementary document bundle of 36 pages and a Respondents’ skeleton argument of 21 pages.

Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.

MS is an IT consultant. During the Relevant Tax Years, he participated in a scheme promoted by Montpelier Tax Consultants (Montpelier). The scheme sought to exploit the UK-Isle of Man double taxation arrangements by routing his earnings through an Isle of Man partnership and an Isle of Man trust. In his self-assessment tax returns for those years (the Returns) MS declared income from the offshore trust and claimed an equivalent amount of double taxation relief.

HMRC opened enquiries into the Returns, and Closure Notices were issued in 2010 under section 28A Taxes Management Act 1970 (TMA 1970) setting out HMRC’s view that additional income tax and national insurance contributions (NICs) were due for the Relevant Tax Years.

Montpelier appealed against the Closure Notices on behalf of MS.

In 2015 the First-tier Tribunal decision in RobertHuitson v HM Revenue & Customs [2015] UKFTT 448 (TC) (Huitson) was released and became final in January 2016 when the time limit to submit an appeal to the Upper Tribunal expired. The case concerned a tax avoidance scheme marketed by Montpelier and found that the arrangements were ineffective in achieving the intended tax result. As a result of this the Appellant in that case was found to be liable to income tax and NICs on his share of the income from an Isle of Man trust.

HMRC consider that the decision in Huitson applies to the arrangements MS entered into for the Relevant Tax Years.

HMRC wrote to MS on 18 October 2016 to advise him that, following the decision in Huitson, he would be issued with Follower Notices (FNs) and Accelerated Payment Notices (APNs) in respect of the Relevant Tax Years. Factsheet CC/FS25a about FNs and APNs was enclosed with this letter.

HMRC wrote to MS on 4 November 2016 enclosing the FNs and APNs. The covering letter, and the FNs themselves, advised that if MS failed to take the “corrective action” required by 7 February 2017, he would be liable to penalties. It also detailed the deadline for paying the accelerated tax and NICs under the APNs.

On 23 December 2016 HMRC wrote again to MS to remind him of the imminent deadlines.

MS wrote to HMRC on 31 January 2017, with a letter drafted by Montpelier making representations regarding the FNs, including that they are wrong in law.

HMRC wrote to MS on 18 October 2017 setting out their view that the FNs were valid and correctly issued and giving MS a further deadline of 22 November 2017 to take corrective action.

MS wrote to HMRC on 19 November 2017, with a letter drafted by Montpelier, challenging the validity of the FNs, confirming that he would not be taking corrective action and that he would be issuing a Judicial Review (JR) challenge against HMRC’s decisions. He did not take corrective action by the deadline of 22 November 2017.

During November and December 2017 MS was in email correspondence with Montpelier regarding a joint JR claim. He confirmed to Montpelier that he would like to join in the claim on 21 December 2017.

HMRC wrote to MS on 22 December 2017 responding to his letter of 19 November and confirming that as he had not taken corrective action by the deadline, he had become liable for FNPs.

HMRC wrote again to MS on 17 January 2018 to inform him that he was now liable to FNPs of 50% of the tax in dispute, but that if he co-operated with HMRC before the FNPs were issued, the amount of the FNPs could be reduced.

During February and March 2018 HMRC contacted MS regarding the unpaid amounts due under the APNs, including warnings about enforcement action. MS contacted Montpelier to ask what he should do and whether there was a relevant JR in progress. Montpelier sent MS a draft letter for him to send to HMRC objecting to any enforcement of the APNs or FNs.

In April 2018 MS entered into a payment arrangement with HMRC to settle his liabilities under the APNs.

Following consideration of the legislation HMRC wrote to MS in October 2018 confirming their view that there would be no defence available under the Limitation Act 1980 in respect of the Class 4 NICs due under the APNs. As a result, HMRC gave MS a new deadline for taking corrective action under the FNs of 31 October 2018.

MS did not take corrective action by 31 October 2018. HMRC wrote to MS on 8 May 2019 to inform him that they intended to charge FNPs.

MS was in telephone and email contact with HMRC during May and June 2019 regarding the FNPs. HMRC officials explained the difference between APNs and FNs, and he was advised that he could still take corrective action to reduce the amount of the FNPs as they had not yet been issued, and how to do so. He was also offered assistance in completing the relevant forms and sent a further factsheet.

MS received a letter from HMRC dated 30 July 2019 setting out HMRC’s view in relation to MS’s appeals against the Closure Notices for the Relevant Tax Years. In that letter MS was offered an HMRC review of the decision and was informed that he could alternatively appeal the decision to this Tribunal. He was also informed that if he did not accept the offer of a review or appeal to this Tribunal, the appeal would be treated as settled by agreement under s 54(1) TMA 1970. MS took no action.

On 14 August 2019 HMRC issued FNPs under s 208 Finance Act 2014 (FA 2014) for the Relevant Tax Years for failure to take corrective action in respect of the FNs.

MS appealed the FNPs on 7 September 2019 and 17 November 2019. HMRC responded on 28 November 2019 upholding the decision to charge the FNPs and offering a further review.

MS appointed an agent, Lynam Tax (LT) to represent him regarding his appeal of the FNPs. LT wrote to HMRC on 20 December 2019 accepting the offer of a review.

LT/MS and HMRC were in contact during 2020, 2021, 2022 and 2023 regarding the review. Initially the review was delayed to allow LT to obtain and review relevant papers before making representations, and subsequently because HMRC were waiting for technical advice. Extensions to the review period were agreed.

HMRC issued a review conclusion letter on 8 February 2024. The decision to issue the FNPs was upheld, but the amount of the penalties was reduced to exclude the NICs element and to allow a greater reduction to reflect cooperation from MS. This would reduce the FNPs from £42,369.80 to £32,541.32.

MS appealed the FNPs to this Tribunal on 5 March 2024.

HMRC request that the Tribunal uses its power under s 50(6) TMA1970 and s 214(9)(b) FA 2014 to reduce the FNP amounts to £32,541.32 in accordance with the conclusion of their review.

In the notice of appeal LT on behalf of MS appeals the FNPs on the following grounds:

HMRC say:

The legislation authorising the issue of FNs and the imposition of FNPs is contained in ss 204 to 214 FA 2014, as then enacted.

S 204 provides that HMRC may give a person (P) an FN if the following four conditions are met:

S 208 FA 2014 sets out when a person may become liable to an FNP:

S 209 specifies that the amount of the FNP is 50% of the value of the denied advantage, and s 210 provides for the reduction of an FNP for co-operation:

Finally, s 214 provides for appeals against FNPs:

In addition to the documents and correspondence contained in the hearing bundle and supplementary document bundle, MS gave oral evidence at the hearing.

We found MS an honest and credible witness. He explained that he initially relied on Montpelier for advice when he received any correspondence from HMRC. He found receipt of HMRC letters difficult and did not read the letters in detail himself. Instead, he would start to read them and then forward them onto Montpelier, who would either advise him that there was no need to respond, or draft a response for him to send to HMRC. He trusted Montpelier and did not consider taking any other advice.

As a result of this MS did not understand what was going on; he was confused about the difference between FNs, APNs, penalties, surcharges and interest and was not aware that he would be liable to FNPs if he failed to take corrective action.

When MS received a hand-delivered letter from HMRC’s Debt Management Office (DMO) on 12 March 2018, he arranged to meet the DMO officer, Roger Winterburn (RW), in person. During that meeting MS discussed the draft letter he had received from Montpelier to respond to HMRC’s letters regarding enforcement action. MS and RW also discussed the amount that MS was required to pay. RW reassured MS that the sums under discussion were all he had to pay.

As a result of this meeting MS entered into a payment plan to settle his liabilities under the APNs.

MS engaged LT after his unsuccessful initial appeal to HMRC against the FNPs when he received a self-assessment (SA) statement showing a further £40,000 due. This precipitated a conversation with his wife, during which they agreed he needed help.

Under cross-examination, after he was asked to read several of the letters he had received from HMRC, MS agreed that he had been given three opportunities to take corrective action, and that it was clear that he could be liable to FN penalties if he failed to do so. He added however that at the time he was not aware of this, and instead he relied on his discussions with RW, from which he assumed there would not be anything else to pay. He did what he thought was best at the time.

The chronology set out in paragraphs [4] to [29] above is evidenced by the documents and correspondence in the bundle and supplementary bundle and is proven.

We find that MS did not properly read letters or factsheets from HMRC until the letters threatening enforcement action in 2018 and did not fully engage with his tax situation until he received notice of the FNPs in May 2019.

As a result we find that MS did not understand the difference between the FNs and APNs, that he might be liable to penalties if he failed to take corrective action, nor what taking corrective action meant, despite lengthy exchanges with HMRC about this between May and August 2019.

We find that MS relied entirely on Montpelier in relation to his case until March 2018, and that he then relied on his conversations with RW to reassure himself that he would have nothing further to pay. He took independent advice for the first time when he engaged LT in December 2019.

Although not raised by MS, we find that the conditions in s 204 FA 2014 were met, the FNs were issued in time and therefore the FNs were validly issued.

Agreeing a payment plan for settling the amounts due under the APNs does not amount to taking corrective action; the legislation contemplates that a taxpayer may make accelerated payments but continue to pursue the claim to the tax advantage. In HMRC v Comtek [2021] UKUT 81 (TCC) at paragraph [45] the Upper Tribunal explained that full counteraction here requires a taxpayer to give up their appeal and communicate this to HMRC.

We find that MS did not take any corrective action before the final deadline of 31 October 2018 and that he was notified of his liability to and the amount of the FNPs in HMRC’s letter of 8 May 2019. We find that the FNPs were issued correctly.

S 214 FA 2014 provides limited grounds for appeal against a decision by HMRC that an FNP is payable. Having found that the FNs were validly issued, the only ground remaining is s 214(3)(d), that it was reasonable in all the circumstances for MS not to have taken the necessary corrective action in respect of the denied advantage. S 214(2) provides a right of appeal as to the amount of any FNP.

We therefore need to consider (1) whether MS has proved on balance that he acted reasonably in all the circumstances not to have taken corrective action, and (2) if not, whether the FNPs should be upheld in the amount set out in HMRC’s review letter, reduced, or increased.

The meaning of the phrase “reasonable in all the circumstances” has been considered in several First-tier Tribunal cases. In Onillon v HMRC [2018] UKFTT 33 (TC) the Tribunal found that “reasonable” must be construed objectively, not subjectively, in light of the facts of the matter and the legislative context, including at paragraph [174] “the taxpayer’s individual circumstances, and any factors they have, or should have, taken into account in deciding whether to take corrective action.”.

In the notice of appeal LT, on behalf of MS, make a number of submissions relevant to whether MS acted reasonably in not taking corrective action. We deal with each of these below.

Firstly, MS contends that it was reasonable for him, as someone without any tax expertise, to rely entirely on Montpelier’s advice in relation to participation in the scheme and subsequent appeals. We recognise that MS, as an IT consultant, did not have tax expertise, and as such the letters he received from HMRC may well have been difficult for him to understand.

However, we have found that MS did not properly read any correspondence or factsheets from HMRC until March 2018 and even then, did not engage fully with his tax position until May 2019. By then the final deadline for taking corrective action had passed. MS followed the advice of Montpelier until March 2018 without any question or understanding. He then ignored HMRC’s letter of 2 October 2018 giving him a further deadline to take corrective action. We conclude that MS’s failure to engage with his tax position was unreasonable.

MS took no steps before 31 October 2018 to understand the consequences of the FNs such that he could make an informed decision as to whether or not to take corrective action. We consider that to be unreasonable behaviour.

Secondly, MS found it difficult to understand what was going on, including the differences between APNs, FNs, interest, penalties and surcharges. He did not understand what was meant by taking corrective action or the consequences of failing to take corrective action.

We acknowledge MS’s lack of tax expertise and accept that HMRC correspondence may have appeared complex and confusing, particularly given that letters were issued by different HMRC departments concerning various aspects of his tax position. However, we have found that he made no attempt to understand what was happening before the final deadline of 31 October 2018 and did not seek expert advice to help him understand. HMRC sent several letters and factsheets that sought to set out as clearly as possible the difference between the APNs and FNs, and the separate actions required in relation to each.

When MS was asked to read relevant sections of those letters at the hearing, he acknowledged he had been given three opportunities to take corrective action, and that it was clear that he could be liable to FN penalties if he failed to do so. We conclude that MS’s lack of understanding stemmed from his own failure to read the correspondence properly and/or to seek advice with a view to gaining a better understanding of it. The first time MS engaged fully in order to understand his position with regard to the FNs and FNPs was in email correspondence with HMRC starting in May 2019, after the final deadline for taking corrective action had expired.

Thirdly, when MS agreed a payment plan with HMRC in respect of his liabilities under the APNs, HMRC assured him that the plan covered all his liabilities. He was never advised that this did not cover the FPNs and he relied on this advice.

In these circumstances, given our comments above regarding MS’s lack of understanding of his tax position, we do not consider it reasonable for him to have assumed following his conversations with RW that there would be no further liabilities in respect of the Relevant Tax Years.

We find that had MS properly read correspondence from HMRC he would have understood that paying any liabilities due under the APNs was entirely separate to any actions required and penalties that may be charged pursuant to the FNs. We further conclude that at the time of agreeing the payment plan, the FNPs had not yet been assessed, and MS had a further opportunity to avoid them if he had taken action following receipt of HMRC’s letter of 2 October 2018.

Fourthly, the delays and contradictory advice given to MS by HMRC, including the lengthy delay in providing the outcome of the review, should be taken into account in this case.

We assume the reference to contradictory advice relates to MS’s conversations with RW which we have addressed above. We consider that the lengthy delay of over 4 years between MS’s request for a review of HMRC’s decision and the review conclusion letter to be very unfortunate. However this has no bearing on whether MS acted reasonably in failing to take corrective action before 31 October 2018.

Finally, as a result of financial pressures caused by his tax debts MS has suffered with mental health issues. MS provided no evidence either in the bundles or at the hearing to demonstrate how any mental health issues may have contributed to his failure to take corrective action, and therefore whether he acted reasonably.

In his notice of appeal MS also stated that his case is similar to that of the successful appellant in Roy Baker v HMRC [2024] UKFTT 126 (TC).

We agree that there are similarities between the cases, however in Baker it was clear that the successful taxpayer had considered his position carefully and had decided, because of multiple errors made by HMRC and uncertainty over its position in relation to NICs, to rely on Montpelier’s advice and not to relinquish his right to appeal.

At paragraph [164] the Tribunal stated, “Objectively, the Tribunal considered that RB had no reason to doubt Montpelier and a number of reasons to doubt HMRC…”, and at [165], “In view of his raised consciousness and experience of the effect of errors in his daily working life, the Tribunal believed that this informed his decision-making process that given the multiple errors made by HMRC in dealing with him and the vacillating view of HMRC as against the advice of his advisers,..,made it objectively reasonable for RB in those circumstances to fail to relinquish his right to appeal and, therefore, the denied advantage and resulted in his failure to take corrective action.”

At [168] the Tribunal in Baker goes on to say, “RB confirmed that he deliberately decided not to take corrective action by the due date..”.

There are no similar HMRC errors in this case, although HMRC did change its position in relation to NICs. However, in contrast to the taxpayer in Baker, MS did not at any point deliberately decide not to take corrective action. While he was still taking advice from Montpelier he effectively acted as a post box, copying and pasting responses drafted by them to HMRC, including his letter of 19 November 2017 stating that he did not intend to take corrective action.

By the time of his final deadline to take corrective action, MS had ceased to take advice from Montpelier and had instead decided to trust HMRC, evidenced by his entering into an agreement to pay his liabilities under the APNs and reliance on the assurances of RW at that time that he had nothing further to pay. Despite this trust, MS failed to take any action following receipt of HMRC’s letter of 2 October 2018 granting him a final extension of time to take corrective action.

We therefore do not consider that the reasons for the success of the taxpayer in Baker are applicable here.

In conclusion, we find that MS has not demonstrated on balance that he acted reasonably in all the circumstances in not taking corrective action.

We therefore find that HMRC was correct to have assessed the FNPs.

We need to consider whether the FNPs should be upheld in the amount set out in HMRC’s review letter, reduced, or increased.

The initial calculation of the FNPs included the amount of denied income tax and NICs for the Relevant Tax Years, to which HMRC applied the maximum penalty percentage of 50%, giving no reduction for the quality of MS’s co-operation under s 210(1)(c) FA 2014. This resulted in a total amount due of £42,369.80.

In HMRC’s review conclusion letter, the denied advantage used to calculate the penalties was reduced to remove NICs following a decision of the First-tier Tribunal in October 2020. Following a change to HMRC policy to allow a 20% reduction to the relevant penalty range (between the maximum of 50% and the minimum of 10%) for co-operation under s 210(3)(a) FA 2014, the penalty amount was reduced from 50% to 42% of the denied advantage, giving a total amount due of £32,541.32.

S 210(3) FA 2014 sets out the circumstances in which a taxpayer will be treated as having co-operated with HMRC. It is established in the Upper Tribunal case of HMRC v Comtek Network Systems (UK) Ltd [2021] UKUT 81 (TCC) at [37] that “co-operation” should be given the specific and restrictive definition set out in s 210(3).

HMRC’s published guidance on reductions for co-operation in the case of an appeal is as follows:

HMRC say that the appeal was deemed settled by agreement after the FNPs were assessed, and therefore no further reductions are appropriate.

S 214(9) FA 2014 provides that on an appeal against a decision of HMRC as to the amount of an FNP payable by a taxpayer, the tribunal may affirm HMRC’s decision or substitute for that decision another decision that HMRC had power to make. We are not obliged to adhere to HMRC’s published guidance set out in paragraph [81] but we are bound by the conditions in s 210 FA 2014.

In his notice of appeal MS submitted that the reductions offered by HMRC are incorrectly applied and too low, and do not take into account relevant behaviours. He did not specify in the notice nor at the hearing how HMRC have incorrectly applied the reductions nor which behaviours he considers justify a further reduction. He also referenced mental health issues as a result of financial pressures caused by his tax debts but provided no further detail either in the notice or at the hearing.

We recognise that MS co-operated with HMRC enquiries to the extent that he was advised to do so by Montpelier until March 2018, and after then to the extent that he was able given his limited understanding of his tax affairs. We find however that MS did not at any point take any positive action to counteract the denied advantage as the appeal was deemed to be settled by agreement when he did not respond to HMRC’s letter of 30 July 2019. This means that MS took no action that could fall under ss 210(3)(b) to (e) FA 2014.

In its review conclusion HMRC proposed to give MS a 20% reduction in the relevant penalty range pursuant to s 210(3)(a) FA 2014. In light of the very limited assistance actually provided by MS to HMRC we find no basis to alter that figure.

For the reasons set out above, the appeal against HMRC’s decision to assess the FNPs is dismissed.

The FNPs were issued correctly, and MS’s failure to take corrective action was not reasonable in all the circumstances.

The amount of the FNPs is revised as follows:

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.