Comtek – Counteraction steps taken after Follower Notice deadline can reduce penalty

In HMRC v Comtek Network Systems (UK) Ltd [2021] UKUT 81, the Upper Tribunal (UT) has held that a taxpayer's failure to take corrective action required by a Follower Notice (FN) was not 'reasonable in all the circumstances', but the taxpayer's subsequent actions and payment of the relevant amounts amounted to co-operation for the purpose of reducing the penalty which had been imposed on it.

Background

Comtek Network Systems (UK) Ltd (CNS) had entered into a tax planning arrangement, intending to save £22,000 of SDLT.  It appealed a determination which HMRC had issued that the arrangement was ineffective and the SDLT was due. CNS did not notify its appeal to the First-tier Tribunal (FTT). 

Following the FTT's decision in Crest Nicholson (Waiscott) and others v HMRC [2017] UKFTT 0136, that a similar arrangement was ineffective, HMRC issued a FN and an Accelerated Payment Notice (APN) under sections 204 and 219, Finance Act 2014 (FA 2014), respectively.  

CNS agreed with HMRC that it would pay the SDLT in issue in two instalments.  However, it did not reach this agreement within the time specified in the FN and nor, HMRC claimed, did it take the 'necessary corrective action' required within the time specified.  HMRC therefore imposed a penalty under section 208, FA 2014. CNS appealed to the FTT on the grounds that it was 'reasonable  in all the circumstances' for it not to have taken the necessary corrective action in respect of the denied advantage.  

The FTT allowed CNS's appeal. The FTT concluded that CNS's directors had initially decided either to ignore the FN or not to take corrective action.  However, they had come to the belief, reasonably, in light of the correspondence, that by entering into an agreement with HMRC to pay the SDLT owing in two instalments, all outstanding disputes relating to the arrangement had been settled (albeit that this belief was not reached until after the deadline for taking corrective action).  The FTT cancelled the penalty on the ground that it had been 'reasonable in all the circumstances' for CNS to take no corrective action.  

HMRC appealed to the UT.

UT decision

The appeal was allowed.

The UT held that the FTT had to consider whether it was 'reasonable in all the circumstances' for CNS not to take corrective action, adopting a natural-language approach to interpretation.  This, it held, required the FTT to consider why CNS had chosen not to take action.  It required the FTT to take account of the fact that the appropriate action had to be taken by the deadline.  It required the FTT to consider the structure and purpose of the provisions imposing the penalty.  In light of this, the UT concluded that the only possible answer was that it was not 'reasonable in all the circumstances' for CNS to take no corrective action.  A penalty was therefore appropriate.

The UT also agreed with HMRC that the FTT had made an error of law in determining what conduct of CNS could be taken into account in reducing the penalty – this was limited to 'co-operation' as specifically and restrictively defined in section 210(3), FA 2014.

The UT exercised its power under section 12, Tribunals, Courts and Enforcement Act 2007, to set aside the FTT's decision and remake it using what it had determined to be the correct test.  In its view, some penalty was payable.  Although CNS had genuinely believed that agreeing (and making) the instalment payments with HMRC had constituted settlement of all the relevant matters, the UT was of the view that such belief was unreasonable in light of certain telephone conversations which had taken place with HMRC.  

The UT agreed that there had been a degree of cooperation by CNS and a genuine attempt to effect some, albeit late, counteraction of the tax advantage obtained. CNS had assisted HMRC with quantifying the tax advantage and had paid the sums demanded.  The UT therefore reduced the penalty to 30% of the denied advantage.   

Comment

HMRC had argued in this case that a taxpayer's counteraction of an intended tax advantage would only operate to reduce the amount of a penalty if the taxpayer had complied fully with section 208(5)(b), FA 2014, before the deadline. In other words, it had taken 'all necessary action to enter into an agreement with HMRC (in writing) for the purpose of relinquishing the denied advantage'.  The UT did not accept this contention. It held, drawing support from the wording of section 210(2) (which requires the 'nature' and 'extent' of a counteraction to be considered – suggesting that non-total counteraction still falls to be taken into account) that 'counteraction' was a broader concept which had to be considered purposively.  The aim of the FN regime was to discourage taxpayers from continuing tax disputes that had been resolved in principle by other decided cases.  Full 'counteraction' occurred if a taxpayer gave up an appeal and informed HMRC that it had done so.  The later it did this, the less credit would be given against any penalty.  In the view of the UT, mere payment of the sums in dispute (or of an amount referred to in an APN) did not amount to full counteraction, as this was nothing more than fulfilling a statutory obligation.

This decision provides helpful guidance on the concept of 'counteraction' of a tax advantage and on conduct that is 'reasonable in all the circumstances' for the purposes of the penalty regime applicable to the FN regime.   

The decision can be viewed here.