HMRC misses penalty

In Portview Fit-Out Ltd v HMRC [2021] UKFTT 447, the First-tier Tribunal (FTT) allowed the taxpayer's appeal against a penalty imposed by HMRC, concluding that the taxpayer's conduct was neither careless nor deliberate.

Background 

Portview Fit-Out Ltd (Portview) had participated (over five 'tranches') in an employee benefit trust (EBT) arrangement.  Under the arrangements, Portview set aside funds to reward four key employees.  It engaged a Jersey-based HR consultancy to review the individuals' performance and recommend how to allocate those funds.  The review's findings would form the basis of recommendations made by the consultancy in a remuneration report, which would invariably include a recommendation that the individuals be rewarded by Portview settling an amount that the consultancy considered would reward and incentivise the individuals.  The consultancy would invoice Portview for a sum that included the recommended remuneration and its fee; upon the invoice being paid, the appropriate amounts would be settled into the relevant sub-trusts of the EBT that related to the relevant individual.  Portview claimed a corporation tax deduction for the payments made to the consultancy.

HMRC concluded that the arrangements did not achieve the tax result sought, and raised determinations in respect of PAYE and NICs.  Portview and HMRC entered into a settlement agreement on 31 March 2017, that expressly excluded penalties from its scope.  

Notwithstanding the settlement agreement, on 31 March 2018, HMRC issued Portview with a penalty in the sum of £666,563.12, on the basis that there had been inaccuracies in its 2010/11 P35 employer end-of-year return (which contained the fifth tranche of the EBT transactions) and that the inaccuracies were the result of deliberate behaviour on the part of Portview.  HMRC did not issue any penalty in respect of the four earlier tranches of EBT transactions.

Portview appealed the penalty to the FTT.

Relevant legislation

Paragraphs 1 and 3, Schedule 24, Finance Act 2007, provide, so far as relevant, that a penalty is payable where:

• a document given to HMRC by a person contains an inaccuracy which amounts to, or leads to, an understatement of a liability to tax, a false or inflated statement of a loss, or a false or inflated claim to repayment of tax; and

• that inaccuracy is 'careless' (due to failure by the person submitting the return to take reasonable care); 'deliberate but not concealed' or 'deliberate and concealed'.

FTT decision

The appeal was allowed.

In relation to the fifth tranche, HMRC argued that Portview had deviated from the steps of the scheme and had predetermined the amount to be included in the consultant's report and in so doing, departed from the steps set out as part of the arrangement.  This meant that Portview had either known, or was careless, as to whether the arrangement was being implemented correctly and therefore as to whether the relevant return contained an inaccuracy leading to a loss of tax. 

Portview offered evidence to the FTT to the effect that while an appropriate split had been suggested to the consultant, the allocation of the funds had ultimately been at the consultant's (and then the EBT trustees') discretion.  The result of this was that there had been no material deviation from the advice that Portview had received.  It argued that there had been no inaccuracy, and no deliberate or careless conduct on its part.  It had taken advice in relation to the arrangement and implemented the arrangement materially in accordance with that advice.  HMRC had disavowed any allegation of sham, conceded that there was no evidence that the consultant was other than an independent third party and accepted, in relation to the fifth tranche, that the trustees were independent and had a discretion as to the allocation between sub-trusts.  In the circumstances, HMRC could not prove that Portview knew the consultant not to be acting independently, and therefore that the arrangement was not being properly implemented and that the P35 was therefore inaccurate.

The FTT agreed with the decision in Auxilium Project Management v HMRC [2016] UKFTT 249 (TC), that the question of whether an inaccuracy was careless or deliberate was "not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate.  It is a question of the knowledge and intention of the particular taxpayer at the time".  Noting that the burden of proof was on HMRC, the FTT concluded that HMRC had not established careless or deliberate behaviour giving rise to an inaccuracy in the P35.

The FTT also discussed the issue of whether there had been an inaccuracy in the return at all.  Applying the Upper Tribunal's decision in HMRC v Raymond Tooth [2018] UKUT 38 (TCC), it commented (although this was not necessary for it to reach its decision) that despite the existence of the settlement agreement, Portview could argue that there had been no inaccuracy in the return as a subsequent decision that the position taken by the taxpayer in a return was wrong did not mean that the return was inaccurate at the time that the return  was submitted.  

Comment 

This decision is notable perhaps, not so much for the result, but rather for the following:

1. Following a successful application to the FTT by HMRC, the appeal hearing was held in private; no reference is made to this in the decision, and it is not immediately clear what HMRC hoped to gain from the hearing being in private (especially in light of a decision that discusses the arguments and evidence in detail being handed down as a public document).
2. HMRC's litigator had to be specifically encouraged by the FTT to put HMRC's case (that the HR consultant was not independent and the figures had been pre-determined) to the taxpayer in the face of evidence that might otherwise have gone unchallenged.  In the context of what appears to have been an ambitious decision by HMRC to impose penalties, this is especially surprising.
3. The FTT referred to the Upper Tribunal's decision in Tooth in making its remarks regarding the nature of an inaccuracy, rather than that of the rather more nuanced decision of the Court of Appeal in the same case, where the majority adopted a rather more technical reading of the legislation pursuant to which an inaccuracy was held still to exist even if corrected elsewhere in the same document. 

The decision can be viewed here.