Pitt v R & C Commissioners
Jurisdiction | UK Non-devolved |
Judgment Date | 22 January 2024 |
Neutral Citation | [2024] UKUT 21 (TCC) |
Court | Upper Tribunal (Tax and Chancery Chamber) |
Judge Swami Raghavan, Judge Jennifer Dean
Upper Tribunal (Tax and Chancery Chamber)
Income tax – Penalty under s. 208 Finance Act 2014 issued after issue of follower notice in relation to arrangements said to give rise to loss on relevant discounted securities(Sch. 13 Finance Act 1996) – Whether FTT erred in its approach to holding judicial ruling (Audley v HMRC) was relevant to taxpayer's arrangements because it had regard to post-Ramsay analysis facts rather than primary facts – No – Appeal dismissed.
In Pitt v R & C Commrs, the Upper Tribunal (UT) upheld the decision of the First Tier Tribunal (FTT) in Pitt confirming the penalty under FA 2014, s. 208, following the failure of Mr Pitt (the appellant) to amend his self-assessment return in accordance with the ‘follower notice’ (FN) issued by HMRC, having correctly decided the judicial ruling of Audley was relevant to the FN.
The appellant entered into arrangements involving the purchase and disposal of loan notes which were ‘relevant discounted securities’ under FA 1996, Sch. 13. The appellant transferred assets to two wholly owned companies in return for the issue of the loan notes, paying £1m. Because of the particular terms of the loan notes, low redemption price and long duration of 30 years, their market value was significantly lower. The appellant then assigned £750,000 in principal amount of the loan notes to two trusts which were connected parties, triggering the market value rule under FA 1996, Sch. 13, para. 8(2)(a). The market value was £55,316 creating a loss of £694,684.
HMRC disputed that these transactions were effective in generating a tax loss and issued a closure notice accordingly for the tax year 1998/99. HMRC subsequently imposed a penalty under FA 2014, s. 208, after the appellant failed to take corrective action in response to a follower notice (FN) that specified the case of Audley as being a relevant judicial ruling. The FTT in Pitt dismissed the appellant’s appeal against the closure notice and heard the appeal against the penalty alongside, and found there were no material differences between the appellant’s case and that of the relevant judicial case of Audley, where the taxpayer had also deliberately purported to subscribe at an over value for a relevant discount security, then disposing of the security to a connected party shortly after.
With the permission of the UT, the appellant appealed against the FTT’s decision on the penalty appeal, on the grounds the FTT should have compared only the primary facts of each case as opposed to evaluative conclusions following the Ramsay principle approach, adopted in Audley. Once post Ramsay principle facts were disregarded, the appellant argued the fact patterns were sufficiently different that principles and reasons in Audley would not apply to him. The UT considered the task required by the legislation was to extract the principles and reasoning of the judicial ruling and see whether it would, if applied to the current case, deny the hoped for tax advantage. The UT concluded there was no error of approach in the FTT not considering a distinction between pre and post Ramsay principle facts, and dismissed the appeal.
In deciding whether a judicial ruling is relevant for the purpose of a FN, this case highlights that the legislation focuses on the principles laid down and reasoning, and are not confined to ‘route map’ type cases, that is identical schemes or those where the ruling has been expressed to apply to other variants.
In this case, the UT also rejected the assertion that the FTT did not dismiss the closure notice appeal purely on the grounds of the principles in Audley, ruling that a closure notice appeal does not specifically impose the question of relevance to a particular judicial ruling.
Comment by Andy Richens, Senior Tax Writer, Croner-i Ltd.
Michael Avient, Counsel, instructed by Price Bailey LLP appeared for the appellant
Nicholas Macklam, Counsel, instructed by the General Counsel and Solicitor to His Majesty's Revenue and Customs appeared for the respondents
[1] This appeal concerns a penalty imposed by HMRC on Mr Pitt, the appellant, pursuant to the follower notice regime in the Finance Act 2014 (“FA 2014”).
[2] In broad terms that works as follows. Where a taxpayer has filed their tax return on the basis they get a tax advantage as a result of tax arrangements they used, but where HMRC consider the arrangements do not have that effect in the light of a “relevant” judicial ruling, HMRC can issue a “follower notice” specifying that judicial ruling. A judicial ruling is defined as “relevant” if the “principles laid down, or reasons given” in it would, if applied to the arrangements, deny the tax advantage asserted by the taxpayer. The taxpayer then has the chance to amend their return to counteract the tax advantage, but if they do not, they become liable to a penalty (which they can appeal to the First-tier Tribunal (Tax Chamber) (“FTT”). As is the case here, the grounds of appeal against the penalty may dispute the judicial ruling is “relevant” (in the sense described above) to the arrangements.
[3] In R (oao Haworth) v R & C Commrs[2021] BTC 20, the Supreme Court accepted the purpose of the follower notice regime and penalty was:
… to deter further litigation on points already decided by a court or tribunal and to reduce the administrative and judicial resources needed to deal with such unmeritorious claims.
[4] Mr Pitt entered into arrangements involving the acquisition and disposal of loan notes which were “relevant discounted securities” for the purposes of Schedule 13 Finance Act 1996 (“FA 1996”). HMRC disputed Mr Pitt's view that those transactions were effective in generating a loss of £694,684 (and therefore tax relief of £278,557.60 arising from that loss in relation to Mr Pitt's other income) under paragraph 2 of Schedule 13 FA 1996 in their closure notice of 3 October 2018 for the tax year 1998/1999. In its decision of 19 July 2022, the FTT dismissed Mr Pitt's appeal against the closure notice.
[5] The appeal before us relates to Mr Pitt's appeal to the FTT against the penalty of £83,547 HMRC imposed on Mr Pitt on 2 July 2018 after he failed to take corrective action in response to a follower notice HMRC issued on him on 16 June 2016. The FTT heard that appeal alongside the closure notice and dealt with it in the same decision, (Pitt[2022] TC 08544“the FTT Decision”). HMRC's follower notice had specified the case of Audley[2011] TC 01084 as a judicial ruling that was “relevant”. The FTT agreed with HMRC that Audley was “relevant”, in other words that the principles and reasoning in Audley would, if applied to Mr Pitt's arrangements, deny the tax advantage (the tax relief) Mr Pitt sought. Rejecting Mr Pitt's arguments to the contrary, the FTT found there were no material differences between Mr Pitt's case and the taxpayer's case in Audley.
[6] With the permission of the Upper Tribunal, Mr Pitt appeals against the FTT's rejection of his penalty appeal. He argues the FTT erred in its legal approach, in particular, on the basis that the FTT ought to have compared only the primary facts of each case as opposed to the evaluative conclusions and inferences that the FTT had found once it had, in accordance with the approach commonly referred to as the Ramsay approach, construed the legislation purposively and, in particular, viewed the facts “realistically”.
[7] The relevant provisions in FA 2014 of the follower notice and penalty regime of relevance are as follows.
[8] Section 204 provides for the circumstances in which HMRC may give a follower notice to a taxpayer. Various conditions must be met, including (at s204(4)) Condition C that “HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements”. Section 204(3) explains such arrangements arise where a return is made by the taxpayer “on the basis that a particular tax advantage (“the asserted advantage”) results from the particular arrangements. Under s201(2)(a)“tax advantage” includes relief or increased relief from tax.”
[9] Section 205 defines a judicial ruling (there is no dispute here that Audley is such a ruling) and when such a ruling is “relevant” to the chosen arrangements, including, crucially, at s205(3)(b) if:
the principles laid down, or the reasoning given, in the ruling would, if applied to the chosen arrangements, deny the asserted advantage or a part of that advantage …
[10] Section 208 provides for a penalty if corrective action (here amending the return) is not taken at the relevant time in the amount (under s209) of 50% (as the legislation stood at the time) of the value of the denied advantage, which amount may, under s 210 be reduced to a minimum of 10% where the taxpayer co-operates with HMRC.
[11] Section 214 enables the taxpayer to appeal HMRC's decision that a penalty is payable to the FTT. Section 214(3)(b) mentions the grounds may include “that the judicial ruling specified in the notice is not one which is relevant to the chosen arrangements”.
[12] The interpretation of the provisions on when a judicial ruling specified in a follower notice is “relevant” was considered by the Supreme Court in Haworth...
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