Root2 Tax Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 September 2021 |
| Neutral Citation | [2021] UKFTT 346 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 346 (TC)
Judge Greg Sinfield
Ms Aparna Nathan QC and Ms Anna Greenley, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the applicants
Mr Hartley Foster, counsel, appeared for the respondent
Preliminary issue – Application for penalty for failure to notify under the disclosure of tax avoidance scheme (DOTAS) provisions – Whether penalty application made outside time limit – Whether duty to notify only when promoter first became aware of any transaction forming part of scheme of notifiable arrangements or each time promoter becomes aware of new implementation of that scheme – Held to be the former – TMA 1970, s. 98C, 100C and 103(4) and FA 2004, s. 308(3).
The First-tier Tribunal (FTT) allowed a promoter's appeal against HMRC's application for a penalty in respect of a failure to notify HMRC of a scheme under the disclosure of tax avoidance scheme (DOTAS) rules. The application was made out of time because a DOTAS notification is only required on the first occasion a scheme is implemented and not, as HMRC submitted, every time a scheme is used.
In Root2 Tax Ltd [2017] TC 06115, the FTT had held that arrangements known as the Alchemy scheme, in respect of which the respondent (Root2) was a promoter, were notifiable arrangements for the purposes of the DOTAS rules. Accordingly Root2 was required to notify the arrangements to HMRC within five days after first becoming aware of any transaction forming part of the notifiable arrangements. Root2 became aware of transactions forming part of Alchemy scheme arrangements that were undertaken by various individuals between April 2011 and August 2017. Root2 made three separate disclosures in relation to the Alchemy scheme. HMRC did not accept that the notifications satisfied the requirements.
On 22 May 2019, HMRC made an application to the FTT for a penalty to be imposed on Root2 under TMA 1970, s. 98C for failing to provide prescribed information in relation to the Alchemy scheme within the required time limit.
Root2 appealed against the penalty application on three grounds. In Root2 Tax Ltd [2021] TC 08254, the FTT directed that the first ground should be dealt with as a preliminary issue. This issue was whether the application made by HMRC under TMA 1970, s. 100C was time barred, on the basis that it had been made more than two years after the expiry of the relevant time limit in TMA 1970, s. 103(4). With the relevant time limit being “at any time within six years after the date on which the penalty was incurred or began to be incurred”.
The only issue that had to be decided was whether Root2 was required under FA 2004, s. 308(3) to provide HMRC with prescribed information within five days of the date of:
- the first occasion on which it became aware of any transaction forming part of the Alchemy scheme (in which case the application was out of time); or
- each occasion on which it became aware of a transaction forming part of any implementation of the Alchemy scheme (in which case the application was in time).
Judge Sinfield found that it was clear from the High Court's decision in Walapu v R & C Commrs [2016] BTC 14 that the effect of FA 2004, s. 308(3) and (5), is that the obligation to notify arises in respect of the scheme and not the individual implementations of its arrangements. Further, variations in a scheme which do not change the analysis for tax purposes are immaterial and do not create a new obligation to notify. Therefore, the FTT was bound by the proposition that a tax avoidance scheme which is implemented on several occasions with only immaterial changes need only be notified once.
The FTT concluded that Root2 was required to provide HMRC with prescribed information on the first occasion on which it became aware of any transaction forming part of the Alchemy scheme, and as that was before 16 May 2013, the penalty application was made out of time and therefore Root2's appeal was allowed.
This case provides useful clarification about the application of DOTAS penalties.
[1] The Disclosure of Tax Avoidance Schemes (“DOTAS”) provisions are contained in Part 7 of the Finance Act 2004 (“FA 2004”). The provisions require those who promote or use tax avoidance schemes to notify the Applicants (“HMRC”) and provide certain information about the schemes.
[2] In Root2 Tax Ltd [2017] TC 06115 (the “DOTAS Decision”), the First-tier Tribunal (“FTT”) held that certain arrangements, known as the “Alchemy scheme”, in respect of which the Respondent (“Root2”) was a promoter, were “notifiable arrangements” as defined by section 306(1) FA 2004. As a consequence, Root2 was required by an order under section 314A FA 2004 issued on 11 September 2017 (the “DOTAS Order”) to notify the arrangements to HMRC.
[3] Under section 308(3) FA 2004, a promoter in relation to notifiable arrangements must provide HMRC with prescribed information within the prescribed period after the date on which he first becomes aware of any transaction forming part of the notifiable arrangements. Regulation 5(5) of the Tax Avoidance Schemes (Information) Regulations 2012 (the “Information Regulations”) provides that the prescribed period is five days. Sections 98C(1)(a) and (2)(a) FA 2004 provide that a person who fails to comply with section 308(1) and (3) FA 2004 shall be liable to a penalty of £600 per day initially, rising to £5,000 a day (see section 98C(2B) TMA).
[4] Between April 2011 and August 2017, Root2 became aware of transactions forming part of Alchemy scheme arrangements that were undertaken by various individuals. The effect of the DOTAS Decision was that Root2 became liable to a penalty if it failed to provide prescribed information within five days of first becoming aware of any transaction forming part of the Alchemy scheme whenever that had occurred.
[5] There is no dispute that Root2 made certain disclosures in relation to the Alchemy scheme on three occasions, namely on 21 September 2017, 13 October 2017 and, finally, on 5 April 2019. HMRC considered that none of the notifications satisfied the requirements of section 308(3) FA 2004. On 22 May 2019, HMRC made an application (the “Penalty Application”) to the FTT for a penalty under section 98C of the Taxes Management Act 1970 (“TMA”) to be imposed on Root2 for failing to provide prescribed information in relation to the Alchemy scheme within the prescribed period.
[6] Root2 appeals against the Penalty Application on three grounds, namely:
- the Penalty Application is time barred, having been made more than two years after the expiry of the relevant time limit in section 103(4) TMA (the Limitation Issue);
- if the Penalty Application is in time, Root2 had a reasonable excuse for not notifying the Alchemy scheme (prior to the DOTAS Decision); and
- if Root 2 did not have a reasonable excuse, it provided sufficient notification of the Alchemy scheme to HMRC on 21 September 2017.
[7] This decision is not concerned with the second and third grounds of appeal because, in a decision released on 3 February 2021, I made a direction under rule 5(3)(e) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“FTT Rules”) that the Limitation Issue should be dealt with as a preliminary issue in the appeal at a hearing by video. The preliminary issue was defined as follows:
Whether the application made by the Applicants, under section 100C of the Taxes Management Act 1970 (“TMA”), for a penalty to be imposed by the Tribunal on the Respondent, which application was filed and served by the Applicants on 22 May 2019, was commenced in time, with the parties agreeing that the relevant time limit is that prescribed by section 103(4) TMA, namely “at any time within six years after the date on which the penalty was incurred or began to be incurred.”
[8] Root2 first became liable to a penalty (subject to grounds 2 and 3 of its appeal) on the sixth day following the date on which it first became aware of any transaction forming part of the notifiable arrangements. In so far as material, section 103(4) TMA provides that “proceedings for … a penalty may be commenced before the tribunal … at any time within six years after the date on which the penalty was incurred or began to be incurred.” The Penalty Application was made by HMRC on 22 May 2019. It follows that if Root 2 first became aware of any transaction forming part of the notifiable arrangements before 16 May 2013, the Penalty Application was out of time. Conversely, if Root2 first became aware of the notifiable arrangements on or after 16 May 2013, the Penalty Application was made in time.
[9] In the Penalty Application, HMRC contend that Root2 first became aware of “any transaction forming part of the notifiable arrangements” on or shortly before 20 June 2013 when Ms Rosalynn Scott entered into arrangements to implement the Alchemy scheme. In their response to the Penalty Application, Root2 asserts that it first became aware of a transaction forming part of notifiable arrangements, ie the Alchemy scheme, on 15 April 2011 when another user, Mr Hayward, first entered into arrangements to implement the Alchemy scheme. I do not need to determine when Root2 first became aware of a transaction forming part of the Alchemy scheme because, for the purposes of the preliminary hearing, the parties agree that Root2 became aware of a transaction forming part of the Alchemy scheme both before and after 21 May 2013 (although, as stated above, the relevant date is 16 May 2013).
[10] The only issue in preliminary hearing is whether Root2 was required by section 308(3) FA 2004 to provide HMRC with prescribed information within five days of the date of:
- the first occasion on which it became aware of any transaction forming part of the Alchemy scheme; or
- each occasion on which it became aware of a transaction forming part of any implementation of the Alchemy scheme.
[11] HMRC...
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R & C Commissioners v Root2 Tax Ltd
...(“HMRC”) against a decision of the First-tier Tribunal dated 22 September 2021 (“the FTT Decision”). The FTT Decision has reference [2021] TC 08280. The appeal concerns the Disclosure of Tax Avoidance Schemes (“DOTAS”) provisions which are contained in Part 7 Finance Act 2004 (“FA 2004”). T......