In Avonside Roofing Ltd v HMRC [2021] UKFTT 158 (TC), the First-tier Tribunal (FTT) set aside an information notice issued under paragraph 1, Schedule 36, Finance Act 2008 (the Notice), on the basis that the information and documents requested by HMRC were not reasonably required for the purpose of checking the recipient's tax position.

Background

Avonside Roofing Limited (Avonside) implemented certain tax planning arrangements in the tax year 2009/10, which involved an employer contribution to establish an employee benefit trust (the Arrangements). The same type of arrangement was the subject of the Rangers litigation (see RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland) [2017] UKSC 45).

HMRC became aware that Avonside had participated in the Arrangements as a result of information obtained from a third party. HMRC’s position was that the amounts paid to the settlor of the employee benefit trust should have been included in Avonside's PAYE return. HMRC issued a determination to Avonside under regulation 80, Income Tax (Pay as You Earn) Regulations 2003 (the Regulation 80 Determination), on the last day of the extended time period that applies under section 36, Taxes Management Act 1970, if a loss of tax is brought about carelessly. The appeal against the Regulation 80 Determination was ongoing and was not part of these proceedings.

HMRC issued the Notice to Avonside on the basis that the information and documents sought by the Notice were required so that HMRC could determine if a penalty was due. Following an appeal by Avonside to HMRC, HMRC upheld its decision to issue the Notice and Avonside appealed to the FTT.

FTT decision

The appeal was allowed.

HMRC had the burden of proof to show that the Notice met the conditions contained in Schedule 36 for its issue. HMRC had to establish that the information required to be produced was ‘reasonably required’ by HMRC for the purpose of checking Avonside’s tax position. The FTT accepted that the Notice was given for the purpose of checking whether a penalty may be payable and that the FTT should consider whether the information was ‘reasonably required’ in the context of the relevant legislation in Schedule 24, Finance Act 2007 (Schedule 24), pursuant to which any penalty would be imposed. Under paragraph 1, Schedule 24, a penalty was payable if it was established that Avonside’s PAYE return contained an inaccuracy which amounted to an understatement of its liability to tax which was due to its failure to take reasonable care.

In the view of the FTT, HMRC had not established that the information requested by the Notice was reasonably required for the purpose of checking Avonside’s position as regards a penalty issued under Schedule 24, on the basis that an inaccuracy in the PAYE return was due to a failure on Avonside’s part to take reasonable care. The explanation given by the relevant HMRC officer for requiring the information related to whether Avonside was careless in its implementation of the Arrangements as opposed to whether the inaccuracy in Avonside’s PAYE return was due to a failure on its part to take reasonable care. The officer confirmed that the possible carelessness in implementing the Arrangements that he had identified did not affect the tax point or the under-deduction of PAYE when the Arrangements were implemented.

The FTT therefore allowed Avonside's appeal and the Notice was set aside.

Comment

In arriving at its decision, the FTT referred to Derrin Brothers Properties Ltd v HMRC [2016] EWCA Civ 15 and Gold Nuts Ltd HMRC [2017] UKFTT 84 (TC) and noted that a request for information contained in a notice issued under paragraph 1, Schedule 36, Finance Act 2008, must be “genuinely directed to the purpose for which the notice may be given". Such a notice may contain an element of uncertainty or speculation on HMRC’s part, but it does not allow HMRC "to fish for possible issues".

HMRC had submitted that as it was considering charging penalties against the company for the lost PAYE it needed the information to establish the behaviour of Avonside's directors and the appeal proceeded on this basis. However, the difficulty for HMRC was that it should already have been able to demonstrate that Avonside was responsible for a careless loss of tax in order for it to have made the extended time limit assessment. It was not enough for HMRC to refer to careless behaviour in the abstract when seeking to charge a penalty. HMRC must show that an inaccuracy in a return was the result of careless behaviour and it must establish a direct causal link.

The decision can be viewed here.