Avoiding penalties: Portview Fit-Out

If a tax avoidance scheme which you have implemented fails to achieve its objective, you will, in the normal way of things, have to pay the tax, together with interest on late payment.

But what about penalties? Penalties are exigible if there is an inaccuracy in your return (or other document) which leads to a loss of tax and which is attributable to your carelessness or your deliberate failure to render an accurate return (or other document).

Historically, if you have taken advice that a scheme works when properly implemented and you have followed that advice to the letter, it’s unlikely that you will be considered to have been guilty of careless or deliberate failure. But that ‘to the letter’ is important. In parallel with technical analysis of the scheme, HMRC will routinely examine its detailed implementation; if it considers that there are deficiencies, penalties may beckon.

Such was the issue in Portview Fit-Out Ltd v HMRC [2021] UKFTT 447 (TC). For the scheme to have had any chance of working as intended, it was crucial that the extent to which individual employees benefitted under the arrangements was determined not by the employer, but by an independent company established as part of the scheme. HMRC accepted that that had been the case for the first four iterations of the scheme and that no penalty was due in respect of those iterations. But it thought the evidence showed that for a fifth iteration, the employer had itself made the determination.

Happily for Portview Fit-Out Ltd, the tribunal disagreed. The employer had indeed indicated what it would like the outcome of the independent report to be: but there was no evidence that it had gone so far as to determine it. There was no evidence that the independent company had not independently formed its own view on the matter.

There are two further points.

First, the ‘escape route’ from penalties that hitherto existed if you could show that you relied upon professional advice was severely cut back in 2017. Nowadays, if you file a return or other document on the basis that avoidance arrangements work and it subsequently turns out that they don’t, you will be treated as having been (at least) careless unless, very broadly, you can show that you relied on advice given to you personally by a genuinely independent and competent adviser who took account of your personal circumstances. Relying on an assurance in a QC’s favourable opinion purchased by the scheme promoters won’t cut the mustard.

Second, most interestingly, the Portview case cites comment from the Upper Tribunal decision in Tooth ([2018] UKUT 38 (TCC)) on the meaning of ‘inaccuracy’ in a tax return: comment which has, perhaps, been overshadowed by the more widely-reported aspect of Tooth as being all about whether a discovery can become ‘stale’.

In Tooth, the Upper Tribunal had this to say (at para 52):

‘In our judgment, where a taxpayer adopts a position in his return which, albeit controversial, cannot (at the time of the return) be said to be wrong and takes the trouble to identify the position he has taken (and the fact that it is controversial) in that return [he] cannot be guilty of an inaccuracy when, subsequently, it is established that the position taken by the taxpayer is wrong.’

The relevance of this is, of course, that if a return is not ‘inaccurate’ at the time at which it is filed, there can be no penalty: whether you have been (or are deemed to have been) careless is irrelevant.

Given that this rather undermines the effect of the first point noted above, we would expect HMRC to push back with some enthusiasm against the Upper Tribunal’s observations (or at least to seek to limit their application to the context of ‘discovery’ in which they were made). Meanwhile, however, they are there to be cited when occasion arises.