How Avoidance Can Cause HMRC Tax Penalty

HMRC tax avoidance can cause an expensive penalty so make sure if you are using such a scheme that you are satisfied you fully understand all the implications.

The case of Hannah & Anor v Revenue and Customs [2021] UKUT 22 (TCC) involved a Stamp Duty Land Tax scheme and may offer insight as to how avoidance of HMRC tax can cause a penalty to sprout for the taxpayer.

This was an appeal to the Upper Tax Tribunal against a discovery assessment and the HMRC tax penalties imposed by the First-Tier Tribunal (“FTT”).

The Tax Scheme

The scheme involved the purchase of a residential property by Mr Hannah and Mrs Hodgson. The contract purchase price was £765,000 by way of a 5% deposit and the balance to be discharged by granting an annuity.

An annuity was granted between exchange and completion. Before completion the sellers redeemed the annuity giving them £726,750.

The Stamp Duty Land Tax Return

The Stamp Duty Land Tax Return referred to the consideration being the 5% deposit and 12 times the annual annuity. This led to the proposition that no HMRC stamp duty land tax was due on the purchase. The return was submitted on 5 October 2011 when the annuity was granted and deemed to contain inaccuracies. HMRC tax penalties arose as a consequence. No return was submitted on 12 October 2011 being the completion date.

The Decision

The FTT concluded that:

The FTT’s findings of fact indicate that it was completely unrealistic to hold that Mr and Mrs Robinson were selling their house in return for a 5% deposit and an annuity of £383.84 per annum. The only realistic finding was that they were selling their house for £765,000. The grant of the annuity, the “assignment” of the annuity, the redemption of the annuity and the release of the annuity were artificial, uncommercial and pre-ordained steps which would be taken and then reversed prior to completion when Mr and Mrs Robinson would receive from the appellants the release of the deposit plus £726,500. The artificiality of the steps was demonstrated by the appellants’ inability to show that they had paid AD Alta for the novation of the annuity or that AD Alta had paid the encashment sum to Mr and Mrs Robinson.

The Upper Tax Tribunal (“UTT”) upheld this position.

The Discovery Assessment

A dispute arose as to whether or not the discovery had become stale and therefore if HMRC could raise a discovery assessment.

We were referred to the summary of the legal principles on that question in Beagles v HMRC [2018] UKUT 380 (TCC) (in relation to the materially similar provisions of s29 TMA 1970) at [100] which we have adapted so as to omit the commentary specific to that particular case and the case law citations:

(1) The test is applied by reference to a hypothetical HMRC officer who has the characteristics of an officer of general competence, knowledge or skill which include a reasonable knowledge and understanding of the law.

(2) The court or tribunal must identify the information that is treated by s29(6) as available to the hypothetical officer at the relevant time and determine whether on the basis of that information the hypothetical officer applying that level of knowledge and skill could not have been reasonably been expected to be aware of the insufficiency.

(3) Before the level of awareness is tested, the hypothetical officer is expected to apply his or her knowledge to the law to the facts disclosed to form a view as to whether or not an insufficiency exists.

(4) It is not necessary that the actual insufficiency is identified.

(5) But the officer is not expected to resolve every question of law particularly in complex cases. It may be the law is so complex that the officer could not reasonably have been expected to be aware of the insufficiency.

(6) The officer must be aware of the actual insufficiency from the information that is treated as available by s29(6) TMA 1970 (Paragraph 30(4) set out above is the SDLT analogue of this subsection). The information need not be sufficient to enable HMRC to prove its case but it must be more than would prompt the hypothetical officer to raise an enquiry.

(7) The level of awareness is a question of judgment not a particular standard of proof. The information made available must “justify” raising the additional assessment or be sufficient to enable HMRC to make a decision whether to raise an additional assessment.

The UTT upheld the discovery assessment.

The HMRC Tax Penalty

HMRC issued a penalty to Mr Hannah for £17,136 in relation to a deliberate but not concealed inaccuracy.

The stamp duty land tax return was issued at the point in which the annuity was granted but not at the point of completion.

The UTT considered the matter of the “deliberate” issue.

There were deemed inaccuracies in the 5 October 2011 return. The FTT was influenced it seems by the fact that Mr Hannah did not give evidence notwithstanding that he could give direct evidence on the matter. Although it seems that Mr Hannah had the right not to give evidence, the UTT appears to have said that this was a case in which a deliberate inaccuracy was at large and called for an explanation.

Notably, the UTT inferred that Mr Hannah had not given evidence because of the prospect of cross-examination about purchasing a property for £765,000 might have been tested in the context of it being believed that this did not result in a stamp duty land tax liability. In addition that explanations for the inaccuracy would not have supported his case. Accordingly, the penalty appeal was dismissed.

Key Judgment Extracts On the HMRC Tax Penalty

167. The appeal in relation to the penalty issue is an appeal against a finding of fact by the FTT. The FTT reached their conclusion by considering the weight to be given to a number of matters which were primary facts which they also found. Those findings included findings as to:
(1) the facts relating to the transaction;
(2) Mr Hannah’s detailed involvement in the facts of the transaction;
(3) Mr Hannah’s actual knowledge of the relevant legal provisions;
(4) Mr Hannah’s considerable experience of SDLT planning;
(5) the fact that the transaction in this case did not conform to the
arrangement considered in Mr Way’s Opinion which had been
obtained by Mr Hannah shortly before the transaction in this case;
(6) the inaccuracies in the return of 5 October 2011;
(7) the failure to deliver a return following the transaction which took place on 12 October 2011.

168.We did not understand Mr Hickey to submit that it was not open to the FTT to make its findings as to the primary facts in relation to the matters listed above. If he intended so to submit, we would not accept that submission. The FTT’s findings of those facts appeared to be plainly correct and, at the lowest, findings which it was open to it to make.
169. The FTT was influenced by the fact that Mr Hannah did not give evidence. We were told that Mr Hannah attended the hearing before the FTT. It was not suggested to the FTT that there was any reason why Mr Hannah could not give evidence. The position therefore was that the FTT was asked to make a finding of fact about Mr Hannah’s state of mind in circumstances where the only person who could give direct evidence on that subject was Mr Hannah himself and he was not prepared to give that evidence. This circumstance must have been particularly striking to the FTT where the FTT was listening to submissions as to what Mr Hannah must have thought, where it was being alleged that the inaccuracies in the return were deliberate on his part, where he was sitting in the hearing and where he declined to give any evidence.

170. If Mr Hannah had given evidence on this issue and if he had said that,
notwithstanding the inaccuracies, he had genuinely believed that he had managed to buy a property for £765,000 without incurring a liability to pay any SDLT, he would no doubt have had a lot of questions to answer. All of the deficiencies in his case which have been discussed on this appeal could have been put to him and he could have been asked whether in the light of all of the difficulties in his way, he genuinely believed that he was not liable to pay SDLT. If he had given evidence and if he had stated that that was indeed his genuine belief, it is possible that he might have been believed. But the fact remains, he did not give evidence on those matters and he did not give any reason why he had chosen not to give any evidence.

171. It is clearly established that a court or tribunal can take into account the fact that a relevant witness has not been called to give evidence on a relevant matter and can draw an inference that, if the witness had been called, the witness’s evidence would not support the case being advanced. Before a court or tribunal can draw such an inference, there must be a case to answer in relation to the finding which the court or tribunal is asked to make. There must be some admissible evidence, even comparatively weak evidence, which points in the direction of the suggested finding. If there is such evidence, then the court or tribunal is able to draw the inference, but is not obliged to do so. The court or tribunal can take into account any explanation given as to why a potential witness has not given evidence. Whether the court or tribunal does draw the
inference, and the weight which it gives to the failure to give evidence, is a matter for the court or tribunal charged with the task of finding the relevant facts.

172. The legal principles stated in [171] above are well known. The FTT did not refer to the case law which established those principles. At the hearing of the appeal, we specifically referred the parties to the caselaw which we considered established the relevant principles. In particular, we referred to R (ex p T C Coombs & Co) v Inland Revenue [1991] 2 AC 283, Wisniewski v Central Manchester Health Authority [1998] PIQR P324 at 340 and Prest v Petrodell Resources Ltd [2013] 2 AC 415, per Lord Sumption at [44]. The parties did not dispute the relevance of those principles in this case.

173. In view of the primary facts found by the FTT (apart from its conclusion as to whether the inaccuracies were deliberate) and in view of the inference that could be drawn from Mr Hannah’s failure to give evidence, we consider that it was open to the FTT to reach the conclusion that the inaccuracies in this case were indeed deliberate.

174. In accordance with the usual practice, we provided the parties with a draft of this decision and invited them to submit typing corrections and corrections of other obvious errors. The draft decision contained our discussion in relation to the penalty issue as set out at paragraphs [167] – [173] above. The solicitors for the appellants then provided us with a further submission to the effect that it was not open to the FTT or the Upper Tribunal to draw an adverse inference from the fact that Mr Hannah had not given evidence before the FTT.

175. This further submission was not an attempt to correct typing errors or other obvious errors. Indeed, at the hearing of the appeal, Mr Hickey did not submit that the principles we described in paragraph [172] above were not applicable and so the further submission is contrary to the stance taken by the appellant at the hearing of the appeal. Nonetheless, we will deal with the further submission which has been made. We did not feel it necessary to call on HMRC to deal with the further submission.

176. The further submission can be summarised as follows. The proceedings before the FTT concerned the imposition of a criminal penalty to which Article 6 of the European Convention on Human Rights and Fundamental Freedoms applied. Article 6(2) provides that everyone charged with a criminal offence shall be presumed innocent until proven guilty according to law. Thus, Mr Hannah had a right to remain silent at the hearing before the FTT. Further, he was entitled to assert the privilege against selfincrimination and could not be compelled to answer questions which were relevant to the imposition of the penalty. Mr Hannah’s solicitors cited John Murray v United Kingdom (1996) 22 EHRR 29 at [45]. It was then submitted that the result of the foregoing was that no adverse inference could be drawn from the fact that Mr Hannah had not given evidence before the FTT.

177. Although we did not call on HMRC to deal with this further submission, we will proceed on the basis that the proceedings before the FTT did engage Article 6(2), that Mr Hannah had a right to remain silent and could assert the privilege against selfincrimination. It is also clear that the burden is on HMRC to prove that the inaccuracy in this case was deliberate on the part of Mr Hannah. However, it is clearly established that neither Article 6(2) nor the privilege against self-incrimination prevents a court or a tribunal from drawing an adverse inference in an appropriate case where the facts call for an explanation from a party and the party does not provide it.

178.The authority cited by Mr Hannah’s solicitors does not support their further
submission but supports the opposite conclusion. In John Murray v United Kingdom, the European Court of Human Rights referred to Article 6, the right to remain silent and the privilege against self-incrimination and then said at [47]:
“47. On the one hand, it is self-evident that [it] is incompatible with the
immunities under consideration to base a conviction solely or mainly on the accused’s silence or on a refusal to answer questions or to give evidence himself. On the other hand, the Court deems it equally obvious that these immunities cannot and should not prevent that the accused’s silence, in situations which clearly call for an explanation from him, be taken into account in assessing the persuasiveness of the evidence adduced by the prosecution.”
And at [52], the Court said:
“…
The question in each particular case is whether the evidence adduced by the
prosecution is sufficiently strong to require an answer. The national court cannot conclude that the accused is guilty merely because he chooses to remain silent. It is only if the evidence against the accused “calls” for an explanation which the accused ought to be in a position to give that a failure to give an explanation
“may as a matter of common sense allow the drawing of an inference that there
is no explanation and that the accused is guilty”. Conversely if the case
presented by the prosecution had so little evidential value that it called for no
answer, a failure to provide one could not justify an inference of guilt. In sum,
it is only common sense inferences which the judge considers proper, in the
light of the evidence against the accused, that can be drawn under the Order.”

179. In this case, HMRC’s case as to the deliberate inaccuracy called for an explanation which Mr Hannah ought to have been in a position to give (if one were available). The inference was that Mr Hannah had not given an explanation because his explanation
and a testing of that explanation by cross-examination would not have supported his case. Accordingly, applying the principles identified in the authority cited by Mr Hannah’s solicitors, we reach the same conclusion as the conclusion we arrived at in paragraph [173] above.

180.We therefore reject the appellants’ ground of appeal in relation to the penalty.

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