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In the case of HMRC v Root2 Tax Ltd, the Upper Tribunal (UT) agreed with Root2 Tax Ltd (R), a promoter of tax schemes, stating that the DOTAS rules required promoters to notify HMRC only on the first occasion a tax avoidance scheme was implemented, not on each subsequent occasion. The UT rejected HMRC’s appeal, reinforcing the importance of checking that the correct time limits have been adhered to when dealing with penalties.
Root2 Tax Ltd was involved in promoting a tax avoidance scheme called “Alchemy.” HMRC argued that the scheme should have been notified under the Disclosure of Tax Avoidance Scheme (DOTAS) rules, and a penalty should be assessed for non-notification. However, the First-tier Tribunal (FTT) rejected the validity of the penalty, and HMRC appealed to the Upper Tribunal (UT).
Under the DOTAS regime, arrangements with certain hallmarks of tax avoidance must be notified to HMRC. A reference number is then given, which scheme users must disclose on their tax returns. This allows HMRC to identify returns that require further investigation. If arrangements are not notified, penalties can apply. There is a six-year time limit for notifying arrangements, which starts from the “relevant date” as defined by s.308(2) Finance Act 2004.
Root2 argued that the relevant date was the first time any related transaction took place (2011), meaning the six-year time limit had expired. HMRC, on the other hand, argued that the interpretation should be a requirement to notify each time there was a transaction, not just the first.
The UT agreed with Root2, stating that the legislation referred to the first time the promoter acquired knowledge of a transaction rather than the date HMRC became aware of the non-compliance. However, the UT’s decision highlights that HMRC’s interpretation of the legislation is only sometimes infallible, and it is crucial to ensure the correct time limits have been followed when dealing with penalties.
The case may be more relevant to promoters rather than clients but serves as a helpful reminder that HMRC’s interpretation of the legislation can be questioned, and correct adherence to time limits is essential.
If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.