In HMRC v Comtek Network Systems (UK) Ltd  UT 008, the Upper Tribunal (UT) allowed HMRC’s appeal against the First Tier Tribunal (FTT) decision allowing an appeal against Follower Notice (FN) penalties.
HMRC can issue a Follower Notice (FN) where they consider that there is a final judicial ruling that is determinative of a dispute between HMRC and a taxpayer in respect of a tax advantage.
Where an FN is issued, the taxpayer must take corrective action and accept that they do not have a claim for a tax advantage. HMRC can charge penalties of up to 50% of the tax in dispute if corrective action is not taken by a 90-day deadline.
The taxpayer can only resist a penalty if it can establish that it was 'reasonable in all the circumstances' not to take the necessary corrective action.
- In 2011, Comtek Network Systems (UK) Ltd (Comtek) used a Stamp Duty Land Tax (SDLT) avoidance scheme which resulted in a tax saving of £22,200.
- HMRC raised a determination in July 2015.
- As no appeal was lodged to the FTT decision in Crest Nicholson (Waiscott) and others v HMRC  UKFTT 0136(TC), HMRC issued Accelerated Payment Notices and FNs to Comtek in September 2017.
- HMRC made further contact with Comtek by way of letter and phone prior to the deadline of 3 January 2018.
- Comtek did not take corrective action by the deadline.
- HMRC subsequently issued correspondence threatening penalties of 50% of the outstanding tax on 15 January 2018.
- Comtek spoke to HMRC on the phone on 22 January 2018 and agreed to pay the SDLT in two instalments and subsequently made the payments.
- HMRC wrote to Comtek on 14 June 2018 issuing a penalty notice for 50% of the tax due as it had failed to take the required action to the FN.
- Comtek appealed to the FTT.
The FTT allowed the appeal finding:
- Comtek had either decided to ignore the FN or decided that it was not going to respond.
- HMRC’s communication throughout the process was unclear and inconsistent.
- The question of whether it was 'reasonable in all circumstances' for a person to fail to take corrective action had two elements:
- To establish 'all the circumstances' relevant to the failure to take corrective action.
- To judge whether in those circumstances the taxpayer’s behaviour was reasonable.
- Comtek had relied on the payment agreement with HMRC including any penalty and having brought matters to a close it had acted 'reasonably in all circumstances'.
HMRC appealed to the UT who allowed the appeal finding:
- The FTT should have considered why Comtek chose not to take corrective action.
- The question of whether it was 'reasonable in all the circumstances' not to take corrective action operates as a defence if no action is taken by a relevant deadline, not afterwards.
- The FTT needed to take into account the purpose of the provisions that were designed to ensure that taxpayers were penalised if they failed to take action by a deadline unless they acted 'reasonably in all the circumstances”' in ignoring it.
- Comtek ignoring the FN was self-evidently an unreasonable course of action.
- Deciding the FN should not be filled out could have been a reasonable course of action depending on the reasoning Comtek gave. Comtek gave no justification.
- The only conclusion the FTT could have made was that Comtek acted unreasonably in missing the 3 January deadline.
- The level of the penalty was reduced to 30% of the tax due as a result of Comtek’s assistance in countering the tax advantage as:
- It had agreed and honoured a payment plan for the SDLT liability.
- Comtek had the belief that it had compromised its outstanding disputes with HMRC.
Useful guides on this topic
Accelerated Payments & Follower Notices
What action is required? What are the penalties for non-compliance? Is there a right to appeal?
SDLT: Amending returns
How do I amend an SDLT return?