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Tribunal decision in recent Clavis Herald case is timely reminder that HMRC must play by the rules

Tribunal decision in recent Clavis Herald case is timely reminder that HMRC must play by the rules

The recent decision in Avonside Roofing Ltd v HMRC has raised questions over HMRC’s strategy in its approach to enquiries into a tax planning arrangement promoted by Clavis Tax Solutions 10-15 years ago. The appeal heard by the Tribunal concerned a formal information notice issued by HMRC to Avonside Roofing Ltd but the decision will have ramifications for many other appeals. Some context is needed to understand the significance of the decision.


The planning was used by some employers up to the tax year 2010/11 until the introduction of the disguised remuneration anti-avoidance legislation. It involved an employer making payments to an external remuneration advisor, who applied the funds it received for the benefits of key employees, typically by establishing a special purpose trust for the benefit of an employee. The employer took a tax deduction for the amounts paid but did not operate PAYE.

HMRC opened a criminal investigation into the planning and in the process obtained copies of correspondence and the transaction documents for all or most employers that used the planning.  Those who used the scheme were viewed by HMRC as having carelessly or deliberately failed to operate PAYE on the payments they made to the remuneration adviser. HMRC wrote to all users of the planning, informed them of the criminal enquiry, raised the prospect of further enquiries and penalties for the user and invited them to settle, which many did. It is worth pausing to consider the impact of such a letter and the reaction it will have caused. It seems unlikely there was a realistic prospect of HMRC commencing criminal proceedings against the vast majority of scheme users but it was inevitable the recipients of HMRC’s letter will have made a connection between the terms “criminal” and HMRC’s threat of penalties and possible enquiries for them. Whether intentional or not, it was an intimidating opening gambit that made many fearful of a criminal prosecution.

Significantly, HMRC looked to protect its position, where possible, by the issue of Regulation 80 determinations to assess the disputed PAYE. However, by this stage in HMRC’s enquiries, the majority of the tax years involved were beyond the normal time limit for making an assessment. HMRC had to rely instead on being able to make an extended time limit assessment by arguing it had discovered a loss of tax caused by careless behaviour. As in the Avonside Roofing Ltd case, we saw many Regulation 80 determinations being issued on 5 April 2016 for the tax year 2009/10; the very last day of the extended time limit period.

The time limit is crucial to HMRC being able to assess the disputed PAYE. In addition, HMRC’s policy of treating all Clavis Herald users in this way has implications for how it collected information and made assessments, which were highlighted by the Tribunal.

Avonside Roofing Ltd v HMRC

Avonside Roofing Ltd entered into the same Clavis Herald planning in 2009/10 and subsequently experienced the treatment from HMRC set out above:

  • HMRC issued Regulation 80 determinations against the company for PAYE income tax on 5 April 2016.
  • HMRC wrote to the company and invited the company to settle the tax.
  • In subsequent meetings, HMRC made the assertion that it had seen documents that showed the directors to have behaved carelessly. It requested further information and documents.
  • The requests were followed up with a formal information notice requiring information and documents to be produced under the threat of financial penalties.
  • The company appealed against the information notice and that appeal was heard by the Tribunal rather than its appeal against the Regulation 80 determination.

The legal problems for HMRC

The first problem for HMRC was how to explain the purpose of the information notice. The legislation allows HMRC to issue a formal information notice for documents and information that HMRC reasonably requires providing it meets certain conditions; broadly where information is needed to check a person’s tax position. This posed a difficulty for HMRC because it had made the Regulation 80 determination under the extended time limit rules on the grounds that it had discovered an amount of tax that had not been assessed.

Having made a “discovery” and raised an assessment, HMRC should be able to defend an appeal against that assessment. It cannot then start enquiries to find the evidence needed to prove its discovery; the law does not permit HMRC to make a “protective” discovery assessment with the intention of proving it later.

HMRC submitted that it was also considering charging penalties against the company for the lost PAYE and so needed the information to establish the behaviour of the company’s directors. The Tribunal judge allowed the appeal to proceed on this basis. The difficulty for HMRC is that it should already have been able to demonstrate that the company was responsible for a careless loss of tax in order for it to have made the extended time limit assessment. The same behaviour is needed for both a valid Regulation 80 determination and for a penalty.

HMRC made the case that it had identified issues that caused it to suspect careless behaviour. HMRC’s assertions were based on third party documents, presumably obtained as part of its criminal enquiry, but those documents were not disclosed:

  • HMRC had doubts about how the remuneration advisor carried out its review work because there did not appear to be direct contact between them and the company.
  • HMRC queried whether or when some pre-signed documents were considered by the directors of the company.
  • There were emails that suggested that an allocation to a sub-trust had been decided in advance and so the outcome of the arrangement was pre-determined.
  • HMRC also wanted to see any tax advice given to the company and argued that any divergence from the advice would be careless.
  • HMRC also argued that the company should not have relied on any advice from Clavis or the introducer agent because they were not independent advisors.

The Tribunal judge reviewed previous penalty cases and pointed to an established principle. It was not enough to talk about 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; it must show a direct causal link. The arguments HMRC was making were about general behaviour in relation to the transactions; HMRC did not show how that the behaviour caused an inaccuracy in a return.

This highlights a problem for HMRC’s policy towards Clavis Herald users. It may have seen cases where PAYE returns relating to Clavis Herald arrangements involved careless, or even deliberate behaviour, but those cases cannot be used to characterise the behaviour of all other Clavis Herald users by extension. HMRC’s justification for doing so has been based on aspects of the transactions it dislikes such as pre-signed documents, reliance on tax advice from the promoter, etc. but these are examples of behaviour in the abstract that are not linked to the submission of an incorrect return.

The Tribunal judge referred to the Glasgow Rangers case and the Morse review of the 2019 loan charge in her decision. She noted the conclusion of both that it was generally accepted, when the Clavis Herald and similar planning was used, that a contribution to an EBT did not trigger an obligation to deduct PAYE.

When HMRC was examined on this point, the Revenue Officer responsible for the enquiry acknowledged that the prevailing thought at the time the planning was used was that until a contribution to an EBT became an emolument, a company could not have a corporation tax deduction i.e. it was not required to operate PAYE. The judge made the point that the officer’s comment was consistent with HMRC being able to make an assessment of corporation tax and so the information it was requesting was not required for checking whether an inaccuracy in a PAYE return was due to a failure to take reasonable care.

HMRC appears to have fallen into the trap of viewing the past through the prism of the present day. The Supreme Court decided the Glasgow Rangers case in July 2017 and determined that PAYE should be operated in arrangements such as the Clavis Herald planning but that was not the law when the planning was adopted. HMRC has joined the current tax analysis that PAYE should have been operated with generic behaviours it characterises as careless to argue that there has been a careless loss of tax but that analysis does not stand up to scrutiny both in terms of timing and cause and effect.

The appeal decision highlights two fundamental problems for HMRC. Firstly, it should not be asking for documents and information after making a discovery assessment in order to gather the evidence to support the suggested discovery. This will be a significant issue should HMRC litigate appeals against Regulation 80 determinations. In how many appeals, where hundreds of determinations were churned out on the same day, will HMRC be able to prove that it had examined the individual circumstances of each case to make a “discovery” based on specific facts it had established by that date? Secondly and more importantly, did HMRC assess the correct tax? It is too late to now assess and litigate any corporation tax possibly lost as a result of the planning.

Contact us if we can help you with an HMRC enquiry or any of the issues covered in this article.