The Commissioners for HMRC v Root2 Tax Limited

A promoter’s duty under section 308(3) of the Finance Act 2004 arises when the promoter first becomes aware of a transaction forming part of the relevant notifiable arrangements. It does not arise afresh whenever another taxpayer implements the same scheme.

The identical wording in section 308(2)(b) supports a single triggering date. Section 308(5) concerns substantially similar proposals or overall schemes. It does not convert each implementation by a different taxpayer into a separate set of notifiable arrangements.

The resulting penalty exposure is time-limited. The six-year period runs from the penalty’s accrual after the prescribed notification period following that first awareness.

HMRC appealed from the First-tier Tribunal’s decision, [2021] UKFTT 0346 (TC), dismissing its application for a penalty against Root2 Tax Limited under the DOTAS regime.

An earlier First-tier Tribunal decision had held that the Alchemy Scheme, promoted by Root2, was notifiable. HMRC contended that Root2 incurred a fresh duty to notify each time a taxpayer implemented the scheme. Root2 contended that the duty arose only when it first became aware of a transaction forming part of the scheme.

The preliminary issue was whether HMRC’s application, brought on 22 May 2019, was within the six-year limit in section 103(4) of the Taxes Management Act 1970.

1. Appeal dismissed. The First-tier Tribunal correctly held that Root2’s duty under section 308(3) of the Finance Act 2004 arose on the first occasion when it became aware of a transaction forming part of the Alchemy Scheme. HMRC’s penalty application was therefore out of time.

2. Section 308(2) identifies one “relevant date”, being the earliest of the listed dates. The references in section 308(2)(za) and (a) plainly identify a single date. The identical phrase in section 308(2)(b), concerning first awareness of a transaction implementing a proposal, must likewise identify a single date. Construing it as multiple dates would make the statutory comparison of the earliest dates unworkable. The same wording in section 308(3) should have the same meaning.

3. The distinction in section 308(3) between notifiable arrangements and a transaction forming part of them was material. A taxpayer’s implementation of the Alchemy Scheme was an implementation of the same scheme and series of transactions. It was not a separate “set” of notifiable arrangements. Section 308(5) instead relieves a promoter where an overall scheme has a substantially similar variant which has already been notified.

4. This construction accords with the DOTAS purpose of giving HMRC early information about a tax-avoidance scheme, enabling allocation of a reference number and subsequent disclosure by scheme users. It does not make the penalty regime ineffective. Parliament chose a limitation period running from the promoter’s knowledge of a relevant transaction, rather than HMRC’s discovery of default.

5. R (oao Walapu) v HM Revenue & Customs and R (oao Graham and others) v HM Revenue & Customs did not determine the issue of construction. The Tribunal also held that HM Revenue & Customs v Premiere Picture Limited did not decide whether each implementation created a separate duty to notify. The principle of doubtful penalisation was, in any event, a further factor favouring the same construction.

• Upper Tribunal (Tax and Chancery Chamber): dismissed HMRC’s appeal and upheld the conclusion that the penalty application was time-barred.
• First-tier Tribunal: in [2021] UKFTT 0346 (TC), held that the section 308(3) duty arose on Root2’s first awareness of a transaction forming part of the Alchemy Scheme, and dismissed HMRC’s penalty application as out of time.
• First-tier Tribunal: in [2017] UKFTT 696 (TC), held that the Alchemy Scheme was notifiable arrangements and made an order under section 314A of the Finance Act 2004.