Follower Notices: A win For The Taxpayer
Important judicial clarity has been given in the context of the use of follower notices by HM Revenue & Customs. In a win for the taxpayer, the Supreme Court dismissed HMRC’s appeal and the follower notice was to be quashed.
What is a follower notice?
A follower notice is a legal request by HMRC to a taxpayer who has used a tax avoidance scheme, to remove the tax advantage claimed. Follower notices can only be issued when the scheme has been defeated in someone else’s litigation, ie the courts have ruled in favour of HMRC in a similar case.
The issue of follower notices arises where there is disagreement between the taxpayer and HMRC on the legal interpretation of tax law. The recipient of a notice can either accept the interpretation claimed by HMRC or continue to dispute it. However, the latter risks increased – and substantial – financial penalties as well as being sent an accelerated payment notice.
This places the taxpayer in the unenviable position of potentially having its rights of recourse to the courts severely hampered by the threat of significant financial penalties.
Haworth
In this case1, a trust had been established to benefit the taxpayer and his family and to avoid CGT on the disposal of company shares held by the trust. The taxpayer acted on advice that the Jersey trustees should resign in favour of trustees resident in Mauritius. This arrangement was designed to allow the taxpayer to benefit from a double taxation treaty between the UK and Mauritius.
Under s205(2)(b) Finance Act 2014 it can be send by HMRC in circumstances where the principles laid down or the reasoning given in a relevant judicial ruling “would, if applied to the chosen arrangements, deny the asserted advantage or a part of that advantage”.
At issue for the Supreme Court was the meaning of ‘would’ in s205(3)(b). HMRC contended that this would be wide enough include “likely”. The court disagreed and ruled that an opinion merely that it is ‘likely’ was insufficient.
Its reasoning in a nutshell was that there was no doubt the threat of the substantial penalty is intended firmly to discourage a taxpayer from pursuing its appeal. It said: “Where a statutory power authorises an intrusion upon the right of access to the courts, it must be interpreted as authorising only such a degree of intrusion as is reasonably necessary to fulfil the objective of the provision in question.”
Applying that principle, the use of the word ‘would’ in the statute requires HMRC to form the opinion that there is no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage. Only then can HMRC “be said to have formed the opinion that the relevant ruling ‘would’ deny the advantage.
What does this mean?
This would have been a blow to HMRC but the ruling provides important clarity for the taxpayer and should increase confidence for those who genuinely have a reasonable prospect of contesting a follower notice.
It might also pave the way for some taxpayers to contest follower notice previously sent out to them. In light of the ruling, HMRC issued a statement saying that it is already considering the judgment and the extent to which any customers who have received follower notice could be affected. It also said it would contact any such customers “as soon as possible”.
1 Haworth v HMRC [2021] UKSC 25
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