Courts rein in HMRC Follower Notice powers

The issue

Since 2014 Follower Notices (FNs) have been part of HMRC’s artillery for collecting cash in respect of what they see as dodgy tax schemes. The broad idea is simple. A case is decided in court based on a particular set of facts and then HMRC has the power to use those facts to get other tax payers (usually other tax scheme users) to pay up. If a tax payer receives an FN then he or she will get penalties of up to 50% if they do not take corrective action to pay the tax. The aim here was to disincentivise a taxpayer from dragging an unwinnable case through various appeal processes and delaying the payment of tax (or in other words using HMRC as providers of a low interest loan).

In order to give an FN HMRC must be “of the opinion that” “the principles laid down, or reasoning given, in [a judicial ruling] would, if applied to the chosen arrangements, deny the asserted advantage or part of that advantage” (ss 204(4) and 205(3)(b) FA 2014). The case of R (Haworth) v HMRC [2021] UKSC 25 further explores the circumstances where HMRC can give FNs.

Outcome of the Haworth case

HMRC shot themselves in the foot by appealing to the Supreme Court in this case because it then added even more restrictions than those provided by the Court of Appeal! The criteria for issuing an FN is now extremely tight and HMRC “must form the opinion that there is no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage”.

The Haworth case involved a scheme whereby a trust needed to become Mauritius resident to access various tax advantages. HMRC used a case that found against the tax payer (the Smallwood case) as a basis of issuing an FN. The shortcoming in HMRC’s approach was that the Smallwood case was very fact specific and the conclusion was that the trust had failed to become Mauritian resident – although the scheme would probably have worked if it had become Mauritian resident. The main thing to come out of this case was that HMRC cannot validly issue FNs unless the circumstances of the taxpayer are heavily aligned to the facts of the case and there are few distinguishing features or fact specific points.

Forbes Dawson view

This is a welcome restriction to legislation which was being used in a draconian way in certain circumstances. We have seen cases where HMRC issues the threat of an FN in order to get the taxpayer to settle. In appropriate cases it is worth resisting such an approach by pointing out distinctions from the case being used by HMRC. The Haworth case should now also be cited. The Haworth case is also relevant where FN penalties are being appealed because the same ‘opinion standard’ by HMRC is required for the penalty to hold. Tax payers who have received FN penalties should be seeking to appeal them where appropriate, comfortable in the knowledge that the tide of the courts seems to be on their side.

 

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