Follower notices and the Finance Bill
The Finance Act 2014 gives HMRC significant new powers which are likely to have the effect of increasing litigation and which are certain to cause anxiety and potentially hardship to many taxpayers, says Neal Todd of law firm BLP.
Follower notices may be issued to taxpayers requiring them to correct their tax returns where there is a ‘judicial ruling’ which, in HMRC’s opinion, renders the tax planning carried out by the taxpayer ineffective. If taxpayers do not take the necessary corrective action and give up the desired tax advantage they will become subject to an immediate penalty of up to 50% of the tax in dispute (20% in the case of partnerships) as the price of continuing to fight against HMRC.
Accelerated payment notices may be issued to taxpayers requiring them to pay the amount of tax that is determined by a designated HMRC officer “to the best of that officer’s information and belief” to be the understated tax.
An accelerated payment notice can be served in conjunction with a follower notice or on a standalone basis if either:
(i) the taxpayer has taken part in a transaction which has been notified to HMRC under the Disclosure of Tax Avoidance Scheme (DOTAS) rules
(ii) a counteraction notice has been issued under the general anti-abuse rule (GAAR) and at least two members of the GAAR advisory panel have confirmed that entering into the tax arrangements was not a reasonable course of action
Taxpayers who receive follower notices and/or accelerated payments notices are unlikely to take them lying down.
The immediate response of many taxpayers will be to make representations to HMRC that the notice in question has been inappropriately served.
So, for example, a taxpayer who receives a follower notice may wish to dispute whether a decided case really does have the effect that HMRC say that it does. Since all decisions inevitably turn to one degree or another on their particular facts, there would seem to be plenty of scope to raise arguments of this nature (just because one film partnership has been found not to be trading, for example, does not mean that all film partnerships lack the quality of trading ventures).
HMRC has a statutory duty to consider any representations made by the taxpayer against service of these notices.
If, however, HMRC confirms the notice, a taxpayer has no statutory right to appeal to the court against service of an accelerated payment notice. A taxpayer can, however, appeal against the imposition of a penalty served under the follower notice provisions to either the first tier or upper tribunal, at least so long as the taxpayer moves rapidly (a taxpayer has 30 days in which to make an appeal).
One of the statutory grounds of appeal against service of a follower notice is that “it was reasonable in all the circumstances for [the taxpayer] not to have taken the necessary corrective action in respect of the denied advantage”.
There will be much speculation as to what exactly this means, but taxpayers are likely to argue that the requirement to pay a penalty as the price of going to court would be a breach of their right to a fair trial (enshrined in Article 6 of the European Convention on Human Rights) so that this, in itself, makes it reasonable not to take any corrective action.
While historically taxpayers have not had much success in arguing against the imposition of taxation on the grounds of human rights, this might be the exception that proves the rule. This is especially so as, on its face, the law does not provide for a refund of the penalty even if the taxpayer goes on and wins the case in court.
By contrast with the position on penalties, the only grounds on which a taxpayer in receipt of an accelerated payments notice can challenge that notice in court will be to make an application for judicial review - but for the taxpayer to succeed the court will need to be persuaded that HMRC has acted unreasonably. This will be a high threshold to establish. One circumstance in which the taxpayer might succeed is if HMRC were to demand payment of a sum which obviously had no relationship at all with the amount of tax at stake - but it is likely to be much harder to obtain judicial review simply because HMRC’s estimate of the tax at stake is based on a ‘worst case’ scenario from the taxpayer’s point of view.
For this reason concerned taxpayers - and there are already many concerned taxpayers and the number is bound to increase if, as expected, there is a wave of notices later this year - are likely to be faced with the unpalatable choice of either settling their dispute on whatever terms can be agreed with HMRC or serving a closure notice so as to expedite the process of a court hearing.
For many, incurring the expense and risk of litigation will be the only real alternative.
Neal Todd is an international tax practitioner at law firm Berwin Leighton Paisner (BLP).