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Supreme Court: Follower notice not valid

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Heather Self and Fiona Fernie explain how a taxpayer managed to overturn a follower notice at the highest court and why his battle with HMRC is far from over. 

1st Oct 2021
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In the case of R (on the application of Haworth) v HMRC [2021] UKSC 25 Mr Haworth succeeded in his appeal against HMRC’s issue of a follower notice. However, this case was a judicial review of the decision making process – the substantive case concerning Haworth’s appeal against his tax liability has yet to be heard.

How it started

More than 20 years ago, in the tax year 2000/01, Haworth entered into a tax planning scheme known as a Round the World scheme. The aim of the scheme was to avoid capital gains tax on a sale of assets in a trust, by exporting the residence of a trust to a low tax jurisdiction with a suitable Double Tax Agreement (DTA) with the UK, and then moving the trust back to the UK after the assets had been sold.

The scheme would succeed provided the trust was resident in the low tax jurisdiction at the time of the sale, and provided the gain was protected from UK tax by the terms of the DTA.

A similar scheme was considered by the Courts in the Smallwood case (Smallwood v HMRC [2010] EWCA Civ 778), where it was decided the place of effective management of the trust was in the UK, so the scheme failed.  Not surprisingly, HMRC thought that the same analysis should apply to Haworth, and so it issued him with a follower notice.

What are follower notices?

Follower notices were introduced by Finance Act 2014. Their aim is to dissuade taxpayers from pursuing “hopeless” cases, by imposing an enhanced penalty of up to 50% (30% for penalties assessed from 10 June 2021) of the tax, if the taxpayer does not concede their case. The notices therefore act as a significant disincentive for a taxpayer to pursue a case to appeal before the tax tribunal.

For HMRC, follower notices can save significant time and cost, by reducing the number of separate cases which need to be taken to the tribunal relating to the same scheme.

A follower notice can only be issued if HMRC satisfy a number of conditions. In particular, they must be of the opinion that there is a “relevant” judicial ruling, which is defined as one where:

the principles laid down, or reasoning given, in the ruling would, if applied to the chosen arrangements, deny the asserted advantage or a part of that advantage.” (FA 2014 s 205(3)(b)).

Supreme Court decision

The decision of the Supreme Court makes it clear that the critical word in this definition is “would”. 

The Smallwood decision was fact-specific, and it was not sufficient for HMRC to assume that an analysis of the facts in Haworth would lead to the same answer. HMRC can only issue a follower notice where they have formed the opinion that “there is no scope for a reasonable person to disagree” that the earlier ruling applies; it is not enough if their opinion is merely that it is likely to do so.  Where a case depends on the facts, this will be difficult to establish, but where the main point is a legal one, HMRC will still be able to meet the relevant test in many cases.

What does this mean for other taxpayers? 

Where a follower notice has been issued, there may be more scope for a challenge to be mounted, particularly if the case is heavily fact-dependent. However, if a binding settlement has already been reached, it is likely to be difficult to unravel that.

Nonetheless this may encourage taxpayers, particularly where there is a large group who have undertaken a specific scheme, to continue to pursue their own cases in the hope that they can differentiate them from those which have already been decided by demonstrating that the fact pattern is not precisely the same.

As for Haworth, he will be able to have his day in court to argue the underlying case – more than 20 years after the transactions were undertaken, which may make it difficult for either side to establish the facts clearly before the first tier tribunal. It remains to be seen whether the tax planning will, ultimately, be successful.

Replies (3)

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By Justin Bryant
01st Oct 2021 12:12

Unless there's >£1m at stake, this is likely to be academic in practice due to the JR costs and the strict 3 month JR claims deadline (and HMRC know that and so are unlikely to back down for small FN/APN JR claims, but it's of course worth asking nonetheless in the JR pre-action protocol).

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By AndyC555
02nd Oct 2021 15:03

Whilst there's no right of appeal against a Follower Notice, you can make 'representations' to HMRC if you think (inter alia) the ruling specified in the notice is not relevant to your case.

A client of mine was issued a follower notice based on the 'Rangers' football case. HMRC's letter honestly had the appearance of a 'cut and paste' job. I think my letter asking for a review had about three pages setting out the many reasons why the two cases had nothing at all in common. To give them their due, HMRC's solicitors office agreed with me and the Follower Notice was withdrawn.

Not only was there "scope for a reasonable person to disagree" that the earlier ruling applied, you'd have had to have been demented to think it did.

It's also worth looking at whether the Follower Notice meets the legal requirements of issue. S206 FA 2014 requires that the FN '"explain the effects of sections 206 to 210" (inter alia how the denied advantage should be calculated and how a reduction of the penalty might be achieved). HMRC's letter had merely referred to those sections but hadn't 'explained' anything.

Bleedin' amateurs.

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Replying to AndyC555:
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By Justin Bryant
04th Oct 2021 10:17

Yes, I have (surprisingly) had similar success re reps on Rangers based FNs/APNs. My comment above was of course directed at the position where reps are unsuccessful and your are stuck with JR as your only hope.

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