Taxpayers who used the tax avoidance scheme known as Working Wheels challenged the follower notices which demand they should pay the tax avoided.
This was a tax avoidance scheme prompted by NT Advisors, which was used by a large number of taxpayers, including a former BBC radio presenter. The scheme was described as highly artificial by the tax tribunal, which struck it down at the first hurdle on 20 February 2014 (Flanagan & Ors v HMRC [TC03314]). The Upper Tribunal refused permission for the taxpayers to appeal against the decision on 17 September 2014, so that is the date on which the ruling became final.
Once the tax scheme had been defeated by a final judicial ruling, HMRC could issue “follower notices” to all the taxpayers who used the scheme who were not already a party to the original court case. The follower notices demand that each taxpayer change his own tax return to pay the tax avoided by the scheme.
If the taxpayer does not take corrective action to change his tax return he can be issued with a penalty. The taxpayer can’t appeal against the imposition of a follower notice, but he can challenge whether the notice has been issued correctly, and hence whether the penalty is due. This case (TC05860) concerning penalties for a failure to take corrective action following the issue of follower notices relating to “Working Wheels”.
The rules state that a follower notice may not be given after the end of the period of 12 months beginning with the later of the day on which the judicial ruling was made, and the day the return or claim was received by HMRC or (as the case may be) the day the tax appeal was made (FA 2014 s. 204(6)).
In this case, HMRC issued what it considered to be a follower notice on 25 February 2015. The time limit for issuing a follower notice was 17 September 2015. Therefore, the notice was issued within the time limit. This was in spite of the fact that follower notice referred to an incorrect date of 16 July 2016.
The taxpayer argued that the notice did not properly explain the effect of FA 2014 s. 207 which provides the conditions under which taxpayers can make representations to HMRC about the follower notice. The taxpayer also contended that the notice failed to set out the date on which the decision in Flanagan became a final ruling and that was a further reason why the effect of s. 207 was not explained.
The legislation does contain a remedy for defects in notices and documents issued by HMRC in s. 114 TMA 1970. The taxpayer claimed that s. 114 could not cure the defects in the notice as the defects were fundamental and gross.
Block HMRC’s involvement
The taxpayer applied to the tribunal under rule 8 of the tribunal rules for a direction barring HMRC from participation in the appeal, on the grounds that there was no reasonable prospect of HMRC’s case succeeding. This was on the basis that the follower notice issued contained a gross and fundamental error with the result that the notice did not meet the legislative requirement for a follower notice.
HMRC’s counter argument was that although the follower notice stated an incorrect date, the notice satisfied the legislative requirements of FA 2014. Furthermore, HMRC argued that the tribunal does not have the jurisdiction to consider the question of the validity of the follower notice. There is no right of appeal to the tribunal in respect of a follower notice. There is only a right to appeal to the tribunal against the issue of a penalty.
Section 214 FA 2014 sets out the process for appealing against the issue of a penalty for failure to take corrective action in response to a follower notice and it states that the grounds for appeal “include in particular” similar grounds to the representations that can be made to HMRC concerning the follower notice itself. The judge considered that the use of the words “include in particular” means that it is not an exhaustive list of grounds for appeal.
The tribunal refused the application to bar HMRC from participation in the appeal. Although this was not a full consideration of the case, the judge deemed that HMRC had a reasonable prospect of establishing (assuming that the tribunal has the jurisdiction to determine the matter) that the notices issued were follower notices for the purposes of FA 2014. The judge also considered that given the follower notice legislation is relatively new, and that HMRC has issued a large number of follower notices, the scope of the tribunal’s jurisdiction in respect of penalty appeals should be tested.
About Lindsey Wicks
Freelance tax writer