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This morning the Supreme Court rejected HMRC’s appeal in R (on the application of Haworth) v Commissioners for Her Majesty’s Revenue & Customs  UKSC 25.
This was in relation to the Court of Appeal’s original decision to quash a Follower Notice issued by HMRC.
The decision clarifies the degree of certainty that HMRC must have regarding whether a relevant judicial ruling is relevant to a taxpayers affairs.
What are Follower Notices (“FNs”)?
FA 2014, s204 provides for HMRC to issue a FNs to taxpayers. The result is that the recipient is required to take ‘corrective action’ and surrender any particular ‘tax advantage’ that is asserted to arise from the relevant tax arrangements.
The stakes are high because a taxpayer who sticks to their guns and fails to take action might be liable to a penalty of up to 50% (of the disputed tax).
Further, s219 enables HMRC to issue an Accelerated Payment Notice (“APN”) requiring the taxpayer to pay the disputed tax to HMRC in advance of the substantive issues being determined by a Court.
Conditions to issue a Follower Notice
I have previously considered the requirements for HMRC to issue a FN in the following article . As such, I will not set this out again.
However, important to the Haworth case, is that “HMRC must be of the opinion that there is a ‘judicial ruling’ which is relevant to the chosen arrangements”.
A ‘judicial ruling’ is a ruling of the court or tribunal on one or more issues and is ‘relevant to the chosen arrangements’ if:
Background to the case
I do not propose going in to the facts of the arrangements in to which Mr Haworth entered. Other than the fact that Mr Haworth had entered in to transactions similar to the ‘Round the World Scheme’ (“ROWS”), perhaps oddly, the precise facts are not relevant to this article.
The seminal case in respect of ROWS is Smallwood v HMRC . Here, the Court of Appeal held that a trust – with a trustee resident in Mauritius – was actually managed and controlled from the UK. As such, the key provisions of the relevant double tax treaty did not apply and the scheme failed to provide the tax advantages advertised.
As such, following the decision in Smallwood decision, HMRC issued FNs and APNs to taxpayers who they believed had entered into similar transactions. This included Mr Haworth.
As there is no statutory right of appeal against either a FN or APN it was left to Mr Haworth to challenge HMRC’s decision by way of judicial review in the High Court.
The key issue was whether the “principles laid down” “or reasoning given” in the Smallwood case would deny the asserted advantage if applied to Mr Haworth’s case.
The High Court judgment
Mr Haworth was initially unsuccessful in the High Court (“HC”).
The HC found that the Smallwood ruling contained both principles and reasoning capable of application to similar arrangements implemented by other taxpayers.
Further, the judge held Cranston that the follower notice was not defective due to any irregularities in its form and/or the manner in which it was issued.
So not much luck, really.
The Court of Appeal judgment
Mr Haworth appealed his decision to the Court of Appeal (“CoA”) where he had greater success.
There were two key principles to be determined:
Principles laid down etc
Here, the CoA agreed with the HC in that ‘reasoning given’ was an alternative to ‘principles laid down’ and extended beyond legal points.
As such, the COA found in favour of HMRC on this particular issue.
What standard of certainty does ‘would’ require?
It was HMRC’s view that the requirement here is that it is ‘more likely than’ that the principles / reasoning would deny the tax advantage being asserted.
However, Mr Haworth argued that HMRC must be of the opinion that the principles / reasoning would deny the asserted advantage. In other words, HMRC must be of the opinion that there is ‘no real prospect of success.’ This would clearly require more certainty from HMRC.
The Court of Appeal agreed with Mr Haworth on this issue:
“[HMRC’s] construction of section 205(3)(b) would allow follower notices to be given in a surprisingly wide range of cases. There would seem, for example, to be no bar on such a notice being given if HMRC believed there was a 51% chance of a high-level principle found in a decided case (say, the Ramsay approach applied recently in UBS AG v Revenue and Customs Commissioners  UKSC 13,  1 WLR 1005) being held to apply in a quite different factual situation. On this basis, it would theoretically be possible for HMRC to use follower notices routinely in relation to disputes pending before the FTT. After all, HMRC’s “Litigation and Settlement Strategy” explains in paragraph 16 that they “will not usually persist with a tax dispute unless it potentially secures the best practicable return for the Exchequer and HMRC has a case which it believes would be successful in litigation.”
The CoA went further and pointed out that the onerous impications that might result from a FN (ie the potential imposition of a 50% penalty) supported this view:
“I can see no indication that follower notices were meant to be available to HMRC otherwise than in relatively exceptional circumstances … Parliament might be expected to have intended such a regime to be applicable only in a limited class of cases“.
The Court concluded that there must be a high degree of certainty that any appeal by the taxpayer in relation to the arrangements would fail. However, the CoA held that HMRC has proceeded on the basis that mere likelihood was sufficient. It did not ask itself the correct question which is whether the ‘principles laid down or reasoning given’ [in Smallwood] would deny Mr Haworth the his claimed tax advantage.
As such, this amounted to a misdirection on the law by HMRC and the FN and APN should be quashed.
Today’s Supreme Court decision
In today’s judgement, the Supreme Court (“SC”) agreed with the CoA’s decision that the standard of HMRC’s opinion turns on the word “would”.
They did not accept HMRC’s arguments that the CoA were wrong to place a ‘judicial gloss’ on the statutory wording. Instead, the SC agreed that it was relevant to take into account the severe consequences for the taxpayer following receipt of such a notice and “there can be no doubt that te threat of the substantial penalty is intended to discourage a taxpayer from pursuing [their] appeal”.
As such, the SC agreed that 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. Only then can they be said to have formed the opinion that the relevant ruling “would” deny the advantage.
The SC agreed with the CoA that HMRC’s opinion did not satisfy this threshold.
Of course, this decision is extremely helpful in clarifying the requirements around which HMRC might issue a FN.
HMRC will clearly find the decision unhelpful and will need to seek to ensure that their opinions are more robust when it comes to issuing such notices in the future.
If you or your clients have any queries about this article, Follower Notices or APNS, or tax matters in general then please get in touch.
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