Numerous cases involving marketed tax avoidance arrangements are still making their way through the courts and tribunals. Where HMRC has won those cases and all avenues of appeal on the part of the affected taxpayers have either been exhausted or abandoned, it has begun using the powers conferred on it in 2014 to issue Follower Notices. These are sent to taxpayers who have been involved in similar arrangements where HMRC considers that the decision in the cases it has won causes those arrangements to fail. To quote HMRC’s own guidance on the subject, “the follower notice rules are designed to improve the rate at which avoidance cases are resolved where the point at issue has, in HMRC’s view, already been decided in another person’s case.”
One of the most invidious (and potentially expensive) aspects of the Follower Notice regime is the fact that a Follower Notice penalty of up to 50% of the denied tax advantage is charged if the recipient of a Follower Notice fails to take “corrective action” by the deadline specified in the notice. Taxpayers who have received a Follower Notice in the past but have not taken the “corrective action” required (or have taken it after the deadline has passed) will receive from HMRC a notice headed: Follower Notice Penalty Assessment: Penalty for not taking corrective action in response to a follower notice. This article deals with the taxpayer’s options in dealing with such a penalty notice.
The Follower Notice legislation gives no right of appeal against a Follower Notice itself. It is, however, possible to make representations to HMRC within 90 days of the issue of the Follower Notice, and if those representations are accepted, HMRC will withdraw the notice. If HMRC accepts that the notice was defective in detail but correct in principle, HMRC will almost certainly withdraw the notice and issue another to remedy the defect. If HMRC refuses to withdraw the notice, that refusal can be challenged in the courts by judicial review within strict time limits – 90 days is usually the strict maximum within which an application must be made. In a recent case before the Tribunals, Benton & Ors v Revenue and Customs, taxpayers have also effectively challenged the validity of Follower Notices by appealing against the issue of Follower Notice penalty assessments, although this appeal has not yet been decided.
However, Section 214 Finance Act 2014 does provide a statutory right of appeal against a Follower Notice penalty assessment and we recommend that this should be exercised in nearly all cases.
The permissible grounds of appeal against a Follower Notice penalty assessment are set out in section 214(3) Finance Act 2014 and include the following:
(a) that Condition A (open enquiry, appeal etc), B (a particular tax advantage results from particular arrangements) or D (no Follower Notice has previously been issued in relation to the same tax advantage for the same period) in section 204 of the same Act was not met in relation to the Follower Notice,
(b) that the judicial ruling specified in the notice is not one which is relevant to the arrangements entered into by the recipient of the notice,
(c) that the notice was not given within the period specified in subsection (6) of that section, or
(d) 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.
The calculation of Follower Notice penalties is complex so it is entirely possible that a Follower Notice penalty assessment may contain errors or be capable of being disputed for other reasons.
There may be circumstances which could support the argument that section 214(3)(d) applies so that it was “reasonable in all the circumstances for the taxpayer not to have taken the corrective action”. Taking corrective action involves giving up the right to pursue the claim, which might have been one which had a more than negligible prospect of success at court or tribunal. It might be argued that the judicial decision upon which the Follower Notice was based is not directly relevant in the recipient’s circumstances, or other factors might have come into play: for example, there might have been carry-back claims which were arguably final (and therefore not capable of being withdrawn as the corrective action requires) on the authority of the Supreme Court’s decision in Cotter because HMRC had not enquired correctly into the claim (this is the subject of the De Silva case which is still making its way through the Courts). In any event, it seems that what was “reasonable in all the circumstances” must be determined by reference to the circumstances at the time corrective action had been required by the Follower Notice, and not with the benefit of hindsight.
While the recipient of an Accelerated Payment Notice which has accompanied a Follower Notice is not entitled to defer payment of any associated Accelerated Payment Notice, the exercise of the right of appeal against the Follower Notice penalty assessment will allow payment of the penalty to be deferred until the charge is confirmed by a Tribunal or conceded by the recipient.
Appeals against Follower Notice penalty assessments should be made promptly as there is a 30-day time limit, although late appeals can be made if a reasonable excuse for lateness can be demonstrated. In almost every case, professional advice should be sought to ensure that the matter is handled appropriately.
If you have any queries regarding Follower Notices or Follower Notice penalties, or any other matters, then please get in touch.