Supreme Court sets threshold for HMRC to give a Follower Notice
The Supreme Court has handed down its judgment in R (Haworth) v HMRC [2021] UKSC 25, concerning the circumstances in which HMRC can give Follower Notices (FNs) to taxpayers seeking a tax advantage by entering into tax arrangements.
Since 2014, FNs have been a part of HMRC’s anti-avoidance strategy. Receiving a FN makes a taxpayer potentially liable to a FN penalty if they do not take corrective action to remove the tax advantage said to flow from use of tax arrangements. Giving a FN is one of the possible conditions entitling HMRC to issue an accelerated payment notice (APN) and demand payment of tax up-front before a tax dispute is resolved.
To give a FN, HMRC must be “of the opinion that” “the principles laid down, or reasoning given, in [a judicial ruling] would, if applied to the chosen arrangements, deny the asserted advantage or part of that advantage” (ss 204(4) and 205(3)(b) FA 2014).
The Supreme Court has determined what it means for HMRC to be of the opinion that the prior ruling “would” deny the asserted advantage. Lady Rose, giving a judgment with which the other members of the Court agreed, rejected the Court of Appeal’s approach of requiring that HMRC have a “substantial degree of confidence” in its opinion that the judicial ruling would deny the advantage. HMRC is either of the requisite opinion or it is not. The focus must be on the content of that opinion, in particular 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”. In reaching that conclusion, she relied upon the Supreme Court’s judgment in R (UNISON) v Lord Chancellor (Equality and Human Rights Commission intervening) (Nos 1 and 2) [2017] UKSC 51; [2020] AC 869, attaching weight to the possibility that the prospect of a FN penalty discourages access to the First-tier Tribunal (Tax Chamber) (FTT) for the resolution of disputes with HMRC.
Mr Haworth’s case concerned his use of the “Round the World” scheme, whereby trustees of a trust pregnant with gains were appointed in Mauritius for the purpose of disposing of an asset, realising those gains and then (in the same tax year) resigning in favour of trustees in the UK. It was expected by those advising on the scheme that the Double Tax Convention between the UK and Mauritius would have the effect that the UK was prevented from imposing capital gains tax on the relevant gains. In Smallwood v HMRC [2010] EWCA Civ 778; [2010] STC 2045, the Court of Appeal upheld the decision of the Special Commissioners that a similar iteration of the Round the World scheme failed, on the facts of that case, to achieve the expected tax avoidance result because (for the purposes of the Convention) the trust was resident in the UK due to having its “place of effective management” here.
HMRC’s opinion was that Mr Haworth’s case exhibited a number of “hallmarks” which meant that it was “likely” that the FTT would in his case reach the same conclusion as the Special Commissioners did in Smallwood. That was not sufficient to satisfy the test for giving a FN as formulated by Lady Rose; despite the Court’s acceptance of HMRC’s criticism of the approach of the Court of Appeal, HMRC’s appeal to the Supreme Court failed.
At [64]ff, Lady Rose set out a number of factors that are relevant to whether HMRC can reasonably form the opinion that there is no scope for a reasonable person to disagree that the earlier ruling would deny the taxpayer the asserted advantage. The first is how fact-sensitive is the application of the judicial ruling. The Round the World scheme was not a mass-marketed scheme in the sense of having one promoter and users all executing documents in similar terms. The place of effective management of a trust has to be determined on a case-by-case basis. Where availability of a tax advantage depends on a factual issue, it will now be harder for HMRC to give a FN. This judgment is unlikely to have a significant impact on truly homogeneous mass marketed schemes, users of which will still be liable to receipt of follower notices.
By way of a Respondent’s Form in the Supreme Court, Mr Haworth sought unsuccessfully to limit the scope of the FN legislation by contending that the requirement for a judicial ruling to contain “principles laid down by, or reasoning given” meant that an appellate judgment that merely upheld the factual conclusion of the FTT (as not being irrational) could never be a relevant judicial ruling for the purposes of the FN regime. In rejecting that argument, Lady Rose accepted that in such a case, the reasoning of the FTT becomes the reasoning of the appellate judgment.
In addition to its impact on HMRC’s ability to give a FN, the Supreme Court’s judgment will also affect how appeals against FN penalties are determined. There is no statutory right of appeal against the giving of an FN, but there is a right of appeal against a subsequent penalty. One of the permitted grounds of appeal is that the judicial ruling identified in the FN “is not one which is relevant to the chosen arrangements” (s. 214(3)(b)). Lady Rose said that when the FTT is required to determine such an appeal, it too must decide whether there was “no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage”.
Timothy Brennan QC and Christopher Stone represented HMRC. The oral submissions before the Supreme Court were made by Christopher Stone alone.
To read a full copy of the judgment, please click here.
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