In the case of R (on the application of Haworth) v Commissioners for HMRC [2021] UKSC 25 (https://www.supremecourt.uk/cases/docs/uksc-2019-0124-judgment.pdf ) Mr Haworth succeeded in his appeal against HM Revenue & Customs’ (HMRC) issue of a Follower Notice. This is an important case on the scope of Follower Notices, but it’s also important to note that the case was a Judicial Review of the process – the substantive case concerning Mr Haworth’s appeal against his tax liability has yet to be heard.
More than 20 years ago, in the tax year 2000/01, Mr 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 that 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 Revenue and Customs Comrs [2010] EWCA Civ 778), where it was decided that 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 Mr Haworth, and so issued a Follower Notice.
What are Follower Notices and why were they introduced?
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. They therefore act as a significant disincentive for a taxpayer to pursue a case to appeal before the 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)).
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 Mr 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.
First published in Accounting Web.
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