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A Supreme Court decision has cast doubt on the enforceability of Follower Notice penalties issued by HMRC in cases of perceived tax avoidance – taxpayers who have received such notices should take legal advice immediately.
The 2 July 2021 Supreme Court decision in R (Haworth) v Revenue and Customs Comrs [2021] UKSC 25 calls in to question the validity of all Follower Notices issued by HMRC to tackle perceived tax avoidance since 2014.
In response to a Freedom of Information request made by Fieldfisher, HMRC confirmed that around 1,330 Follower Notice penalties totalling approximately £45 million have been issued since the Follower Notice regime was introduced in 2014.
Following the decision in Haworth, all of these Follower Notice penalties may be liable to be repaid.
Those who have received such notices should take action without delay (see details at the end of this article).
What are Follower Notices?
Follower Notices were first introduced in 2014. The effect of these notices is summarised by HMRC as:
"A follower notice can be given to a person (P) who has used an avoidance scheme that has been shown in another person’s litigation to be ineffective. The follower notice tells P that they may be liable to a penalty of up to 50%[1] of the tax and/or NICs in dispute if they do not amend their return or settle their dispute."
Follower Notices are highly controversial because of the way that they have been used by HMRC. HMRC has applied Follower Notices liberally, issuing them to taxpayers where the link between the decided test case and the taxpayer's particular facts and circumstances are tenuous.
For example, HMRC issued a substantial number of Follower Notices following HMRC's Supreme Court victory in a case concerning Rangers Football Club.
HMRC stated (following the Rangers decision) that:
"HMRC’s view is that this principle applies to a wide range of disguised remuneration tax avoidance schemes, no matter what type of third party is used."
The Finance Act 2014 (FA 2014) provides that HMRC may issue a Follower Notice if four conditions are met.
Condition C is that HMRC is of the "opinion" that there is a judicial ruling that is "relevant" to the particular tax arrangements. Relevance is defined in s 205(3) FA 2014 (emphasis added):
"A judicial ruling is 'relevant' to the chosen arrangements if –
- it relates to tax arrangements,
- 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, and
- it is a final ruling."
The Supreme Court decision: R (Haworth) v Revenue and Customs Comrs
In Haworth, the Supreme Court considered the meaning of the word "would" (as highlighted in bold above).
HMRC argued that "would" in this context meant "would likely". The Supreme Court disagreed.
It was held that condition C (as above) is only met when HMRC has formed the opinion that there is "no scope for a reasonable person to disagree" that the earlier ruling will deny the taxpayer the asserted advantage.
The effect of Haworth is to call in to question the validity of all Follower Notices issued since 2014.
Where Follower Notices have been issued by HMRC on the basis that a relevant ruling would "likely" be applied to another taxpayer's litigation, that is not sufficient.
FOI request
Further to the decision in Haworth, Fieldfisher has made a number of information requests (under Freedom of Information rights) to HMRC.
HMRC has in turn confirmed in relation to Follower Notices that:
"We have issued around 22,700 since the Follower Notice (FN) regime was introduced in 2014."
And that:
"Around 13,550 corrective actions have been taken since the FN regime was introduced in 2014".
This means that more than 13,000 individuals have given up on their tax appeals further to being served with a possibly unenforceable Follower Notice.
The fact that these Follower Notices may have potentially been unlawful raises the question of whether those appeals can now be revived.
HMRC confirmed that:
"We have issued around 1,330 penalties, totalling around £45 million since the FN regime was introduced in 2014."
In light of Haworth, it is difficult to see how HMRC can justify retaining the penalty sums paid.
HMRC declined to confirm the identity of the judicial rulings it has relied on for the purposes of issuing Follower Notices, but did confirm that there have been "around 215" such rulings since the Follower regime was introduced in 2014 that it has used as bases on which to issue notices.
Actions arising
Anyone who has received a Follower Notice should now take advice. Those who have paid Follower Notice penalties should ask HMRC for:
- Disclosure of the HMRC submission to the workflow governance group (WFGG – the board that authorises the issuance of Follower Notices) underpinning their notice; and
- Disclosure of the decision of the WFGG.
They should then take legal advice as to whether, in light of Haworth, these documents stand up to scrutiny.
If they do not, a claim can be brought against HMRC for the return of the penalties paid.
Fieldfisher is in the process of assembling a group action in relation to Follower Notice penalties. If you or your clients have been affected, you are encouraged to contact George Gillham and Matthew Sharp, from the Fieldfisher tax disputes team, for further information.
George Gillham, Co-Head of Tax Disputes and Investigations
george.gillham@fieldfisher.com
+44 (0)20 7861 4059
Matthew Sharp, Director, Tax and Dispute Resolution
matthew.sharp@fieldfisher.com
+44 (0)207 861 4561
Please note: The fact that an appeal could be revived does not necessarily imply that it should be – the merits of any appeal would need to be considered. Fieldfisher will consider the details of every prospective claimant and provide you with a prompt response on the likelihood of success.