A recent decision in the Supreme Court (R (Haworth) v Revenue and Customs Commissioners [2021] UKSC 25) has cast doubt on the enforceability of penalties charged by HM Revenue & Customs (HMRC) in relation to Follower Notices.
Follower Notices were introduced in 2014 by the Finance Act 2014 (the Act) and are one of the tools that HRMC uses to tackle tax avoidance. They were designed, as a means of leveraging decisions in comparative litigation to persuade a taxpayer to settle their own dispute. At the time of their introduction, HMRC was concerned about the prospect of facing a tsunami of litigation if it was forced to contest every tax avoidance case through the Tax Tribunal and Courts. The purpose of the notices was to encourage early settlement and (along with Accelerated Payment Notices, which were introduced at the same time) to undermine the economic attraction of using tax avoidance schemes by imposing substantial additional costs on the participants in such schemes, which eventually fail.
HMRC summarises the effect of Follower Notices as follows:
"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% of the tax and/or NICs in dispute if they do not amend their return or settle their dispute."
Follower Notices are particularly controversial because of the manner in which HMRC has used them. HMRC has been found to have issued notices prolifically, including in some circumstances where the link between the decided case and the taxpayer's particular facts and circumstances may be somewhat ambiguous.
It should be noted that there are certain legislative conditions laid out in the Act that must be met before a Follower Notice can be issued. One such condition (Condition C found in Section 204(4) of the Act) is that HMRC is of the "opinion" that there is a judicial ruling that is "relevant" to the particular tax arrangements. Also in accordance with Section 205(3)(b) of the Act in order for the judicial ruling to be "relevant", it must be established that "the principles laid down, or reasoning given, in the ruling would, if applied to the chosen arrangements, deny the asserted advantage or part of that advantage".
In the Haworth case, the Supreme Court considered the meaning of the word "would". HMRC argued that in this context "would" meant "would likely". However, the Supreme Court disagreed holding that Condition C 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 of the asserted advantage.
The effect of this decision is that it potentially calls into question the validity of all Follower Notices issued since 2014.
A recent Freedom of Information request has confirmed that more than 13,000 taxpayers have taken corrective actions after receiving a Follower Notice and this decision means that many of these may have been unlawful.
Anyone who has received a Follower Notice should now take advice to determine its legality and what action should be taken. Such action could include asking HMRC to withdraw the Follower Notice and any accompanying Accelerated Payment Notice and a claim to recover any penalties paid.