The follower notice provisions were introduced by FA 2014 and continue to be seen by the government as an important weapon in its fight against tax avoidance.
Follower notices (“FN”) disincentivise users of tax planning arrangements from continuing their disputes with HMRC where the Courts have already made a decision on the same or very similar cases. However, many believe the FN regime to be draconian and that it acts to deny taxpayers a right to justice, by leaving those in dispute little option but to settle with HMRC, irrespective of how strong they believe their cases to be.
The FN provisions
HMRC may serve a taxpayer with a FN provided each of the following four conditions is satisfied:
a) There is an open enquiry into a person’s tax return or that the person has made a tax appeal which has not been resolved;
b) The relevant tax return was prepared on the basis that a tax advantage results from tax arrangements;
c) HMRC is of the opinion that there is a judicial ruling which is relevant to those arrangements; and
d) No previous FN has been issued to the person in respect of the same tax advantage, arrangements, judicial ruling and period.
Recipients of FNs are required to take “corrective action” within 90 days of the issue of the FN. Broadly, that involves recipients who are subject to an HMRC enquiry amending their tax returns by disapplying the tax advantage claimed. Alternatively, where tax appeals have been made, recipients are expected to withdraw their appeals.
Those who do not take corrective action within the statutory timeframe may be subject to a penalty of up to 50% of the additional tax payable “as a result” of counteracting the denied advantage. However, that penalty may be reduced in respect of the quality of the taxpayer’s cooperation. “Cooperation” for these purposes includes assisting HMRC in quantifying the tax, counteracting the tax advantage, providing information for corrective action, providing information to facilitate a settlement and allowing access to records.
Suffice it to say, there is no right of appeal against FNs. Therefore, recipients who wish to have their cases heard before the tax Tribunal (and who, therefore, do not take corrective action), do so knowing that if they are unsuccessful, they face the prospect of having to pay significant financial penalties in addition to the disputed tax.
Raymond Barlow and The Commissioners for HMRC (First-Tier Tribunal 2020)
HMRC levied penalties on Mr Barlow for tax years ended 2005 to 2008 because he did not take corrective action within the time specified by the FNs issued to him. HMRC had agreed to reduce the penalty loadings from the maximum 50% to 29.6% for 2005, and to 37.6% for the other three years, to reflect the quality of his cooperation with HMRC. The validity of the FNs was not in dispute.
Mr Barlow’s appeals were made on two grounds, (i) that he had acted reasonably, despite not having undertaken corrective action within the time allowed, and (ii) that in any event the penalty loadings were excessive. He said the reason for the delay was because he had relied on the advice of his adviser at the time, Montpelier.
In his judgment, Judge Charles Hellier said that in order to set aside the penalties, it must have been “reasonable in all the circumstances for Mr Barlow not to have taken corrective action” sooner than he did. Mr Barlow’s counsel argued that his client was a layman who relied on the advice of his professional adviser. Evidence provided at the hearing supported Montpelier’s credentials and that Mr Barlow had acted on its advice not to take corrective action. In short, he had not simply buried his head in the sand. However, there were certain inaccuracies in Montpelier’s correspondence which, according to HMRC’s counsel, should have caused Mr Barlow to query the position. The inaccuracy concerned the Huitson case, i.e. the judicial ruling cited in the FN issued to Mr Barlow.
Montpelier had referred to the Huitson case as ongoing, but the time for making an application for permission to appeal had passed, as correspondence available to Mr Barlow from HMRC confirmed. HMRC argued that it would have been the action of a reasonable taxpayer, in Mr Barlow’s position, to seek clarification on the point and question Montpelier why it believed litigation would be more successful second time around. There was no evidence that he had done so.
Judge Hellier decided the case in favour of HMRC in relation to first part of the appeal, namely that penalties were justified. He commented:
“It seems to me that if a taxpayer is not reasonably well informed and does not take steps to make himself such, his action or inaction may not be reasonable.”
“Overall I conclude that it was not shown in all the circumstances that Mr Barlow acted reasonably in acting on the basis that he had a good or reasonable case that the scheme worked.”
In respect of the second part of the appeal and the quantum of the penalties, it was decided that further quality reductions were due in light of Mr Barlow’s cooperation. Interestingly, whilst penalties were reduced to 25% of the denied advantage for all years, Judge Hellier commented:
“In setting the penalty reduction I do not consider that the reasons for a taxpayer’s behaviour should generally play any part …. I do not consider that the fact that he delayed because he had been advised that the scheme worked is relevant.”
What is to be taken from the judgment in the Barlow case is that the bar protecting taxpayers from FN penalties is very high indeed. Regardless of an adviser’s credentials, recipients of FNs cannot simply rely on advice received without seeking to properly understand it.
The government has already rejected the House of Lords committee’s recommendation to abolish FN penalties claiming that it would render the regime ineffective. However, perhaps to appease critics, it has been proposed that the penalty regime be amended. The consultation (which ended on 27 January) proposes replacing the 50% penalty with a 30% penalty, with an additional 20% should a tax tribunal strike out the taxpayer’s appeal on certain grounds, e.g. where the taxpayer has no reasonable prospect of success. Some might say such a change offers little relaxation to the regime and that it continues to restrict access to justice.
If you would like to discuss the FN regime or HMRC’s pursuit of tax geared penalties, please contact us.