On 2 July 2021, the Supreme Court issued its judgment in Haworth v HMRC. Haworth is the first challenge to HMRC’s use of follower notices since the relevant legislation was introduced.
Key background and takeaway
Follower notices are relevant where HMRC disagree with a taxpayer and contend that the taxpayer’s position relies on a particular interpretation of the relevant taxing statute which has already been rejected by the Courts.
Very broadly, once HMRC have a final judgment in their favour on a particular point of law, they can issue follower notices to any taxpayer whose case is sufficiently similar that, if the principles of the judgment were applied to that taxpayer’s case, the taxpayer would lose.
Follower notices are a powerful tool for HMRC because they force taxpayers to either:
- accept HMRC’s interpretation; or
- continue to dispute it and face the risk of increased penalties and of having to pay any disputed tax up front as the result of an accelerated payment notice (APN).
The key issue in Haworth was how certain HMRC have to be that an existing judgment “would” apply to another taxpayer’s circumstances before HMRC can issue a follower notice to that taxpayer.
The Supreme Court’s answer was that 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" (see paragraphs [58-61] of the judgment).
In other words, it is not enough for HMRC to think it is “likely” that the earlier judgment would apply to the taxpayer’s case. HMRC must be convinced beyond any reasonable doubt.
More detail - the meaning of “would”
There are four conditions (Conditions A-D) that must be met in order for HMRC to issue a follower notice to a taxpayer. Of these, condition C was the key point of contention in Haworth.
Condition C is met where, in HMRC’s opinion, there is a judicial ruling which is relevant to the taxpayer’s arrangements. A judicial ruling is relevant where (emphasis added):
- “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.”
In Haworth, HMRC argued that the earlier case of Smallwood set out indicators for a specific type of tax avoidance planning: round the world capital gains tax avoidance. HMRC’s opinion was that, in any case where these Smallwood indicators were present, it was likely that the Smallwood judgment would defeat such tax planning. The Supreme Court had to decide whether this was sufficient.
In discussing the relevant threshold, Lady Rose stated that: “this turns on what is meant by “would” in s 205(3)(b) - how certain must it be, in HMRC's opinion, that Smallwood provides the answer in Mr Haworth's case before it can be said that HMRC's opinion is that Smallwood would deny Mr Haworth the advantage he asserts?”
Lady Rose concluded: “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. Only then can they be said to have formed the opinion that the relevant ruling “would” deny the advantage. An opinion merely that is likely to do so is not sufficient.”
The Supreme Court also set out four factors that must be considered by HMRC when determining whether a ruling is relevant for these purposes. These include:
- how fact sensitive the application of the earlier ruling is;
- whether, if the taxpayer’s evidence indicates that the earlier ruling may not be relevant, HMRC can reasonably form the view that such evidence is untruthful;
- whether the legal arguments put forward by the taxpayer are different to those put forward in the earlier ruling; and
- the nature of the earlier ruling (for example, a ruling arrived at after a hearing where the taxpayer did not appear or was not legally represented may not be capable of being a “relevant ruling”).
What is the likely impact?
The Haworth decision clearly restricts the use of follower notices. It is likely that HMRC will now be more wary of using them where there is any scope for a taxpayer successfully distinguishing their own case from an earlier judgment.
In this context, it is important for taxpayers and advisers to be aware that cases can be distinguished not only on the basis of the relevant facts but also on the basis of the legal arguments put forwards.
As well as impacting HMRC’s approach in the future, the Haworth judgment will call into question HMRC’s use of follower notices to date.
HMRC have clearly comprehended this and have issued a statement saying:
“On 2 July, the Supreme Court handed down its judgment in the case R (on the application of Haworth) vs Commissioners for Her Majesty's Revenue & Customs. The case related to a Follower Notice (FN) issued to Mr Haworth, and the Accelerated Payment Notice (APN) which accompanied it. HMRC may issue FNs to users of avoidance schemes which, in the opinion of HMRC, have been shown to fail in another person’s litigation. APNs can be issued with FNs and require the recipient to pay the disputed tax to HMRC pending resolution of the dispute.
This was the first challenge to the FN legislation to be considered by the Supreme Court. HMRC lost the case on all grounds.
The Court provided a useful clarification of the test HMRC must apply when deciding whether to issue Follower Notices. HMRC are considering the judgment carefully and the extent to which any customers who have received FNs might be affected. There is no need for customers to contact us about this case, we will contact any customers we think will be affected by the judgment as soon as possible.
Steps for taxpayers to take now
If you receive or have previously received a follower notice you should consider whether the Haworth judgment could be relevant to you and take appropriate advice.
Burges Salmon’s tax experts are experienced in dealing with HMRC enquiries and would be happy to help.
This article was written by Ed Hayes and Robert Jeffrey of Burges Salmon’s Tax, Trusts, and Family Team.
The Supreme Court unanimously dismisses HMRC’s appeal and upholds the Court of Appeal’s decision to quash the follower notice.