A follower notice tells a taxpayer that an earlier ruling disposes of the claimed tax advantage. Mr Haworth challenged a notice based on a decision involving another trust. The question was how certain HMRC had to be before it could use that decision against him.
The follower notice regime and Mr Haworth’s arrangements
Under the Finance Act 2014 provisions in issue, HMRC could give a follower notice only if the statutory conditions were met. One required HMRC to form the opinion that applying the principles or reasoning of a final judicial ruling to the taxpayer’s arrangements would deny the asserted advantage. Failing to take corrective action could expose the taxpayer to a substantial penalty.
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In his 2000/2001 return, Mr Haworth disclosed arrangements intended to avoid capital gains tax on a substantial gain realised by a trust of which he was the settlor. The arrangements combined sections 86 and 77 of the Taxation of Chargeable Gains Act 1992 with the UK/Mauritius double taxation convention. Jersey trustees were replaced by Mauritian trustees, the shares were disposed of, and UK-resident trustees were appointed within the same tax year. He maintained that the trust’s place of effective management was Mauritius, so the convention prevented a UK charge.
HMRC opened an enquiry in January 2003. After the Court of Appeal’s decision in Smallwood and the introduction of the follower-notice regime, HMRC identified seven features, drawn from paragraph 70 of Hughes LJ’s judgment, which they treated as indicating that a later appeal would be likely to fail. Their Workflow Governance Group approved a notice for Mr Haworth because those features were said to be present. The notice was issued on 24 June 2016 and stated that corresponding reasoning applied to his arrangements. An accelerated payment notice for £8,786,288.40 was issued the same day. A closure notice then included gains of £21,965,721 and additional tax of £8,786,288.40. Mr Haworth appealed to the First-tier Tribunal; the hearing had taken place but the decision was still awaited. No penalty was notified in time, so the statutory penalty appeal was unavailable.
The judicial review and the required opinion
Sir Ross Cranston dismissed Mr Haworth’s judicial review claim. The Court of Appeal allowed his appeal, holding that the statutory conditions had not been met. HMRC appealed. It was agreed that Conditions A, B and D were satisfied and that Smallwood was a final ruling relating to tax arrangements. The dispute concerned whether HMRC had formed the opinion required by Condition C.
HMRC’s submissions and the evidence of Julie Elsey established only that they considered it likely that Smallwood would deny the advantage where the seven features were present. Lady Rose, with whom Lord Briggs, Lady Arden, Lord Leggatt and Lord Stephens agreed, held that the word “would” in section 205(3)(b) requires an opinion that there is no scope for a reasonable person to disagree that the earlier ruling denies the advantage. A view that denial is merely likely does not suffice. The serious consequences of a notice, including the penalty and the possibility of accelerated payment, support that reading: a statutory intrusion upon access to the courts authorises only such intrusion as is reasonably necessary. The same high threshold applies when the First-tier Tribunal decides for itself, on a penalty appeal, whether a ruling is relevant. The appeal therefore failed on this ground.
The treatment of Smallwood
The Court also agreed that HMRC had misdirected themselves. Their analysis treated Hughes LJ as having held that a UK place of effective management was the inevitable consequence of a scheme containing the seven features. That overstated the decision. The Court of Appeal in Smallwood accepted the OECD Commentary, which states that no definitive rule can be given and that all relevant facts and circumstances must be examined. Hughes LJ was explaining why the Special Commissioners had been entitled to reach their conclusion on the primary facts of that case, not prescribing features that were necessary and sufficient in every later case. It was not highly likely that the notice would still have been issued without the overstatement, so section 31(2A) of the Senior Courts Act 1981 did not require relief to be refused. The proper course was to quash the notice.
Factual findings and the form of the notice
The Court rejected Mr Haworth’s argument that a factual conclusion, such as the place of effective management found in Smallwood, cannot form part of the principles or reasoning given in a ruling. Where a legal test is applied to primary facts, the resulting conclusion can guide later cases involving arrangements that are not legally distinguishable. It makes no difference whether an appellate court expressly agrees with the finding or says only that the fact-finding tribunal was entitled to make it.
The notice itself was deficient. After setting out the seven features, it said only that corresponding reasoning applied to Mr Haworth’s arrangements. It should have identified the features of his arrangements which, in HMRC’s opinion, meant that Smallwood would deny the advantage. On the proper construction of section 206, however, that defect did not invalidate the notice. This conclusion, like the conclusion on factual findings, did not affect the result.
Verdict: The Supreme Court unanimously dismissed HMRC’s appeal, so the follower notice remained quashed. HMRC had applied too low a threshold and overstated what Smallwood decided. The separate defect in the notice’s explanation would not, by itself, have invalidated it.
