A decision in the Supreme Court in July has cast doubt on the legitimacy of HM Revenue and Customs’ (HMRC) follower notice penalties issued to taxpayers.
According to law firm Fieldfisher, the UK taxman may now have to repay tens of millions in penalties issued since 2014, which totals around £45m ($62.3m, €52.5m).
The court decision (R (Haworth) v Revenue and Customs Comrs  UKSC 25), handed down on 2 July 2021, called into question the use of follower notices issued by HMRC to tackle tax avoidance.
According to HMRC, “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 National Insurance Contributions in dispute if they do not amend their return or settle their dispute”.
In the 2021 case, Haworth entered arrangements – known as ‘round-the-world-schemes’ – that he claimed meant he was not subject to capital gains tax (CGT) of approximately £9m ($12.5m, €10.5) in relation to the disposal of shares by a trust, of which he was the settlor.
The arrangements involved the resignation of Jersey trustees in favour of trustees resident in Mauritius. The trust then disposed of shares, realising a substantial gain, and the Mauritian trustees were replaced by UK resident trustees within the same tax year.
The CGT avoidance depended on the residence of the trust being Mauritius at the time the disposal was made, for the purposes of the UK/Mauritius double tax treaty. This would make the gain subject to tax only in Mauritius, where there was no tax liability in these circumstances.
HMRC issued a follower notice to Haworth on the basis that a 2010 Court of Appeal decision meant the double tax treaty did not relieve Haworth of the CGT liability.
In the 2010 case, the Court of Appeal decided the trustees were resident in both Mauritius and the UK and under the double tax treaty ‘tie breaker’ provision, and the ‘place of effective management’ (Poem) of the trust was the UK and not Mauritius, so the scheme did not work and the gain was subject to CGT. The Court of Appeal also set out seven “pointers” relevant to that decision.
Based on that decision, HMRC issued the follower notice to Haworth along with an accelerated payment notice requiring the disputed tax be paid before the issue has been determined by a tribunal or court.
Ultimately, the Supreme Court quashed Haworth’s follower notice. The court decided the notice issued to Haworth did not explain why the 2010 decision applied to his case.
Law firm Fieldfisher said that follower notices are “controversial because of the way that they have been used” and HMRC has “applied follower notices liberally, issuing them to taxpayers who are in dispute with HMRC, where links between a decided test case and the taxpayer’s particular facts and circumstances are tenuous”.
There is no appeal against a follower notice. The recipient can either abandon their claim against HMRC and pay the tax or take their case to court. If they take the case to court, they have to pay a penalty of up to 50% of the disputed tax upfront, which they get back if they win.
George Gillham, tax disputes partner at Fieldfisher, said: “Following the Supreme Court decision in Haworth, those who have been subject to follower notices should take action without delay.
“Anyone who has paid a follower notice penalty should be asking HMRC for disclosure of the HMRC submission to the workflow governance group (WFGG) – the board which authorises the issuance of follower notices – underpinning their notice; and disclosure of the WFGG decision.
“They should then take legal advice as to whether, in light of the Haworth case, these documents stand up to scrutiny. If they do not, a claim can be brought against HMRC for the return of the penalties paid.”
The freedom of information (FOI) request by Fieldfisher also found that some 13,550 corrective actions have been taken since the regime was introduced since 2014.
Matthew Sharp, tax director at Fieldfisher, said that this means “many cases have been dropped by taxpayers who have been discouraged by being served with what may be an unenforceable notice”.
He added: “Ultimately, HMRC could owe a lot more money to these taxpayers.”
An HMRC spokesperson said: “HMRC will consider the judgment carefully which refers to circumstances specific this case and does not call into question the general validity of the notices HMRC has issued.
“The Supreme Court’s decision does not change that the underlying tax would still be due.”