28 May 2014

Follower notice provisions are in Chapter 2 Part 4 of the Finance (Number 2) Bill (Finance Bill).  HMRC can give a follower notice to a person if four conditions are met.

Broadly speaking, these four conditions are:

1. The person ('P') is subject to a tax enquiry or has made a tax appeal.
2. P’s enquiry or appeal involves tax arrangements which generate a particular tax advantage.
3. HMRC are of the opinion that there’s a judicial ruling which is relevant to P’s tax arrangements.
4. No previous follower notice has been given (or given and not withdrawn).

A follower notice can only be given within 12 months after the judicial ruling has been given.

A judicial ruling is an important concept. Basically it’s a court or tribunal ruling, which is no longer appealable (or has been settled by agreement) and which is on “all fours” with the principles of P’s tax arrangements.

There is no appeal right against the issue of a follower notice.  If P is served with one, he has 90 days to ask HMRC to reconsider by making representations to HMRC. Once P has made those representations, HMRC will then confirm or withdraw the follower notice.

Again, there’s no right to appeal against a non withdrawal to the FTT. So, the only remedy that P has to impugn a follower notice, is to judicially review either the original issue, or any subsequent failure to withdraw it following P’s representations.

The consequence of a follower notice is that P has to take “the necessary corrective action”. This must be taken within 90 days of the original notice, or 90 days of it being confirmed following P’s representations. Necessary corrective action is different depending upon whether P is subject to an enquiry, or is bringing an appeal.

If the former, then P must amend his return to “counteract” the denied advantage.

If the second, P must take “all necessary action” to enter into an agreement with HMRC for the purpose of giving up the denied advantage.

Failure to do either of these within the relevant time will render P liable to a penalty which is 50 per cent of the denied advantage (greater if there are international aspects).

One presumes that if HMRC are dilatory in entering into an agreement where P wishes to do so, P can plead reasonable excuse in any penalty appeal.

Now P does have an appeal right against the penalty. And one argument he can raise in the appeal (which has been made clear in the explanatory notes to the Finance Bill (but isn’t, at least to me, terribly clear in the legislation itself)) is that the judicial ruling is not relevant, ie not on all fours with P’s particular facts.  

But (and this is going to be a real problem in practice) if P is successful in his appeal, there is no mechanism to force HMRC to withdraw the follower notice. This is likely to have an  impact on accelerated payment notices which are issued on the back of follower notices (more of which in later briefings).

If P has already brought an appeal, then P will have two appeals on the go. One the substantive one, and the second, the penalty appeal.

P, once he’s been served with a follower notice, has two choices. He either risks a penalty by failing to take the necessary corrective action, (but he can then fight his corner in the penalty appeal by saying that the judicial ruling is not relevant); or he caves in and pays up, in which case his substantive appeal will also be compromised.

But what if, at the time the follower notice is served, there is a relevant judicial ruling?  P believes that case has been wrongly decided, and does not compromise his substantive appeal.  He appeals against the penalty, but is unsuccessful because the FTT rules that the judicial ruling is relevant. Two months later, the UT overturns the “relevant” FTT decision. Where does that leave P?  

It seems pretty clear that, as a matter of equity, the relevant judicial ruling has been shown not to be relevant and thus the penalty should be reimbursed. But there seems no mechanism (or at least no obvious mechanism) to achieve this.

Finally, whilst it appears that the penalty will not be levied pending a penalty appeal to the FTT, it is not clear whether, in circumstances where P is unsuccessful at the FTT but appeals to the UT, the payment of the penalty will still be held in abeyance.

All in all, not an entirely satisfactory regime as currently drafted.

If you would like to discuss follower notices in further detail, or any other tax issue, please call or email the key contact identified at the top of this page.

Key contact

Brian Wong

Brian Wong Partner

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