UT/2022/000120 - [2024] UKUT 00021 (TCC)

This appeal concerns a penalty imposed by HMRC on Mr Pitt, the appellant, pursuant to the follower notice regime in the Finance Act 2014 (“FA 2014”).

In broad terms that works as follows. Where a taxpayer has filed their tax return on the basis they get a tax advantage as a result of tax arrangements they used, but where HMRC consider the arrangements do not have that effect in the light of a “relevant” judicial ruling, HMRC can issue a “follower notice” specifying that judicial ruling. A judicial ruling is defined as “relevant” if the “principles laid down, or reasons given” in it would, if applied to the arrangements, deny the tax advantage asserted by the taxpayer. The taxpayer then has the chance to amend their return to counteract the tax advantage, but if they do not, they become liable to a penalty (which they can appeal to the First-tier Tribunal (Tax Chamber) (“FTT”). As is the case here, the grounds of appeal against the penalty may dispute the judicial ruling is “relevant” (in the sense described above) to the arrangements.

In R (on the application of Haworth) v Revenue and Customs Commissioners [2021] UKSC 25,the Supreme Court accepted the purpose of the follower notice regime and penalty was:

“…to deter further litigation on points already decided by a court or tribunal and to reduce the administrative and judicial resources needed to deal with such unmeritorious claims.”

Mr Pitt entered into arrangements involving the acquisition and disposal of loan notes which were “relevant discounted securities” for the purposes of Schedule 13 Finance Act 1996 (“FA 1996”). HMRC disputed Mr Pitt’s view that those transactions were effective in generating a loss of £694,684 (and therefore tax relief of £278,557.60 arising from that loss in relation to Mr Pitt’s other income) under paragraph 2 of Schedule 13 FA 1996 in their closure notice of 3 October 2018 for the tax year 1998/1999. In its decision of 19 July 2022, the FTT dismissed Mr Pitt’s appeal against the closure notice.

The appeal before us relates to Mr Pitt’s appeal to the FTT against the penalty of £83,547 HMRC imposed on Mr Pitt on 2 July 2018 after he failed to take corrective action in response to a follower notice HMRC issued on him on 16 June 2016. The FTT heard that appeal alongside the closure notice and dealt with it in the same decision, (Kevin John Pitt v HMRC UKFTT [2022] UKFTT 222 “the FTT Decision”). HMRC’s follower notice had specified the case of Audley v HMRC [2011] UKFTT 219 as a judicial ruling that was “relevant”. The FTT agreed with HMRC that Audley was “relevant”, in other words that the principles and reasoning in Audley would, if applied to Mr Pitt’s arrangements, deny the tax advantage (the tax relief) Mr Pitt sought. Rejecting Mr Pitt’s arguments to the contrary, the FTT found there were no material differences between Mr Pitt’s case and the taxpayer’s case in Audley.

With the permission of the Upper Tribunal, Mr Pitt appeals against the FTT’s rejection of his penalty appeal. He argues the FTT erred in its legal approach, in particular, on the basis that the FTT ought to have compared only the primary facts of each case as opposed to the evaluative conclusions and inferences that the FTT had found once it had, in accordance with the approach commonly referred to as the Ramsay approach, construed the legislation purposively and, in particular, viewed the facts “realistically”.