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

The relevant provisions in FA 2014 of the follower notice and penalty regime of relevance are as follows.

Section 204 provides for the circumstances in which HMRC may give a follower notice to a taxpayer. Various conditions must be met, including (at s204(4)) Condition C that “HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements”. Section 204(3) explains such arrangements arise where a return is made by the taxpayer “on the basis that a particular tax advantage (“the asserted advantage”) results from the particular arrangements. Under s201(2)(a) “tax advantage” includes relief or increased relief from tax.

Section 205 defines a judicial ruling (there is no dispute here that Audley is such a ruling) and when such a ruling is “relevant” to the chosen arrangements, including, crucially, at s205(3)(b) if:

Section 208 provides for a penalty if corrective action (here amending the return) is not taken at the relevant time in the amount (under s209) of 50% (as the legislation stood at the time) of the value of the denied advantage, which amount may, under s 210 be reduced to a minimum of 10% where the taxpayer co-operates with HMRC.

Section 214 enables the taxpayer to appeal HMRC’s decision that a penalty is payable to the FTT. Section 214(3)(b) mentions the grounds may include “that the judicial ruling specified in the notice is not one which is relevant to the chosen arrangements”.

The interpretation of the provisions on when a judicial ruling specified in a follower notice is “relevant” was considered by the Supreme Court in Haworth. That was an appeal in relation to the taxpayer’s judicial review challenge against a follower notice on a number of grounds including whether HMRC’s opinion that it was likely that the application of the ruling was enough to establish that Condition C (at [8] above) was satisfied. That issue turned on the degree of certainty HMRC had to arrive at before they could show that they had formed such an opinion and the meaning of the term “would” in s205(3)(b). Lady Rose noted the threat of penalty was intended to discourage a taxpayer from pursuing their appeal. Applying the principle that where a statutory power “authorises an intrusion upon the right of access to the courts, it must be interpreted as authorising only such degree of intrusion as is reasonably necessary to fulfil the objective of the provision in question”, the Court held (at [61]) that the provision required that HMRC had to have formed the opinion:

“…that there is no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage.”

Lady Rose went on to say that an opinion that the relevant ruling was likely to deny the advantage was not sufficient. That did not gloss the wording but gave “full weight to the use of the word “would” as opposed, for example, to “might”” ([62]).

At [64] to [68] Lady Rose explained that whether HMRC could reasonably form the opinion that the earlier decision was relevant would depend on a number of factors: 1) fact sensitivity (whether a small difference in the fact pattern of the taxpayer’s arrangements or circumstances as compared with the fact pattern described in the earlier ruling would prevent the principles or reasoning applying, 2) whether the relevance turned on HMRC’s rejection of the taxpayer’s evidence as untruthful, 3) whether there were legal arguments put forward by the taxpayer that were not raised in the earlier ruling or whether a concession was made in one but not the other, 4) the nature of the earlier ruling, whether taxpayer was represented, and whether the decision was brief or unclear.

Lady Rosealso made clear (at [63]) that in a follower notice penalty appeal the FTT “determines for itself whether the earlier case is a relevant ruling or not applying the same “high threshold of certainty” under s205(3)(b) as applies to HMRC’s opinion.

Haworth also rejected the taxpayer’s argument there that factual findings in a judgment could not form part of the principles laid down or reasoning given in a ruling for the purposes of Condition C. Lady Rose gave the example of the finding of fact in Clark (HMIT) v Perks [2001] EWCA Civ 1228 that the oil rig there was a ship with the consequence the taxpayer, a worker on board it, was a “seafarer” and entitled to an income tax exemption for work performed abroad. Despite turning on a finding of fact, the conclusion would still give rise to questions of whether the principles and reasoning in the case applied to other oil rigs, and whether those were distinguishable (in the legal sense of that word) ([77] to [80]).