In the recent case of Ardmore Construction Limited v HMRC, the First-tier Tribunal (Tax Chamber) ('FTT') dismissed the taxpayer's appeal and chose not to follow its recent decision in Perrin v HMRC. Both cases concerned the issue of when interest arises in the UK for the purpose of section 874 Income Tax Act 2007.
Whilst readers might find these cases of interest in relation to this issue, the FTT's comments in relation to HMRC seeking to rely upon unpublished decisions and its decision not to follow a previous decision of a differently constituted FTT, is the focus of this blog.
The decision of the FTT not to follow an earlier decision of the FTT is of course perfectly permissible, as the FTT is not a tribunal of binding authority and it is not bound to follow its previous decisions. However, given that the government's proposals in relation to 'follower notices' contained in the Finance Bill 2014 will, if enacted, enable HMRC to issue a follower notice to a taxpayer if it is of the opinion that there is a final judicial ruling that is relevant to the taxpayer concerned (and HMRC has confirmed that in its view decisions of the FTT constitute such rulings), the Ardmore decision is of particular interest from this perspective.
The 'follower notice' proposals
If the follower notice proposals become law, when a tax appeal is determined by a tribunal or court and there is no further appeal, HMRC may decide that ruling is determinative of disputes involving other taxpayers. In such circumstances, HMRC will be able to issue a follower notice to a third party taxpayer requiring him to:
- amend his return so as to counteract the tax advantage (in enquiry cases), or
- agree to relinquish the tax advantage (in appeal cases).
A taxpayer will be liable to a penalty if he fails to take the necessary corrective action. The penalty may be 50% of the value of the 'denied advantage' i.e. the tax advantage that is denied by the judicial ruling relied upon by HMRC. Normally, this will be the amount of tax due on the assumption that the tax advantage is counteracted.
On a preliminary issue, the FTT decided that it was not proper for HMRC to cite an unpublished decision of the Special Commissioners. HMRC wanted to refer to Poldi (UK) Limited v Commissioners of Inland Revenue, an unpublished decision of the Special Commissioners, which it had relied upon in the earlier Perrin case.
In reaching their decision on this point, the FTT noted that:
"there must be thousands of unpublished decisions known by and available only to HMRC
[from the era before 1994 when Special Commissioners decisions were unpublished] … it cannot be right or just for HMRC to have such an advantage over the taxpayer".
The FTT also referred to Lord Diplock's comments in Fothergill v Monarch Airlines Limited:
"Elementary justice or to use the concept often cited by the European Court, the need for legal certainty demands that the rules by which the citizen is to be bound should be ascertainable by him … by reference to identifiable sources that are publicly accessible."
The FTT declined to follow Perrin and chose to consider the issue raised in the appeal afresh. Having done so, it concluded that the interest under consideration arose in the UK and dismissed the taxpayer's appeal.
A follower notice will require the recipient taxpayer to amend his return to give up the claimed tax saving, or withdraw his appeal. If the taxpayer disagrees with HMRC and is of the view that his case is different from the judicial ruling relied upon by HMRC and refuses to capitulate, there is no right of appeal against the issue of the notice and a penalty of 50% of the disputed tax may be imposed. Even if the taxpayer successfully pursues his substantive case to the FTT, so that the disputed tax saving is confirmed, the penalty will not be refunded.
The Ardmore decision is a timely reminder that decisions of the FTT are not binding and the FTT is free to choose not to follow an earlier decision. Under the follower notice proposals, you could have a scenario where a taxpayer loses his appeal before the FTT, HMRC then decide to rely upon that decision and issue a follower notice to another taxpayer. The recipient of the follower notice refuses to take the necessary corrective action and HMRC decide to impose a penalty of 50% of the disputed tax. The taxpayer then pursues his own appeal to the FTT which decides not to follow its previous decision (relied upon by HMRC to justify the follower notice) and allows the taxpayer's appeal. Although the tax saving will have been confirmed, the taxpayer will have paid 50% of the disputed tax to HMRC in penalties and he will not be able to recover this penalty from HMRC. This is an extraordinary state of affairs and arguably inconsistent with the rule of law.