In the recent Supreme Court decision in the case of Haworth, the court firmly reset the balance between taxpayers and HMRC on the question of access to the courts in tax appeals where there is precedent case law.
The case involved Follower Notices. These allow HMRC to issue a notice to a taxpayer effectively requiring a taxpayer to give up its tax appeal where HMRC considers that a previous case has already established that the tax planning arrangements used by that taxpayer don’t work.
These notices were introduced in Finance Act 2014 as a way of streamlining the process of ‘tidying up’ once a tax avoidance scheme had been found to fail. In such cases, HMRC would normally have taken forward a lead case in order to challenge a particular scheme. However, if HMRC were successful in the lead case there was very little incentive for other users of the same scheme to ‘throw in the towel’. The concern was that the use of mass marketed schemes meant that the system could be clogged up with cases that were bound to fail. HMRC would have to expend considerable resources in investigating and closing down each and every usage of the failed scheme.
Follower Notices (along with Accelerated Payment Notices) were intended to deal with the problem by using the threat of a significant penalty (up to 50% of the tax at stake) if a taxpayer continued with a hopeless case.
However, the usage of these powers does not appear to have been confined to completely hopeless cases. HMRC had arguably begun to use the notices as a tool to prevent taxpayers from disputing avoidance matters before the courts. We have had clients stuck in the unenviable position of having to choose between pursuing litigation which has decent prospects of success, and having to drop their appeal for fear of becoming liable for a massive penalty if they lose.
Haworth was a perfect illustration of the problem. In issuing a Follower Notice to the taxpayer (on the basis of the Court of Appeal’s decision in favour of HMRC in the Smallwood Case - where the Court of Appeal had also made it clear that its decision was based on the facts in that particular case), HMRC had tried to soften the test for issuing a notice from a question of whether the lead case meant that the taxpayer was more or less doomed to fail, to whether in HMRC’s opinion the taxpayer was merely likely to fail.
The Supreme Court found that this was taking things too far, deciding that “HMRC must form the opinion that there is no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage… An opinion merely that is likely to do so is not sufficient”.
This must be correct. The significant financial penalty that can be imposed as a result of a Follower Notice can have a real chilling effect on whether a taxpayer will raise legitimate issues through the courts and so their usage must be confined to their originally intended scope.
Tools such as follower notices certainly have their place, and the weeding out of hopeless cases benefits all users of the justice system. However, as the Supreme Court has made clear in Howarth, access to justice for those with legitimate arguments must be prioritised.
The Supreme Court unanimously dismisses HMRC’s appeal in Haworth v HMRC