Ouch! Penalties for Follower Notices – The floodgates open
The trickle of Follower notices (‘FN’s) (FA2014, Part 4, Chapter 2) has begun to turn into a flood and hapless taxpayers who have entered, often many years previously, into tax efficient schemes are now finding themselves subject to FN’s on the back of decisions in other cases.
Under s. 204 an FN may be given if four conditions, A, B, C and D are met.
‘((2) Condition A is that—
(a) a tax enquiry is in progress into a return or claim made by P in relation to a relevant tax, or
(b) P has made a tax appeal (by notifying HMRC or otherwise) in relation to a relevant tax, but that appeal has not yet been—
(i) determined by the tribunal or court to which it is addressed, or
(ii) abandoned or otherwise disposed of.
(3) Condition B is that the return or claim or, as the case may be, appeal is made on the basis that a particular tax advantage (“the asserted advantage”) results from particular tax arrangements (“the chosen arrangements”).
(4) Condition C is that HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements.’
Section 205 sets out what is ‘relevant’.
205 “Judicial ruling” and circumstances in which a ruling is “relevant”
(1) This section applies for the purposes of this Chapter.
(2) “Judicial ruling” means a ruling of a court or tribunal on one or more issues.
(3) A judicial ruling is “relevant” to the chosen arrangements if—
(a) it relates to tax arrangements,
(b) the principles laid down, or reasoning given, in the ruling would, if applied to the chosen arrangements, deny the asserted advantage or a part of that advantage, and
(c) it is a final ruling.
(4) A judicial ruling is a “final ruling” if it is—
(a) a ruling of the Supreme Court, or
(b) a ruling of any other court or tribunal in circumstances where—
(i) no appeal may be made against the ruling,
The legislation is widely drafted and very much in HMRC’s favour. Firstly, HMRC need only to hold an opinion that there is a relevant judicial ruling. Presumably, this requirement is subject to reasonableness on HMRC’s behalf, i.e. in accordance with the usual public law principles HMRC must not act irrationally in forming that opinion. Secondly, the relevant ruling need only be at the level of the First-tier Tribunal (“FTT), so that a taxpayer who ‘gives up’ at the FTT will be the trigger for HMRC having the power to issue FN’s. Thirdly, the term ‘principles laid down or reasoning given’ is unclear, but presumably refers to the ‘ratio decidendi’ of a case; if so the taxpayer may not be able to challenge an FN even if his or her fact pattern is not on all fours with those in the FN judicial ruling. Fourthly, there is no right of appeal to a Tribunal against the issue of an FN.
The sting in the tail
The penalty regime under s.208 is draconian.
‘(1) This section applies where a follower notice is given to P (and not withdrawn).
(2)P is liable to pay a penalty if the necessary corrective action is not taken in respect of the denied advantage (if any) before the specified time.
(3) In this Chapter “the denied advantage” means so much of the asserted advantage (see section 204(3)) as is denied by the application of the principles laid down, or reasoning given, in the judicial ruling identified in the follower notice under section 206(a).
(4) The necessary corrective action is taken in respect of the denied advantage if (and only if) P takes the steps set out in subsections (5) and (6).
(5) The first step is that—
(a)in the case of a follower notice given by virtue of section 204(2)(a), P amends a return or claim to counteract the denied advantage;
(b)in the case of a follower notice given by virtue of section 204(2)(b), P takes all necessary action to enter into an agreement with HMRC (in writing) for the purpose of relinquishing the denied advantage.
(6) The second step is that P notifies HMRC—
(a) that P has taken the first step, and
(b) of the denied advantage………
(8) In this Chapter—
“the specified time” means—
(a )if no representations objecting to the follower notice were made by P in accordance with subsection (1) of section 207, the end of the 90 day post-notice period;
(b) if such representations were made and the notice is confirmed under that section (with or without amendment), the later of—
(I )the end of the 90 day post-notice period, and
(ii) the end of the 30 day post-representations period;
“the 90 day post-notice period” means the period of 90 days beginning with the day on which the follower notice is given;
“the 30 day post-representations period” means the period of 30 days beginning with the day on which P is notified of HMRC’s determination under section 207.
The penalty under section 208 is 50% of the value of the denied advantage.’
It may be seen that, in the context of the above legislative scheme, ‘corrective action’ is a legal euphemism for ‘giving up.’
Cooperation – a partial solution only
As for all penalties legislation, the amount of a penalty may be reduced for co-operation. S. 208 is no different in this respect.
(a) P is liable to pay a penalty under section 208 of the amount specified in section 209(1),
(b) the penalty has not yet been assessed, and
(c) P has co-operated with HMRC,HMRC may reduce the amount of that penalty to reflect the quality of that co-operation.
(2) In relation to co-operation, “quality” includes timing, nature and extent.
(3) P has co-operated with HMRC only if P has done one or more of the following—
(a) provided reasonable assistance to HMRC in quantifying the tax advantage;
(b) counteracted the denied advantage;
(c) provided HMRC with information enabling corrective action to be taken by HMRC;
(d)provided HMRC with information enabling HMRC to enter an agreement with P for the purpose of counteracting the denied advantage;
(e) allowed HMRC to access tax records for the purpose of ensuring that the denied advantage is fully counteracted.
(4) But nothing in this section permits HMRC to reduce a penalty to less than 10% of the value of the denied advantage.
Here is the real sting in the tail. How many taxpayers will be prepared to risk not taking corrective action where the ‘worse case’ scenario is a huge 50% penalty and the very best- case scenario 10%? We suggest, not many.
The right of appeal – a toothless power for the taxpayer?
An appeal against a section 208 penalty may be made.
‘(1) P may appeal against a decision of HMRC that a penalty is payable by P under section 208.
(2) P may appeal against a decision of HMRC as to the amount of a penalty payable by P under section 208.
(3) The grounds on which an appeal under subsection (1) may be made include in particular—
(a) that Condition A, B or D in section 204 was not met in relation to the follower notice,
(b) that the judicial ruling specified in the notice is not one which is relevant to the chosen arrangements,
(c)that the notice was not given within the period specified in subsection (6) of that section, or
(d)that it was reasonable in all the circumstances for P not to have taken the necessary corrective action (see section 208(4)) in respect of the denied advantage.
(4)An appeal under this section must be made within the period of 30 days beginning with the day on which notification of the penalty is given under section 211.
The appeal in theory gives the taxpayer some scope to challenge the issue of a penalty and in particular to argue that the judicial ruling relied upon by HMRC is not relevant to the chosen arrangements. The problem is that the underlying FN cannot be challenged and this means that, assuming the taxpayer’s representations are not accepted, there will be no escape from the imposition of a penalty with the risk of a huge 50% charge as above, the more so as the penalty appeal will not doubt be construed as a lack of co-operation by HMRC. How many taxpayers will risk an appeal under these circumstances? We suggest, not many.
Tax efficient arrangements
We suggest that the FN regime is playing its part in sounding the death knell of a wide variety of tax planning arrangements and it seems likely that most taxpayers will take the necessary ‘corrective action’ rather than take a gamble and incur a large penalty. HMRC are very much ‘on the front foot’ in their relentless campaign to crack down on all forms of tax efficient arrangements.
Levy and Levy – the tax resolution specialists.