The sting – penalties for failure to take corrective action for follower notices
Anyone with an open enquiry or appeal concerning a tax avoidance scheme may have to deal with follower notices and accelerated payment notices to be issued under Part 4, Finance Act 2014.
A follower notice brings an appeal or an enquiry to an end by requiring the taxpayer to make the necessary “corrective” amendments to his return (and pay the disputed tax) or face a 50% penalty.
By FA 2014 s.208:
Penalty if corrective action not taken in response to follower notice
‘(1) This section applies where a follower notice is given to P (and not withdrawn).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 and (where different) the additional amount which has or will become due and payable in respect of tax by reason of the first step being taken.
(7) In determining the additional amount which has or will become due and payable in respect of tax for the purposes of subsection (6)(b), it is to be assumed that, where P takes the necessary action as mentioned in subsection (5)(b), the agreement is then entered into.
The penalty under section 208 is 50% of the value of the denied advantage.
S.209 does provide for mitigation as follows:
‘Reduction of a section 208 penalty for co-operation
(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.’
A taxpayer may appeal against the imposition of a penalty for failure to take corrective action. However, the result of the above legislation is that a taxpayer who wishes to dispute a follower notice and pursue his or her appeal to the Tribunal will be faced with, at the least, a penalty of 10% even if subsequently successful in his or her appeal.
Follower notices represent a clear attempt by HMRC to shorten enquires and stifle appeals by taxpayers in ‘tax avoidance’ cases by the use of what in effect is a 50% tax premium should a taxpayer challenge HMRC and lose. This is draconian legislation and no doubt capable of being challenged under the general principles of judicial review, including a potential breach of the right to access to justice for a punitive penalty under Article 6 of the European Convention on Human Rights. However, given the hostility of the Courts against all forms of ‘tax avoidance,’ it may take a well-funded and adventurous taxpayer to do so.
Levy and Levy – the tax investigations and resolution specialists.