V8: Follower notices
Circumstances in which a follower notice may be given
"(1) HMRC may give a notice (a ‘follower notice’) to a person (‘P’) if Conditions A to 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.
(5) Condition D is that no previous follower notice has been given to the same person (and not withdrawn) by reference to the same tax advantage, tax arrangements, judicial ruling and tax period." (FA 2014, s.204(1) - (5))
Time limit for issuing follower notice
(6) A follower notice may not be given after the end of the period of 12 months beginning with the later of -
(a) the day on which the judicial ruling mentioned in Condition C is made, and
(b) the day the return or claim to which subsection (2)(a) refers was received by HMRC or (as the case may be) the day the tax appeal to which subsection (2)(b) refers was made.” (FA 2014, s.204(6))
Relevant judicial ruling
"(2) ‘Judicial ruling’ means a ruling of a court or tribunal on one or more issues." (FA 2014, s.205(2))
Relevant judicial ruling
"(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." (FA 2014, s.205(3))
Principles or reasoning would deny asserted advantage: must be no scope for reasonable disagreement
" Even taking those differences into account, the principle of statutory interpretation referred to in UNISON supports, in my view, the Court of Appeal’s conclusion. There can be no doubt that the threat of the substantial penalty is intended firmly to discourage a taxpayer from pursuing his appeal. As Lord Reed said at para 80 of UNISON, where a statutory power authorises an intrusion upon the right of access to the courts, it must be interpreted as authorising only such a degree of intrusion as is reasonably necessary to fulfil the objective of the provision in question. Applying that principle, the use of the word “would” in the provision requires 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. Only then can they be said to have formed the opinion that the relevant ruling “would” deny the advantage. An opinion merely that is likely to do so is not sufficient." (R (oao Haworth) v. HMRC  UKSC 25)
Includes factual reasoning
" I reject therefore Mr Goodfellow’s submission that factual findings of this kind are not part of the reasoning given in the relevant ruling for the purposes of section 205(3)(b). That contention, if correct, would also create an anomalous position where the decision of the FTT might be a relevant ruling if it becomes a final ruling for the purposes of section 205(3)(c) but the reasoning in the decision could not be applied if the decision were upheld on appeal either because there was no Edwards v Bairstow challenge or where such a challenge failed. If an appellate judgment upholds the decision of the FTT, the FTT’s reasoning to that extent becomes the reasoning given in the appellate judgment." (R (oao Haworth) v. HMRC  UKSC 25)
Factors affecting relevance
 Whether HMRC can reasonably form the opinion that an earlier ruling is relevant to the taxpayer’s asserted advantage will depend on a number of factors. First, it may depend on how fact sensitive the application of the relevant ruling is; in other words, 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. A follower notice may be issued at different stages of the investigation into the taxpayer’s affairs. According to Condition A in section 204(2), it may be given as soon as a tax enquiry has been opened into the tax return made by P or it may be given during the course of a tax appeal. If the application of the earlier ruling is very fact dependent, then it may be more difficult for HMRC to form the opinion that the relevant ruling would deny the advantage where HMRC is considering Condition C at the earlier stage. If the follower notice is being considered when the tax appeal is already underway it may be clearer whether the fact patterns are sufficiently similar." (R (oao Haworth) v. HMRC  UKSC 25)
" Secondly, the relevance of the earlier ruling may turn on HMRC’s rejection of the taxpayer’s evidence as being untruthful. HMRC will have to consider carefully whether it is satisfied that the untruthfulness of those factual assertions is so clear that it can reasonably form the opinion that the earlier ruling is relevant, despite that contrary evidence.
 Other cases may be less fact sensitive, for example where the taxpayer has entered into the same mass marketed tax avoidance scheme as the taxpayer in the earlier ruling so that the provisions applicable in his case are identical to those held to be ineffective by the earlier ruling. If it is clear that there is no material difference between the chosen arrangements and the arrangements considered in the earlier ruling, it will be easier in such a case for HMRC to form the opinion that Condition C is satisfied." (R (oao Haworth) v. HMRC  UKSC 25)
Legal arguments not raised
" Thirdly, HMRC will need to consider the legal arguments put forward by the taxpayer. The taxpayer may rely on an argument that was not raised in the earlier ruling. This is what happened in R (Locke) v Revenue and Customs Comrs  EWCA Civ 1909;  1 All ER 459;  STC 2543. In that case, the taxpayer Mr Locke relied on a different statutory provision as entitling him to the tax advantage he asserted as compared to the statutory provision that had been considered and rejected in the earlier case on which HMRC sought to rely as the relevant ruling. The novel argument he made had not been put forward by the other taxpayers who had entered into the same arrangements as Mr Locke. It had not therefore been determined by the earlier ruling so that earlier ruling did not satisfy Condition C. A similar situation might arise where the earlier ruling was based on a concession by a party to those proceedings as to some aspect of the legal framework, but the taxpayer whose asserted tax advantage is being considered has made clear that he does not make that same concession and wishes to argue the point." (R (oao Haworth) v. HMRC  UKSC 25)
" Fourthly, HMRC should also consider the nature of the earlier ruling. As Mr Stone pointed out, a ruling by the FTT can be a relevant ruling for the purposes of Condition C even though it has no precedential value. However, a ruling arrived at after a hearing where, for example, the taxpayer did not appear or was not legally represented or where the reasoning in the decision is brief or unclear is less likely to be capable of forming the basis for the necessary opinion required in Condition C." (R (oao Haworth) v. HMRC  UKSC 25)
"(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,
(ii) if an appeal may be made against the ruling with permission, the time limit for applications has expired and either no application has been made or permission has been refused,
(iii) if such permission to appeal against the ruling has been granted or is not required, no appeal has been made within the time limit for appeals, or
(iv) if an appeal was made, it was abandoned or otherwise disposed of before it was determined by the court or tribunal to which it was addressed." (FA 2014, s.205(4))
Time of becoming final
"(5) Where a judicial ruling is final by virtue of sub-paragraph (ii), (iii) or (iv) of subsection (4)(b), the ruling is treated as made at the time when the sub-paragraph in question is first satisfied." (FA 2014, s.205(5))
HMRC are of the opinion
Must be HMRC's opinion (not simply that of an officer)
" Condition C makes clear that for a follower notice to be given the opinion must be formed by HMRC. This can be contrasted with other provisions in taxing statutes that require only that an officer of HMRC form a specified opinion: see for example sections 9C and section 29 of the Taxes Management Act 1970. HMRC interpreted Condition C, correctly in my view, as requiring them to set up a procedure whereby the decision whether to issue a follower notice was taken by a senior person within the organisation. The Government’s consultation response document “Tackling marketed tax avoidance - summary of responses” published in March 2014 noted that HMRC was putting in place “strict internal governance and safeguards so that follower notices can only be issued following approval at senior level within the organisation, and will be scrutinised by staff other than those who have been working on the detail of the case”. This was reflected in HMRC’s published guidance “Follower notices and accelerated payments” (July 2015) which states, at para 1.19.1, that decisions over the giving of follower notices will be taken by a senior HMRC panel independent from the team who investigate the cases.
 One can envisage a case in which a taxpayer challenges a follower notice on the basis that the notice was not based on an opinion formed by HMRC but only by an officer of HMRC. Such a challenge by Mr Haworth was rejected by the judge, see paras 95 onwards of his judgment where he held that the establishment of WFGG generally and the decision-making process in respect of Mr Haworth in particular did not involve any improper sub-delegation. Permission to appeal to the Court of Appeal against that finding was refused. Whatever opinion is formed by WFGG, whether the opinion is that the judicial ruling is relevant or that it is not relevant or they are not sure whether it is relevant or not, is an opinion formed by HMRC." (R (oao Haworth) v. HMRC  UKSC 25)
Must properly understand the judicial ruling and not overstate its conclusions
" There is nothing in that careful account by the judge that suggests that he made a finding of fact that the opinion that HMRC formed in Mr Haworth’s case was based on evidence that he had seen other than the submissions he described. The tenor of those submissions is that Hughes LJ found in Smallwood that the presence of the seven pointers inevitably led to the conclusion that the POEM of a trust was the UK. Further, the submissions stated and the WFGG proceeded on the basis that if those seven pointers were present in any subsequent case, that justified the issue of a follower notice.
 That does overstate the conclusion of the Court in Smallwood. Hughes LJ did not decide that it was an inevitable consequence of a scheme which shared the Smallwood pointers that its POEM would be the UK and not Mauritius. All the members of the Court of Appeal accepted that the test was that set out in the Commentary on article 4(3) of the Model Convention. That Commentary states that “no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management”. Although Hughes LJ summarised the findings of the Special Commissioners in para 70 of his judgment, he was not, in my view, listing those pointers as being necessary and sufficient to establish in any other case that the POEM of the trust is the UK. On the contrary, he referred to the full description of the primary facts found by the Special Commissioners as set out in the judgement of Patten LJ as supporting their finding that in Mr Smallwood’s case, the POEM of their trust had been the UK.
 I also consider the Court of Appeal were right to reject HMRC’s contention that section 31(2A) of the Senior Courts Act 1981 applied to prevent the follower notice from being quashed. Section 31(2A) provides that the High Court must refuse relief on an application for judicial review if it appears to the court to be highly likely that the outcome for the applicant would not have been substantially different if the conduct complained of had not occurred. It is, as Newey LJ said, by no means self-evident that HMRC would have arrived at the same conclusion if the November Submission had not overstated the conclusions arrived at by Hughes LJ. In my view the proper course was to quash the follower notice. Grounds 2 and 3 of HMRC’s appeal must therefore be dismissed." (R (oao Haworth) v. HMRC  UKSC 25)
Content of follower notice
"A follower notice must -
(a) identify the judicial ruling in respect of which Condition C in section 204 is met,
(b) explain why HMRC considers that the ruling meets the requirements of section 205(3), and
(c) explain the effects of sections 207 to 210." (FA 2014, s.206)
Should contain reasons but failure to do so does not render it invalid
" I can deal with this issue briefly since it cannot affect the outcome of the appeal. I agree with Newey LJ’s conclusion that the follower notice was deficient. Having described the ruling in Smallwood in some detail including setting out the seven pointers, the notice then stated baldly that “Corresponding reasoning applies to the circumstances and implementation of the tax arrangements used by you or on your behalf.” I would not want to encourage HMRC to send voluminous notices to taxpayers. But some more explanation as to why the corresponding reasoning applied to his arrangements should have been set out. This is required even though there may have been discussions between HMRC and Mr Haworth’s advisers prior to the giving of the notice. The notice need not be lengthy, but it should have contained a description of the features of Mr Haworth’s arrangements that in HMRC’s opinion meant that Smallwood would deny him the tax advantage asserted.
 Although the notice was defective, I agree with the Court of Appeal that on its true construction, section 206 does not provide that any defect in the notice will render it invalid and that the defects in the present case did not invalidate this notice." (R (oao Haworth) v. HMRC  UKSC 25)
No right of appeal against the notice
" There is no right of appeal as such against the issue of a follower notice. However, section 214 provides a right of appeal against a section 208 penalty and that the taxpayer may challenge the notice on the ground that the judicial ruling relied on by HMRC was not relevant" (R (oao Haworth) v. HMRC  UKSC 25)
Appeal against penalty
FTT decides for itself if the ruling would deny the advantage
"HMRC also argued that this construction of section 205(3) is inconsistent with the test that is applied by the First-tier Tribunal when determining an appeal under section 214(3)(b). I do not see that there is any anomaly created here. HMRC say correctly that in an appeal against a penalty under that provision, the FTT does not review the reasonableness or rationality of HMRC’s opinion but determines for itself whether the earlier case is a relevant ruling or not. The tribunal must also apply the wording of section 205(3)(b) when arriving at their decision as to whether the judicial ruling is “relevant”. Faced with such an appeal, the tribunal must, therefore, decide whether the ruling would deny the advantage, applying the same high threshold of certainty as applies to HMRC. The same test applies in both contexts in which the issue of whether the judicial ruling is relevant within the meaning of section 205(3) arises; both for HMRC’s role in forming the opinion required by section 204(4) and for the tribunal in determining whether the taxpayer’s ground of appeal in section 214(3)(b) succeeds." (R (oao Haworth) v. HMRC  UKSC 25)
Reasonable in all the circumstances not to take corrective action
Not the same as reasonable excuse (because taking corrective action not mandatory)
" We would, however, observe that the phrase “reasonable in all the circumstances” involves the application of a straightforward test. We do not consider that straightforward test needs elucidation by reference to the wording of different tests applied in different contexts. The concept of a “reasonable excuse” often appears as a defence to a penalty where a taxpayer has failed to meet a mandatory obligation, such as filing a tax return by a specific date. The use of different wording in s 214(3)(d) is explained by the fact that the penalty under s208 is not imposed for breach of any mandatory requirement: taxpayers are lawfully entitled not to take corrective action in response to a follower notice." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)
Decide based on why the deadline was missed
" It follows, in our judgment, that the FTT simply had to consider whether it was “reasonable in all the circumstances” for the Company not to take corrective action, giving that phrase its ordinary and natural meaning. That required the FTT to do the 11 following in this case (which should not be taken as setting out an exhaustive list of the examination required in all cases):
(1) The FTT needed to consider why the Company chose not to take corrective action as its thought process formed part of the relevant “circumstances”.
(2) The FTT also needed to take into account the fact that the question of whether it was “reasonable in all the circumstances” not to take corrective action operates as a defence to a penalty that applies if corrective action is not taken by a deadline. Accordingly, the fact that the deadline was missed, and the Company’s reasons for missing it were highly relevant.
(3) The FTT needed to take into account the structure and purpose of the relevant provisions of FA 2014. Those provisions are designed to ensure that taxpayers who fail to take corrective action by the deadline in response to a follower notice are to suffer a penalty unless, among other defences, they can establish that it was reasonable in all the circumstances not to take the corrective action. Once a taxpayer fails to meet the deadline, even if that failure was not reasonable in all the circumstances, it is not pre-ordained that the maximum penalty of 50% will be charged, since s210 provides for the penalty to be mitigated if there has been “co-operation” as statutorily defined. But it would be quite contrary to the purpose of the legislation for a taxpayer who misses the deadline for no good reason to enjoy complete exemption from a penalty simply because of actions taken after the deadline has been missed.
 Examined in that way, there was only one possible answer. Given the FTT’s findings, it was not “reasonable in all the circumstances” for the Company to take no corrective action. In this case at least, the Company’s actions after the deadline was missed were of potential relevance to the amount of the penalty that should be charged but did not entitle it to complete exemption from that penalty. HMRC’s appeal on Grounds 1 and 2 is accordingly allowed." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)
Might be possible in some cases for subsequent events to be relevant
" ... We will say only that we consider that it may be possible, in some limited circumstances, for events taking place after the deadline for taking corrective action to have some bearing on the question whether it was “reasonable in all the circumstances” for a taxpayer not to take that action. The only example we have been able to think of, though it may be that with the benefit of full legal submissions from the Company we might have found more, is that of a taxpayer who, having received a follower notice, decides to continue to contest the underlying appeal considering that the “final judicial ruling” on which HMRC rely was either wrongly decided, or not determinative of the taxpayer’s appeal. Such a taxpayer could be assessed to a penalty as soon as the deadline is missed. The question whether it was “reasonable in all the circumstances” for the taxpayer to continue to contest the appeal could, in our judgment, be informed by an analysis of how that appeal ultimately fares. For example, if it is struck out as having no prospect of success, that might suggest that it was not “reasonable in all the circumstances” not to take corrective action; the conclusion might be otherwise if the taxpayer is ultimately successful." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)
Limited basis for mitigation
" We agree with HMRC that the FTT made an error of law in its discussion at . It approached its discretion as to the amount of penalty that should be imposed as entitling it to consider the Company’s activities of “telling”, “helping” and “giving”, but did not note that the FTT was able only to give credit for “co-operation” as specifically and restrictively defined in s210(3). Accordingly, it applied the wrong approach when deciding how to exercise its power under s214(9)." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)
Counteraction is broader enquiry than required corrective action
" In our judgment, “counteraction” in s210(3)(b) embraces a broader category of action than the similar concepts referred to in s208(5). That is readily apparent in relation to follower notices issued during an enquiry. For such follower notices, the action required in s208(5)(a) is to “amend a return or claim to counteract the denied advantage”. Therefore, only a specific type of counteraction (amending a return or claim) is to count for the purposes of s208(5)(a), but “counteraction” generally counts for the purposes of s210(3)(b). We see no reason why the position should be otherwise for follower notices issued after an appeal not least since Parliament has not chosen to replicate, in s210(3)(b), the concept of taking all necessary steps to reach agreement with HMRC that appears in s208(5)(b).
 We are reinforced in that conclusion by the fact that s210(2) requires the “nature” and “extent” of any counteraction to be considered. If, as HMRC submit, there can only be “counteraction” if a taxpayer does everything that is required to take corrective action, albeit late, considerations of “nature” and “extent” would be redundant since the taxpayer’s counteraction could only be perfect, or non-existent." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)
Giving up appeal and communicating that to HMRC
" In our judgment, the concept of “counteraction” needs to be understood purposively. The purpose of the follower notice regime is to provide taxpayers with a strong disincentive to continue to consume public resources by continuing tax disputes which appear to have been resolved by other finally decided cases. Therefore, in our judgment, full “counteraction” occurs, in the case of a follower notice issued after an appeal has been commenced, if the taxpayer gives up the appeal and communicates that fact to HMRC. The requirement to consider “timing” means that the amount of credit available for such counteraction will reduce the later it takes place. The requirement to consider “nature” and “extent” means that partial credit may be available for steps on the way to full counteraction." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)
Payment of amount in dispute not of itself sufficient
"...We do, however, agree with HMRC that mere payment of the amount in dispute, or of any APN does not of itself amount to full counteraction. A person paying an APN is doing nothing more than complying with a statutory obligation to pay a particular sum by a particular time on account of that person’s overall tax liability. Compliance with that statutory obligation is entirely consistent with continuing to progress an appeal against that liability. In the context of this appeal, therefore, “counteraction” involves surrendering the underlying dispute as to the efficacy of the Scheme and not the payment of amounts demanded under the APN." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)
But genuine belief that appeal had been settled is relevant
" In our judgment, the combination of the three factors set out in paragraph 47 represented a step on the way to counteraction. Since it genuinely believed it had settled the dispute about the Scheme, in practice after 23 January 2018 the Company was not going to require HMRC to progress its appeal relating to the Scheme. The Company’s actions certainly fell a long way short of full counteraction, not least since it failed to tell HMRC that it would no longer be progressing the appeal. But in practice public resources were saved by the Company’s decision and it would be unduly harsh to deny the Company any credit at all for its steps along the way to counteraction." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)
Quantum of mitigation depends on overall view
Some elements of potential mitigation may not be relevant
" The final question, therefore, is how much credit to give the Company for the cooperation it gave. We have seen some decisions from the FTT that have approached this as a largely arithmetic exercise: for example allocating a notional 20% amount of maximum mitigation to each of the five categories of “co-operation” specified in s210(3) and then deciding how much mitigation to award in each of those five categories in order to reach an overall penalty total. We consider that such an approach risks losing sight of the holistic nature of the exercise and also the fact that, given the overall purpose of the follower notice legislation to which we have referred, “counteraction” of the tax advantage should in most cases tend to attract greater credit than the other categories. It also gives rise to conceptual difficulties. To take an example, in some cases the “tax advantage” at issue might be so straightforward to quantify that HMRC have no real need of assistance that could constitute co-operation falling within s210(3)(a). If a notional 20% of maximum mitigation was available for that category, the question would arise whether the taxpayer should obtain no credit at all (which might operate harshly since if it provided all necessary co-operation in other categories it could still not obtain maximum mitigation) or whether it should obtain the full 20% of maximum mitigation (which might appear generous when HMRC in fact needed no assistance)." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)
Correct holistic approach
" We will, therefore, apply the following approach when deciding what level of penalty to impose:
(1) We will approach the question holistically. Recognising that not all of the categories of “co-operation” set out in s210(3) are relevant in this case, we will not seek to allocate an overall level of discount to each of those categories, but rather will seek to give the Company credit for the overall level of “co-operation” afforded.
(2) We will recognise that the overall purpose of the regime is to discourage taxpayers from pursuing, without good reason, disputes about tax advantages which HMRC reasonably consider to have been determined in their favour in other final decided cases. Co-operation that comes closest to addressing that purpose should, accordingly, attract the greatest credit and conversely, if the Company’s actions, even if technically meeting the definition of “co-operation”, have done relatively little to meet the statutory purpose, correspondingly lower credit should be given.
(3) Where the Company took steps falling within s210(3), we will consider the overall effectiveness of those steps in meeting the purpose of the provisions, recognising that even if those steps were not fully effective, and more could reasonably have been done, some partial credit may still be appropriate." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)
30% penalty where genuine but ineffective attempt at late counteraction
" Applying that approach, we see no reason to depart from HMRC’s conclusion that the co-operation falling within s210(3)(a) would, on its own, justify a reduction in the penalty rate from 50% to 42%. Taking into account the Company’s additional imperfect steps on the way to counteraction, we consider that an appropriate penalty rate would be 30% (which involves raising the level of mitigation from 20% offered by HMRC to 50%). That, in our judgment, recognises the Company’s genuine attempt to effect some late counteraction, the most significant type of co-operation that could be offered in this case, whose effect was that no more HMRC resources in practice needed to be allocated to the appeal relating to the Scheme, while at the same time recognising that it fell a long way short of what was needed to achieve full counteraction and was based on an unreasonable belief as to the effect of the telephone call with HMRC on 22 January 2018. That puts the Company’s penalty exactly half way between the minimum penalty of 10% and the maximum penalty of 50% which we consider appropriate." (HMRC v. Comtek Networks Systems (UK) Ltd  UKUT 81 (TCC), Judge Richards and Judge Greenbank)