Don’t Follow Me: Haworth and Follower Notices in the Supreme Court
Follower notices (FNs) were first introduced in 2014. A draconian anti-avoidance measure that requires a taxpayer to take steps to counteract or surrender a disputed tax advantage or to withdraw an appeal on pain of heavy penalties if the taxpayer ultimately loses. The purpose of this is to promote early settlement and, along with the accelerated payment notice (APN) introduced at the same time, to change the economics of tax avoidance schemes by imposing substantial additional costs on those which eventually fail. They represent a powerful tool in HMRC’s arsenal, but also a rather blunt one which has not always been correctly understood. This has recently been made clear by the Supreme Court in R (Haworth) v Revenue and Customs Comrs [2021] UKSC 25.
There are a number of conditions that must be met before a FN can be issued. The most important is that HMRC is of the opinion that there is a final judicial ruling that is relevant to the taxpayer’s tax arrangements. The purpose of this is, supposedly, to penalise obstructive taxpayers who try to re-litigate settled legal issues. Section 205 of Finance Act 2014 states that a judicial ruling is ‘relevant’ if, among other considerations, ‘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’. HMRC long thought that it was sufficient to look to previous judgments for a set of ‘pointers’ that could be used to determine where such principles would apply.
Mr Haworth, the taxpayer, was the settlor of a Jersey trust which held shares that were standing at a sizeable capital gain. He was advised to migrate it to Mauritius, which has no capital gains tax, by replacing the existing Jersey trustees with Mauritian residents and shortly thereafter replacing the Mauritian trustees with UK resident trustees. The intention of the tax planning was, in essence, that the trust’s ‘place of effective management’ (POEM) for the purposes of the UK-Mauritius Double Taxation Agreement would be in Mauritius and any capital gain on the shares would fall within its jurisdiction. This was known as a “Round-the-World scheme” and was similar to one, also involving Mauritius, which had been considered by the Court of Appeal in Smallwood v Revenue and Customs Comrs [2010] EWCA Civ 2045. In Smallwood, the court had upheld the Special Commissioners’ decision at first instance that the POEM of the trust was in the UK. Based on this fact, HMRC concluded that Mr Haworth’s scheme was also ineffective and issued him with a FN (and APN). He challenged the issue of the follower notice by way of judicial review.
The Supreme Court found in favour of Mr Haworth. It emphasised, most importantly, that a past judicial ruling is relevant only if HMRC are of the opinion that there is ‘no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage’. Drawing on the language of the statute, it clarifies that the standard which must be met before HMRC are able to issue a FN is a very high one, in keeping with the potential intrusion on access to justice that is implicit in a FN. In Mr Haworth’s case, the Supreme Court also concluded that HMRC had misunderstood Smallwood by assuming that a scheme that had the ‘pointers’ identified in it must inevitably have failed to establish its POEM in Mauritius. It was also noted that the conclusion of the majority of the Court of Appeal in Smallwood was that the Special Commissioners had been entitled to find that the POEM of the trust was in the UK. As a result, HMRC had both misunderstood the position and had failed to reach the necessary standard of certainty to issue a FN.
The decision is a welcome reassertion of the limits of HMRC’s enforcement powers whose scope has only seemed to grow over previous years. In the case of FNs, this is particularly important because they risk penalising a taxpayer, in essence, for seeking to bring his case before a court or tribunal. Indeed, the penalties for failure to comply with a FN have recently been reformed and slightly softened in Finance Act 2021. Perhaps the balance is shifting in the taxpayer’s favour?
