R (on the application of Haworth) v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 02 July 2021 |
| Neutral Citation | [2021] UKSC 25 |
| Year | 2021 |
| Court | Supreme Court |
[2021] UKSC 25
Lord Briggs, Lady Arden, Lord Leggatt, Lord Stephens, Lady Rose
Supreme Court
Judicial review – Appeal against Court of Appeal decision – Follower notice – Interpretation of FA 2014, s. 205(3)(b) – Significance of R & C Commrs v Smallwood [2010] BTC 637 – Whether HMRC misdirected – Yes – Notices quashed – Whether follower notice defective – Yes, but not enough to invalidate follower notice – Appeal dismissed – FA 2014, Pt. 4.
The Supreme Court upheld a Court of Appeal decision on follower notices in R (on the application of Haworth) v R & C Commrs [2019] BTC 13. To give a follower notice, HMRC had to be of the opinion that the principles or reasoning in the ruling in question “would” deny the advantage, which required that HMRC had to have formed the opinion that there was no scope for a reasonable person to disagree that the earlier ruling denied the taxpayer the advantage, whereas in this case HMRC's evidence merely showed that it was “likely” that the earlier ruling would have denied the advantage.
The respondent (Mr Haworth) completed his 2000–01 tax return on the basis that he had avoided tax on a substantial capital gain arising from the disposal of shares by a trust of which he was the settlor. The avoidance of tax depended on a combination of provisions in TCGA 1992 and the UK/Mauritius double tax convention and on the assertion that the place of effective management (POEM) of the trust was in Mauritius.
HMRC enquired into Mr Haworth's tax return and sent him a follower notice (and an accelerated payment notice (APN) requiring payment of £8.8 million) on the basis that the scheme used was similar to that defeated in the Court of Appeal in R & C Commrs v Smallwood [2010] BTC 637.
Mr Haworth challenged HMRC decisions to issue the follower notice and APN by judicial review. In R (on the application of Haworth) v R & C Commrs [2018] BTC 22, Sir Ross Cranston dismissed the claim.
Mr Haworth appealed to the Court of appeal, which, in R (on the application of Haworth) v R & C Commrs [2019] BTC 13, unanimously held that the conditions required for the giving of a follower notice had not been satisfied.
The main provision in dispute was that in FA 2014, s. 205(3)(b), which provides when a previous judicial ruling is “relevant” to the taxpayer's chosen arrangements for the purposes of Condition C in s. 204(4), which must be met before HMRC can issue a follower notice. FA 2014, s. 205(3)(b) provides that a judicial ruling is relevant to the chosen arrangements if “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”. The key issue was the degree of certainty that HMRC had to have before they could show that they had formed the opinion that the principles laid down or reasoning given in the Smallwood ruling if applied to Mr Haworth's tax arrangements would deny the tax advantage asserted by Mr Haworth. In this respect HMRC accepted that their evidence had shown no more than that HMRC concluded that it was “likely” that the application of the Smallwood ruling would deny that advantage to Mr Haworth. The Supreme Court decided that the use of the word “would” 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 it is likely to do so is not sufficient. Given that HMRC had accepted that their evidence had merely shown that it was likely that the ruling in Smallwood if applied would deny Mr Haworth his tax advantage HMRC's appeal was dismissed on this issue.
The Supreme Court also ruled that:
- The Court of Appeal was right to conclude that HMRC had misdirected themselves about what was actually decided in Smallwood by overstating the conclusions reached by the Court of Appeal in that case;
- The Court of Appeal was right to dismiss Mr Haworth's contention that findings of fact in a judgment do not form part of the principles laid down or reasoning given in a ruling for the purposes of Condition C.
- The Court of Appeal was right that the follower notice failed to give an adequate explanation as required by s. 206(b), but the defects did not invalidate the notice.
HMRC's appeal was dismissed.
The taxpayer's appeal against the closure notice charging him to almost £9m of CGT in relation to the scheme at issue in this judicial review claim has been heard by the First-tier Tribunal and the decision is awaited.
Christopher Stone (Instructed by HMRC Solicitors Office (Bush House)) appeared for appellant
Giles Goodfellow QC Ben Elliott (Instructed by Levy & Levy) appeared for respondent
[1] The follower notice regime established by Part 4 of the Finance Act 2014 has been described as raising the stakes on tax avoidance. It has also been described as draconian. The provisions apply where a taxpayer has completed his tax return or brought an appeal against his assessment on the basis that he is entitled to a tax advantage because of arrangements that he has entered into. The advantage might be an entitlement to a particular relief from tax or the avoidance of a tax charge. HMRC may form the opinion that the taxpayer is not entitled to that tax advantage because a previous court or tribunal ruling has already decided that arrangements like his are not effective and do not confer that advantage on taxpayers. If certain conditions are met, HMRC may serve a follower notice, informing the taxpayer that his situation follows that in the earlier case, denying him the tax advantage he asserts.
[2] The taxpayer who receives a follower notice must decide whether to respond by taking the “corrective action” specified in Part 4. If he takes corrective action, he concedes that he is not entitled to the tax advantage and he then becomes liable to pay the tax he had initially sought to avoid. If the taxpayer decides not to take corrective action and maintains that he is entitled to the advantage claimed then, if he ultimately loses his case before the tribunal and HMRC are proved right, not only will he have to pay the additional tax, but he will also be subject to a substantial penalty.
[3] In his tax return for the year 2000/2001, the respondent, Mr Haworth, disclosed that he had entered into arrangements whereby, he asserted, he avoided any charge to tax on a substantial capital gain arising from the disposal of shares by a trust of which he was the settlor. His avoidance of the charge to tax depended on a combination of the provisions of the Taxation of Chargeable Gains Act 1992 (“the TCGA”) and the operation of the UK/Mauritius double taxation convention as appended to the Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981 (SI 1981/1121) (“the Convention”).
[4] HMRC opened an enquiry into Mr Haworth's tax return and issued a follower notice to Mr Haworth contending that the Court of Appeal has already decided in R & C Commrs v Smallwood [2010] BTC 637 (“Smallwood”) that on the true construction of the Convention, the provisions he relies on do not relieve him of liability under the TCGA. In that case, HMRC say, arrangements which were the same in all material respects to those of Mr Haworth were held not to remove the charge to tax in the way that Mr Haworth asserts.
[5] Mr Haworth brought judicial review proceedings in the Administrative Court to challenge the issue of the follower notice. Mr Haworth's challenge was dismissed at first instance by Sir Ross Cranston: see [2018] BTC 22 handed down on 23 May 2018. Mr Haworth's appeal was allowed by the Court of Appeal. The Court held unanimously that the conditions required for the giving of a follower notice had not been satisfied in Mr Haworth's case [2019] BTC 13. The main judgment was given by Newey LJ with Gross LJ giving a short concurring judgment. Sir Timothy Lloyd agreed with both judgments.
[6] The conditions that must be satisfied before HMRC can give a follower notice are set out in section 204 of the Finance Act 2014 (“FA 2014”) as follows:
(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 tax enquiry is in progress into a return or claim made by P in relation to a relevant tax, or
- P has made a tax appeal (by notifying HMRC or otherwise) in relation to a relevant tax, but that appeal has not yet been –determined by the tribunal or court to which it is addressed, orabandoned 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.
(6) A follower notice may not be given after the end of the period of 12 months beginning with the later of –
- the day on which the judicial ruling mentioned in Condition C is made, and
- 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.
[7] Capital gains tax is a relevant tax for the purposes of Condition A: see section 200(b) FA 2014. For our purposes, the time limit in section 204(6) was substituted by a transitional...
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