Finance Act 2014 introduced the concept of Follower Notices (“FNs”). Broadly, these give HMRC the unilateral non-appealable power to conclude in their favour any tax dispute where the statutory conditions are met. (Granted, a taxpayer does have the legal right to ignore the notice and carry on arguing: but it’s a high-risk strategy whose failure carries a penalty of up to 50% of the tax at stake: for all but the brave or foolhardy a validly-issued FN means “game over”.)
If, after HMRC have responded to your representations, you still disagree with HMRC as to whether the notice is validly issued, your only recourse is to seek judicial review. That is what Mr Haworth did. He lost. But the case ([2018] EWHC 1271 (Admin)) raises some interesting features.
One of the key requirements to be met before an FN can be validly issued in respect of any dispute is that HMRC should be “of the opinion that there is a judicial ruling which is relevant” to the matter in dispute. Broadly, this means that a final ruling has been given by the courts in another case and “the principles laid down, or reasoning given, in the ruling” would be determinative of the dispute in question.
The main battleground for Mr Haworth was whether the Court of Appeal ruling in Smallwood [2010] EWCA Civ 778 was “relevant” to his case.
Essentially, HMRC had succeeded in Smallwood because they had been able to show that the Place of Effective Management (“POEM”) of a trust at a relevant time was not Mauritius (as it had to be if the planning was to succeed) but the UK. That, as everyone agreed, was a question of fact.
Mr Haworth’s planning was in all relevant regards very similar to that which had been found to fail in Smallwood. However, he contended that HMRC could not validly found an FN on the Smallwood decision because that decision depended on the specific facts of that case (namely the POEM of the trust) and it was not possible to “read over” the facts of one case to another. In other words, the “principles laid down, or reasoning given” in Smallwood simply established that if the POEM of the trust in his own case was the UK, his planning failed: they had nothing to say about where his trust’s POEM actually was.
The submission is an attractive one: the more so because in another case involving similar arrangements (Lee and Bunter v HMRC [2017] UKFTT 279 (TC)) the Tribunal had not decided the case simply on the grounds that Smallwood determined the matter: on the contrary – it had said that “despite the close resemblance, this case is not on all fours with Smallwood, and that I cannot, as Mr Brennan urged me to do, simply apply the outcome in that case to the facts in this.” Yet that was, in effect, exactly what HMRC had purported to do in Mr Haworth’s case.
In upholding the validity of the FN, the High Court in Haworth held that the Court of Appeal’s decision in Smallwood did indeed contain “reasoning applicable in other cases” inasmuch as it “identified important facts relied upon by the Special Commissioners relevant to determining POEM”, leading it to conclude that “the Special Commissioners were entitled to find that the POEM of the trust was the UK” and that “these principles and reasoning are capable of application to other similar schemes by other taxpayers”. The obvious riposte is – so they may be, but that is not the point: the question that must be asked is – would the application of these principles and reasoning to the facts of Mr Haworth’s case be a “knock-out blow” to his dispute?
The case shows, perhaps, two things. The first is that fine distinctions on the facts may not be sufficient to avoid being tarred with the same brush as a decided case and hence escaping an FN. The second is that this seems to be another example of the readiness of the courts to err on the side of generosity to HMRC in interpreting counter-avoidance legislation.
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