02 July 2021

R (Haworth) V HMRC; (SC)

Supreme Court upholds taxpayer’s challenge to follower notice in R (Haworth) v HMRC

The Supreme Court has unanimously dismissed HMRC’s appeal in the case of R (Haworth) v HMRC. Mr Haworth received a follower notice in which HMRC stated their view that, due to the decision in Smallwood v Revenue and Customs Comrs [2010] EWCA Civ 778, he was unlikely to succeed in his appeal seeking relief under the UK-Mauritius Double Taxation Convention. Mr Haworth brought a claim for judicial review challenging the follower notice.

The Court of Appeal had allowed Mr Haworth’s claim and quashed the follower notice holding that:

(1)   As a matter of language, but also due to the draconian nature of the follower notice regime (in Chapter 2 Part 4 Finance Act 2014) and the legislation’s impact on access to the courts and the rule of law, HMRC can only issue a follower notice in circumstances in which they have a “substantial degree of confidence in the outcome”;

(2)   HMRC had overstated the conclusion in Smallwood, in particular in their decision-making HMRC had considered that Hughes LJ had held that the place of effective management of the trust being in the UK (which was the determinative issue) was the “inevitable consequence” of the tax scheme.

In a unanimous judgment, the Supreme Court has confirmed that HMRC overstated the conclusion in Smallwood when deciding to issue the follower notice. In addition, the Supreme Court has held that, taking into account the severe consequences of follower notices and the intrusion upon the right of access to the courts, the legislation requires that HMRC must form an opinion not merely that the earlier ruling is likely to deny the taxpayer’s advantage, but that “there is no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the [tax] advantage.”

The Supreme Court has also laid down certain factors that will need to be considered in applying the relevant threshold:

(1)   How fact sensitive is the application of the relevant ruling;

(2)   Whether the relevance of the earlier ruling turns on HMRC’s rejecting the taxpayer’s evidence as being untruthful;

(3)   The particular legal arguments put forward by the taxpayer;

(4)   The nature of the earlier ruling, including its precedential value.

The threshold for HMRC to issue follower notices laid down by the Supreme Court is therefore even higher than that laid down by the Court of Appeal. This is of particular significance given that the Supreme Court has also observed that, when a taxpayer appeals to the First-tier Tribunal against a penalty issued for failure to comply with a follower notice, the First-tier Tribunal must apply the same threshold.

The press summary of the judgment is here.

Giles Goodfellow QC and Ben Elliott, counsel, instructed by Levy & Levy for the Respondent.

You can read the full decision here.