The UK government is considering changes to the penalties which apply when a 'follower notice' is issued and the taxpayer fails to settle their dispute with HM Revenue & Customs (HMRC).
According to a consultation document published by HMRC, the government proposes replacing the 50% penalty for failing to settle the dispute after receipt of the notice with a 30% penalty. It is then proposed that an additional 20% penalty could be imposed if a tax tribunal or court strikes out the taxpayer’s appeal on the grounds that it has no reasonable prospect of success or that there is an abuse of process or alternatively if the tax tribunal or court makes a statement that the taxpayer has acted unreasonably in bringing or conducting the proceedings.
Steven Porter
Partner, Head of Tax Disputes and Investigations
These proposed changes look like tinkering around the edges, rather than striking a fair balance between HMRC’s autonomy and genuine advance judicial oversight
The changes are in response to recommendations from the House of Lords Economic Affairs Committee in December 2018 that the "draconian" follower notice penalties be abolished on the basis that they restrict access to justice.
Lord Judge, former Lord Chief Justice of England and Wales, said in advising the committee: “If the taxpayer questions an asserted tax liability HMRC cannot be judge in its own cause. The imposition of penalties on those who wish to use the court system to establish that, contrary to the views of HMRC, there is no liability, fetters access to justice.”
Tax expert Steven Porter of Pinsent Masons, the law firm behind Out-Law, said: "These proposed changes look like tinkering around the edges, rather than striking a fair balance between HMRC’s autonomy and genuine advance judicial oversight."
Follower notices were introduced in 2014 and are aimed at marketed avoidance schemes, where HMRC has succeeded in the courts against one scheme user. They are designed to prevent other scheme users delaying settlement of their disputes and clogging up the tribunal system with claims that have no chance of success.
The legislation is widely drawn and allows the issue of a follower notice where HMRC is of the opinion that there is a judicial ruling where principles laid down or reasoning given in the ruling would, if applied to the arrangements, deny the tax advantage.
A follower notice requires the taxpayer to take 'corrective action', which means amend its return, if the return is still under enquiry, or enter into an agreement with HMRC to settle the dispute, where a closure notice or tax assessment is under appeal. The taxpayer is also required to give HMRC a notice stating that it has taken the necessary corrective action and notifying HMRC of the amount of additional tax which becomes payable as a result. The taxpayer has 90 days in which to comply.
An accelerated payment notice can also be given to a person who has received a follower notice, requiring the tax to be paid upfront, before any dispute is resolved.
There is no right of appeal against a follower notice, just a right to send written representations to HMRC, within 90 days of the notice being given, objecting to the notice on the basis that the procedural conditions have not been complied with or that the judicial ruling is not relevant to the taxpayer's circumstances.
There is currently a maximum penalty of 50% of the tax due if the taxpayer fails to comply with the follower notice, though this can be reduced to a minimum of 10% if the taxpayer cooperates. There is a right of appeal against a follower notice penalty. The grounds of appeal include that the procedural conditions for the follower notice were not met, that the judicial ruling is not relevant to the arrangements or that it was reasonable in all the circumstances not to have taken the necessary corrective action.
The government rejected the House of Lords committee's recommendation to abolish follower notice penalties as it said this would render the regime ineffective. According to HMRC's consultation document, the government has been unable to identify any effective means of providing greater judicial oversight over the regime which would not exacerbate the delays in settling disputes and paying the disputed tax, which the regime was designed to address.
Under the proposals there would continue to be a right of appeal against the 30% penalty, including on the grounds that it was reasonable not to have taken corrective action. However, it is proposed that the 20% additional penalty could only be appealed on the grounds that the statutory grounds for issuing it have not been met. The government proposes that there should be no right of appeal against this additional penalty on the grounds that it was reasonable not to have taken corrective action.
The consultation period ends on 27 January 2021.
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