Tax disputes: follower notices and accelerated payments

HMRC can issue an accelerated payment notice (APN) to require payment of tax upfront before a dispute about the efficacy of a tax scheme has been settled by the tax tribunals or courts. Where HMRC has succeeded in the tribunals or courts on a substantially similar point, it can issue a follower notice requiring a taxpayer to settle their dispute or face substantial penalties if it is ultimately unsuccessful.

The rules apply to income tax, National Insurance contributions (NICs), capital gains tax, corporation tax, apprenticeship levy, inheritance tax, stamp duty land tax and the annual tax on enveloped dwellings.

Accelerated payment notices

The usual position in direct tax disputes is that the disputed tax can be postponed so that it is not payable to HMRC until a tribunal has ruled against the taxpayer or the dispute is settled. APNs overrule that position by requiring the tax to be paid within 90 days of the issue of the notice. The accelerated payment will be repaid with interest in the event that the scheme is ultimately proved to work.

HMRC can issue an APN to a taxpayer if a tax enquiry or tax appeal is in progress and:

• HMRC has issued a Disclosure of Tax Avoidance Schemes (DOTAS) reference number in relation to the arrangements (or similar arrangements where the promoter is required to notify a scheme reference number to the taxpayer);
• a follower notice has been given or is given at the same time in relation to the same return and same tax advantage; or
• a general anti-abuse rule (GAAR) counteraction notice has been given in a case where the stated opinion of at least two members of the sub panel of the GAAR advisory panel was that the arrangements were not a reasonable course of action.

HMRC publishes a list of DOTAS scheme reference numbers of schemes where it intends to issue APNs. The list is updated quarterly.

The APN will specify the amount of tax that must be paid on account of any final liability in respect of the enquiry or appeal. This will be determined to the best of the HMRC officer's information and belief.

The APN will be discharged by a settlement of the dispute with HMRC, and so for those who have also received a follower notice, will only be relevant to those who decide not to comply with the follower notice and to continue with their own dispute.

When introduced, the APN regime was particularly controversial in relation to DOTAS schemes. A DOTAS scheme user could have to make an accelerated payment of tax in relation to a scheme entered into many years before these provisions become law, even though their use of the scheme was still under enquiry or being litigated and despite there being no other judicial ruling in respect of the scheme in question. This led to a number of judicial review challenges to the retrospective nature of the regime, which were unsuccessful.

There are penalties if you fail to pay the accelerated payment within 90 days of the issue of the notice.

For those who have invested through a partnership, an APN cannot be given to the representative partner. Instead, 'partner payment notices' (PPNs) may be issued to individual partners. These operate in a similar way to APNs.

There is no right of appeal against an APN. However, a recipient has 90 days from receipt of the notice to send written representations objecting to the notice to HMRC but only on the grounds that the conditions for the notice were not fulfilled – eg the scheme was not a DOTAS scheme or that the amount of the accelerated payment claimed is incorrect. HMRC must consider the representations and will then confirm or withdraw the notice or amend the amount of the accelerated payment. If written representations are made and the notice is confirmed by HMRC, the recipient has 30 days from receipt of HMRC's decision to make the payment, if this would be a later date than the end of the original 90 day period.

Statistics published by HMRC in 2021 showed that representations had been made in respect of over half of APNs and follower notices issued and these had led to 10% of notices being withdrawn and around 20% amended. In any event, representations are usually worth making as they also give the taxpayer a little more time to get the cash together.

There are no specific provisions allowing tax to be paid in instalments. However, HMRC will consider requests for its normal 'time to pay' discretionary relief.

The amount of tax paid in advance pursuant to APNs has slowed considerably since they were first introduced. It was only £8 million in 2020-21 compared to £2.4 billion in 2015-16, the heyday of APNs. This is not surprising since in the first few years of the scheme HMRC was issuing notices in respect of DOTAS schemes entered into years before APNs existed.

Follower notices following a judicial ruling in another case

'Follower notices' are aimed at marketed avoidance schemes, where HMRC has succeeded in the courts against one scheme user. The idea is to stop other participants in schemes from dragging out their own dispute, delaying the payment of tax and clogging up the tribunals, once HMRC has a ruling in one case to say that the scheme (or a similar scheme) does not work. If the taxpayer does not settle their case after receiving a follower notice, they are at risk of a substantial additional penalty.

If the disputed tax has not already been paid, a follower notice will usually be accompanied by an APN specifying an amount of tax that must be paid on account of the final liability. The APN will remove the cashflow advantage of dragging out the dispute and act as an added incentive to settling the dispute promptly.

HMRC can issue a follower notice where an enquiry or tax appeal is in progress in relation to 'arrangements' where it is reasonable to conclude that obtaining a 'tax advantage' was the main purpose or one of the main purposes of the arrangements.

A further condition before a follower notice can be issued is that "HMRC is of the opinion that there is a judicial ruling which is relevant to [the taxpayer's] arrangements". A ruling is relevant if "principles" laid down or reasoning given in the ruling would, if applied to the arrangements, deny the asserted advantage, or part of it.

The Supreme Court decided in 2021 that HMRC can only issue a follower notice to a taxpayer where it is of the opinion that there is "no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage". It is not sufficient for HMRC to form the view that it was likely that the application of the earlier case would deny the tax advantage.

The judicial ruling must be a final determination. This means a decision where there is no right of appeal such as from the Supreme Court, where permission to appeal is refused or where an appeal is not made within the time limits or is abandoned. The ruling could therefore be a ruling of the First-tier Tribunal, if the taxpayer does not appeal.

A follower notice requires the taxpayer to amend its return, if the return is still under enquiry, or to 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.

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 your circumstances. If you submit representations and are unsuccessful, you have 30 days from being notified of the outcome to comply with the notice, assuming this period ends after the original 90-day period.

There was originally a maximum penalty of 50% of the tax due for failure to settle the dispute after receipt of a follower notice. This was changed in response to recommendations from the House of Lords Economic Affairs Committee in December 2018 that the "draconian" penalties be abolished on the basis that they restrict access to justice. Rather than abolishing the penalty, the 50% penalty has been replaced with a 30% penalty with effect from 10 June 2021. An additional 20% penalty can 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.

Follower notice penalties are in addition to APN penalties if the tax in dispute is not paid in accordance with the APN.

You can 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". This last ground should prevent a penalty arising where a taxpayer continues their own litigation and is ultimately successful.

HMRC has 12 months to issue a follower notice, beginning on the latest of the day of the judicial ruling, the day HMRC received the taxpayer's return or claim and the day the taxpayer made its appeal.

Special provisions apply in relation to scheme participants who have invested through a partnership. In these circumstances, a follower notice will be issued to the representative partner of the partnership, and not to the individual partners. However, if the partnership does not comply with the follower notice, penalties of a maximum of 20% of the tax due will be assessed on the individual partners in accordance with their profit shares.

What to do if you receive a follower notice or an APN

Anyone receiving a follower notice or an APN should take advice as soon as possible from a tax disputes specialist. The timescales for compliance are short and the penalties for non-compliance are significant.

This is based on an article by Steven Porter and Sam Wardleworth of Pinsent Masons, which was published in Tax Journal on 4 February 2022.