Analysis
On an application for judicial review, the claimant challenged the decisions of HMRC to issue him with a follower notice and an accelerated payment notice in relation to gains arising to the Trustees of a settlement (‘the Trust’) from the disposal of assets. The claimant was the settlor and, along with his family, a beneficiary of the Trust. The notices were issued under Part 4 of the Finance Act 2014.
A follower notice can be given where the principles laid down or reasoning given in a final judicial ruling would, if applied to the taxpayer’s chosen arrangements, deny him the claimed tax advantage. The taxpayer can be required to settle the disputed tax owed or risk incurring a penalty if they continue and ultimately fail in the dispute. An accelerated payment notice can require the recipient to pay the tax up-front and on account until the dispute is resolved, or risk incurring a penalty. The notices can be issued at a stage before a tax appeal has been determined.
The claimant contended that he was not chargeable in respect of the gains made by the Trustees because they were exempted from the charge to UK CGT by virtue of the UK/Mauritius double tax treaty (‘the treaty’). His argument was that the gains were realised when the trustees of the Trust were resident in Mauritius, having replaced trustees in Jersey. Since the trustees were resident in Mauritius the ‘tie-breaker’ of the place of effective management (‘POEM’) in the treaty would resolve the question of residence in favour of Mauritius. The result was that Mauritius was the only jurisdiction with taxing rights over the gains. Mauritius did not impose tax on such gains, so that the intended effect of the scheme was that there was no relevant taxation in Mauritius, and no taxation in the UK either.
In response, HMRC contended that the claimant engaged in a tax avoidance scheme known as a ‘Round the World’ (‘RTW’) arrangement. Along with at least 100 others, he was trying to avoid CGT of nearly £9,000,000 by routing a disposal of trust assets through Mauritius. Its view was that the claimant’s arguments had effectively been disposed of by the Court of Appeal in Smallwood v Revenue and Customs Commissioners (‘Smallwood’) in which the effective management of a trust was found to be in the UK, and not Mauritius, so that double taxation did not apply. HMRC claimed to have correctly applied the legislation in issuing the notices to the claimant and that it was lawful and appropriate to do so.
Chapter 2 of Part 4 of the Finance Act 2014 sets out four conditions HMRC must satisfy in order to issue a follower notice. The relevant condition was Condition C, that HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements, i.e. one where the principles laid down, or reasoning given, in the ruling would, if applied to the chosen arrangements, deny the asserted advantage part of that advantage (s205(3)(b)). The claimant contended that HMRC’s issue of a follower notice in his case was wrong in law, since there were no ‘principles’ or ‘reasoning’ (necessarily being legal principles and reasoning) of general application arising from Smallwood which would deny him a tax advantage. The claimant also contended that HMRC did not give the explanation, required by s206 of the Finance Act 2014, as to why Smallwood determined its case.
The claimant also contended that a panel of HMRC officers (‘WFGG’) had been delegated the function of determining whether a follower notice should be issued. WFGG had delegated the task to the compliance team, which in turn appeared to have delegated it to one of its members, in breach of the principle that a delegate cannot normally sub-delegate his authority. Furthermore, there was no evidence that anyone in HMRC had completed a review in the claimant’s case as to the POEM of the Trust and whether or not a follower notice could be issued. The decision-making process adopted by HMRC was also entirely one-sided in that it required the decision-maker to identify facts that suggested that the POEM was within the UK, with no intention or procedure for identifying or taking into account any factors which suggested that it was in Mauritius.
With regard to the accelerated payment notice, the claimant contended that the Court could not be confident that the designated officer had reached the required independent view, since the officer in question had seen his role as calculating the understated tax, on the assumption that no tax advantage was available, rather than considering the efficacy of the arrangement.
The claimant also argued that there had been a disproportionate interference with his possessions (his money) contrary to Article 1, Protocol 1 of the European Convention on Human Rights in issuing the notices.
Held:
1) The statutory language of s205(3)(b) of the Finance Act 2014 was clear: ‘principles laid down’ and ‘reasoning given’ were separate and alternative concepts, both with a well-understood and ordinary meaning. The condition at issue in s204 of the 2014 Act was Condition C, whether HMRC was of the opinion that there was a judicial ruling relevant to the chosen arrangements. The test in s205(3)(b) was therefore satisfied if HMRC was on the opinion that the principles laid down, or reasoning given, in Smallwood would, if applied to the arrangements in the instant case, deny the asserted tax advantage. The claimant’s suggestion was, therefore, rejected that ‘reasoning given’ somehow qualified ‘principles laid down’, so that s205 was satisfied only in the event of legal principles denying the asserted advantage.
2) The principles and reasoning in Smallwood were capable of application to other similar schemes by other taxpayers. HMRC had applied the principles and reasoning of Smallwood to the documents, evidence and representations in the claimant’s case to determine whether there was a scheme of management control from the UK which would deny the asserted advantage. It properly understood the legislation and Smallwood. The claimant submitted that the threshold for issuing a follower notice was that the principles or reasoning in the earlier case had clearly determined the issue in the subsequent case. However, the test is satisfied if HMRC is of the opinion that the principles or reasoning in the relevant judicial ruling would deny the asserted advantage. If Parliament had intended the higher threshold the claimant suggested, it would have said so.
3) The follower notice itself had provided, albeit succinctly, an explanation of why HMRC considered that Smallwood was the relevant judicial ruling and that corresponding reasoning applied to the claimant’s case. There was no statutory requirement to set out the detailed facts or to identify the scheme documents relied upon by HMRC for its conclusion that the Smallwood hallmarks were present. Further, the claimant well knew the background to HMRC’s thinking about the arrangements he had effected.
4) The legislation did not forbid what HMRC had established for the administration of follower notices in delegating functions to officers within HMRC. These measures were consistent with the ordinary machinery of administration. None constituted improper sub-delegation.
5) There was no direct record of the conclusion of HMRC’s review of the claimant’s case. However, there was clear and unchallenged evidence from the head of the relevant compliance team that she would not have put a case forward to WFGG unless she had been satisfied that a review had been conducted and had concluded that the case met the conditions for a follower notice to be issued.
6) The claimant had not established that the decision-making process adopted by HMRC was unbalanced or one-sided. There was corroborative evidence that the compliance team examined the whole picture, including negative features, in that in a number of cases it recommended to WFGG that a follower notice should not be issued.
7) If the Judge had not reached the conclusions at (5) and (6) above, he would have applied s31(2A) of the Senior Courts Act 1981 to refuse the claimant relief on the basis that it appeared to be highly likely that the outcome for the claimant would not have been substantially different if the conduct complained of had not occurred.
8) The officer designated to issue the accelerated payment notice was entitled to be satisfied that the scheme was not effective. That was because there was a decision that a follower notice be issued. With a follower notice the context is that a conclusion has been reached as to the effectiveness of the scheme, albeit elsewhere in HMRC. The legislation itself provides for the designated officer to proceed on the basis that the judicial ruling would deny the asserted advantage. In other words, the designated officer does not review the decision to issue a follower notice. What the designated officer needs to do, as he did in the instant case, is to take the work done elsewhere in HMRC and to determine the understated tax to the best of his information and belief.
9) The issue of a follower notice cannot by itself involve any interference with taxpayers’ possessions for the purposes of Article 1, Protocol 1, of the European Convention on Human Rights. No money is demanded by a notice. Indeed, in the instant case, the claimant still had his money. Even if coupled with the accelerated payment regime, a follower notice did not constitute an interference with the taxpayer’s money. Even if there was such interference, the overall aim of the follower notice regime is to ensure that someone who continues to challenge HMRC’s assessment of the impact of another judicial ruling should not have the benefit of the money while that challenge is resolved. That aim is legitimate, and is also given effect in a proportionate manner. The taxpayer served with a follower notice will be in possession of more information about his circumstances than HMRC, and can take a decision about whether to take the necessary corrective action or pursue an appeal. The challenge under this ground, therefore, failed.
10) The claim for judicial review was dismissed.
<![CDATA[ JUDGMENT: SIR ROSS CRANSTON: INTRODUCTION [1] In this judicial review the claimant, Mr Geoffrey Haworth, challenges the decisions of the Commissioners for HM Revenue and Customs (‘HMRC’) to issue him in 2016 with a follower notice and an accelerated payment notice in relation to gains arising to the trustees of a settlement from the …Continue reading "R (Haworth) v HMRC [2018] WTLR 459"