I have written about Accelerated Payment Notices (“APNs”) elsewhere. Here, I propose to examine a feature common to both APNs and Follower Notices (“FNs”) – that of relevant Judicial rulings (“RJRs”) – but with a particular emphasis on the latter. However, I need to begin by setting out how the (complex) Follower Notices regime operates.
The FN regime seeks to put pressure on prospective appellants in tax cases to ditch their appeals by exposing them to the threat of a 50% tax geared penalty (i.e. on top of the tax that is due) should they (a) choose to pursue their appeal in circumstances where (b) there is a final RJR. If you receive a FN, you have 90 days to object and if you don’t object (or you do, and your objections are dismissed) you become liable to that penalty. That penalty disappears if you win your appeal but if you lose your liability may be increased by up to 50%.
Now, it has been said that you have no right of appeal against a FN. This is wrong, you do (see clause 207 of the Finance Bill). But that right of appeal looks deliberately constructed so as not to interfere with the critical pressure that FNs are designed to place upon the litigant: the pressure to throw the towel in even in cases where you consider yourself to have decent prospects of succeeding.
Let’s assume HMRC issue you with a FN. Your advisers tell you that you have decent prospects. But you’re obviously concerned at the thought you might have to pay 150% of your present bill should the courts or tribunals disagree. And assume, also, that you disagree that a FN should have been issued perhaps because you consider there is no RJR.
To make the right decision in these circumstances you need to know whether the FN was correctly issued. If it was, you can then form an assessment of whether your prospects of winning are so good that you’ll take the chance of suffering a penalty of an extra 50% should you lose. If it wasn’t, you are in the familiar regime of merely suffering (at least if they are yours to bear) the professional costs of pursuing the appeal. But the statutory appeal provided by clause 207 against the issuance of the penalty is extremely unlikely to take place until after you have fought and won (or lost) the appeal in respect of which the penalty is due. So the certainty you need – as to whether you are at risk of a 50% penalty – comes too late to be useful.
Broadly I want to make two observations. First, it seems to me (for reasons set out following) that the circumstances in which courts or tribunals are likely to uphold the issuance by HMRC of FNs are likely to be very narrow indeed. Second (a point that will have to be explored elsewhere), it may well be the case that the sensible judicial review challenge is not a tanks-on-the-lawn challenge to the FN regime as a whole, but is a rather quieter one.
When will courts or tribunals find there is an RJR?
The concept of an RJR was hitherto unknown to English law. It is defined in clause 198(2) and (3) of the Bill as follows:
(2) “Judicial ruling” means a ruling of a court or tribunal on one or more issues.
(3) A “judicial ruling” is relevant to the chosen arrangements if… (b) the principles laid down or reasoning given, in the ruling would, if applied to the chosen arrangements deny [the tax advantage].
What follows is two short points about the concept of an RJR, one observation about how courts and tribunals are likely to approach RJRs and three golden rules the breach of any of which by HMRC would, in my view at least, leave them exposed to judicial challenge.
My two points about the concept of an RJR. First, a RJR is not the same thing as a binding ruling (or, as lawyers would put it, a ratio decidendi). Any judicial observation – even if merely passing and/or unnecessary – if found in a “final ruling” (a relatively straightforward concept which can be found in clause 198(4)) is capable of constituting an RJR. There is no explicit qualitative test. Second, a judicial ruling is only relevant – is only an RJR – if it would “if applied to the chosen arrangements… deny” the tax advantage. So, although the judicial ruling does not need to be of high quality it does need to be bang on point.
My observation about how courts and tribunals are likely to approach them. Follower Notices clearly raise Human Rights Act questions about the interference with the right to a fair trial . In such circumstances, to state the obvious, courts and tribunals are obliged to read legislation in such a way as to ensure it complies with Convention Rights. This is, in my view, likely to have practical consequences.
My three golden rules.
The best reasoning rule. There is nothing in the definition of RJR explicitly obliging HMRC to choose the better of competing “principles” or pieces of “reasoning”. I consider there is scope for the courts to read one in.
The qualitative control. Notwithstanding that a tribunal – whose decisions do not bind anyone else – is as a matter of law capable of delivering a final RJR (see clause 198(4)(b)) I consider that a court or tribunal will apply a qualitative control. In other words, the less compelling the judicial reasoning sought to be relied upon by HMRC, the greater the likelihood a court or tribunal will hold there is no RJR. Again, I consider there is scope for the courts to do this.
The scrutiny principle. The reality of litigating tax avoidance transactions is that there is very rarely a piece of reasoning or a principle which is decisive of the outcome. I consider courts and tribunals are likely closely to scrutinise the contention to the contrary.
It follows from the above that, in my view, the circumstances in which a court or tribunal will uphold a decision by HMRC to issue and not withdraw a FN are likely to be confined, in practice, and with only rare exceptions, to one class of case.
That (narrow) class of case is, in my opinion, that class of tax avoidance scheme where one taxpayer has fought and lost. In those circumstances, others entering into that scheme, if they fail to fold, face the likelihood of FNs, and of courts upholding them.
It is instructive to stand back and remind ourselves of how HMRC originally badged the provisions now known as the Follower Notice provisions. They were originally described as “Penalties for Other Users of Failed Schemes.” That original description accords with the likely legislative effect of the provisions as interpreted by the courts and tribunals at least as I understanding it. It is a point worth remembering.