It seems that the right to appeal against a follower notice penalty is – to quote The Hitchhiker’s Guide to the Galaxy – ‘on display in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying “Beware of the leopard”’.
There is a general perception that any taxpayer to whom HMRC has issued a follower notice has a stark choice: either concede their dispute or pay a 50% penalty if they continue, unless they litigate successfully. This has been described as a very costly disincentive to challenging HMRC. More worryingly, the follower notice regime has been roundly condemned as a breach of the rule of law with HMRC acting as judge, jury and executioner. If true, this would clearly be outrageous in a country that believes in fair play.
Fortunately, it is not true. Unfortunately, though, no one – including HMRC – seems to be pointing this out, despite the right of appeal under FA 2014 s 214(3)(d) against a follower penalty on the grounds ‘that it was reasonable in all the circumstances … not to have taken the necessary corrective action’. The necessary corrective action is set out in s 208 and basically means conceding the dispute and relinquishing the tax advantage that was sought.
When will it be reasonable not to take the necessary corrective action, i.e. not to concede and relinquish the tax advantage? It is not sensible to try to set out a comprehensive list of circumstances when not conceding will be reasonable, but one such circumstance ought to be obvious: as long as there is a real issue that needs adjudication and the taxpayer has litigable arguments with realistic prospects of success, it will always be reasonable not to concede. This is because everyone has the right to disagree with the state and take their disagreement to a court or tribunal. That is a basic aspect of living in a free country. So the right of appeal on these grounds makes the difference between abiding by and breaching the rule of law. That is what makes this appeal right such an important feature of the follower notice regime.
Why then has no one noticed it? One reason is that HMRC has not even mentioned it in the CC/FS25a leaflet which explains follower notices, published in December. The tone of the leaflet is that taxpayers who receive such a notice cannot appeal and have no alternative but to take the corrective action or face a penalty of between 10% and 50%. It says: ‘There is no right of appeal against a follower notice. If you decide not to do what the follower notice asks, you will be liable to a penalty.’ Granted, there is a statement that ‘you will be able to appeal against it if you disagree’, but nowhere is there any reference to the critical ground on which such an appeal may be based.
This risks fuelling the view that HMRC is riding roughshod over the rule of law. It is important because taxpayers (and their advisers) should understand their rights, and because the lack of understanding is creating a rift between the government and constitutional lawyers, which is damaging. Arthur Dent’s complaint in The Hitchhiker’s Guide to the Galaxy was that his property was being taken away from him without his rights being respected – the plans under which his house was to be demolished had been available in the local planning office but: ‘You hadn’t exactly gone out of your way to call attention to them, had you? I mean, like actually telling anybody or anything.’
Happily, HMRC has indicated that it will look again at the wording of this leaflet and will add more detail about the appeal right. That is a welcome development. Like Arthur Dent, there will still be unhappiness among those whose property is being confiscated by the state, but it is impossible to overstate how important it is that the way this is done must accord with the rule of law.
It seems that the right to appeal against a follower notice penalty is – to quote The Hitchhiker’s Guide to the Galaxy – ‘on display in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying “Beware of the leopard”’.
There is a general perception that any taxpayer to whom HMRC has issued a follower notice has a stark choice: either concede their dispute or pay a 50% penalty if they continue, unless they litigate successfully. This has been described as a very costly disincentive to challenging HMRC. More worryingly, the follower notice regime has been roundly condemned as a breach of the rule of law with HMRC acting as judge, jury and executioner. If true, this would clearly be outrageous in a country that believes in fair play.
Fortunately, it is not true. Unfortunately, though, no one – including HMRC – seems to be pointing this out, despite the right of appeal under FA 2014 s 214(3)(d) against a follower penalty on the grounds ‘that it was reasonable in all the circumstances … not to have taken the necessary corrective action’. The necessary corrective action is set out in s 208 and basically means conceding the dispute and relinquishing the tax advantage that was sought.
When will it be reasonable not to take the necessary corrective action, i.e. not to concede and relinquish the tax advantage? It is not sensible to try to set out a comprehensive list of circumstances when not conceding will be reasonable, but one such circumstance ought to be obvious: as long as there is a real issue that needs adjudication and the taxpayer has litigable arguments with realistic prospects of success, it will always be reasonable not to concede. This is because everyone has the right to disagree with the state and take their disagreement to a court or tribunal. That is a basic aspect of living in a free country. So the right of appeal on these grounds makes the difference between abiding by and breaching the rule of law. That is what makes this appeal right such an important feature of the follower notice regime.
Why then has no one noticed it? One reason is that HMRC has not even mentioned it in the CC/FS25a leaflet which explains follower notices, published in December. The tone of the leaflet is that taxpayers who receive such a notice cannot appeal and have no alternative but to take the corrective action or face a penalty of between 10% and 50%. It says: ‘There is no right of appeal against a follower notice. If you decide not to do what the follower notice asks, you will be liable to a penalty.’ Granted, there is a statement that ‘you will be able to appeal against it if you disagree’, but nowhere is there any reference to the critical ground on which such an appeal may be based.
This risks fuelling the view that HMRC is riding roughshod over the rule of law. It is important because taxpayers (and their advisers) should understand their rights, and because the lack of understanding is creating a rift between the government and constitutional lawyers, which is damaging. Arthur Dent’s complaint in The Hitchhiker’s Guide to the Galaxy was that his property was being taken away from him without his rights being respected – the plans under which his house was to be demolished had been available in the local planning office but: ‘You hadn’t exactly gone out of your way to call attention to them, had you? I mean, like actually telling anybody or anything.’
Happily, HMRC has indicated that it will look again at the wording of this leaflet and will add more detail about the appeal right. That is a welcome development. Like Arthur Dent, there will still be unhappiness among those whose property is being confiscated by the state, but it is impossible to overstate how important it is that the way this is done must accord with the rule of law.
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