The accelerated payment and follower notice regime has drawn much comment, in particular due to the lack of a formal right of appeal against the issue of a notice, beyond making representations to HMRC to ask them to reconsider their position.
For the ‘payment on account of the understated tax’ due under an accelerated payment notice, there is no ‘right’ answer to the question of whether the taxpayer or HMRC should hold the tax whilst the substantive matter is determined by the courts. Different taxes and factual scenarios have always given different answers. Disputed VAT is paid before an appeal, and if a dispute concerns PAYE over-collected from an employee’s earnings, that tax will be held by HMRC unless and until the court decides otherwise.
For policy reasons, the follower notice provisions contain a substantial ‘stick’ in the form of a 50% tax geared penalty. In the short consultation on these provisions, HMRC expressed a concern that taxpayers hold out from settling a matter until the last moment, even where its chances of success are very slim. In a follower notice case, a follower notice penalty will be imposed if the taxpayer does not take ‘corrective action’ and concedes its substantive position within the given time frame. Any taxpayer that wants to continue with a substantive appeal will therefore face 100% of tax to be paid upfront, and a penalty of up to 50%.
Recognising that there are possible sensitivities around requiring a payment equal to 150% of tax potentially interfering with the right to a fair trial, Finance Bill 2014 contained a right to appeal against the follower notice penalty. Where the penalty is under appeal, it is not to be paid until the penalty appeal is determined. Where there is also a substantive tax appeal, it is expected (and hopefully this will be clarified in guidance, if not in primary legislation) that the penalty appeal will not be determined until after the resolution of the substantive tax appeal.
At Report Stage, the government introduced an additional clause into the right to appeal against a follower notice penalty, which sets out the grounds on which a penalty appeal may be taken. In addition to compliance with the procedural aspects of the issue of a follower notice penalty, there are two substantive, and evaluative, grounds of appeal.
A follower notice can be issued where ‘HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements’. This is the heart of the follower notice provisions and the one which gives rise to the most concern from a taxpayer/adviser perspective, particularly where that judicial ruling involves a complex evaluation of facts and law. The Report Stage amendment provides that a taxpayer can appeal against a follower notice penalty where the judicial ruling is not one which is relevant to the chosen arrangements. Presumably, a court will only be able to determine this having engaged fully with the taxpayer’s substantive appeal. However, the effect of this amendment should be that if the taxpayer is successful in the substantive appeal on the same principles or reasoning which are referenced in the judicial ruling by reference to which the follower notice was given, a follower notice penalty is unlikely to be upheld.
The greater concession by the government is the final ground of appeal, and this ground will be relevant even if the taxpayer is not successful on the substantive appeal, or is successful but on different grounds. A follower penalty will not be upheld if ‘it was reasonable in all the circumstances’ for the taxpayer not to have taken ‘corrective action’, and instead to have pursued the appeal. This gives the court some latitude to waive the penalty if the taxpayer was reasonable to think that its factual position, or the way in which the law should apply to those facts, was relevantly different to the court decision by reference to which the follower notice was issued.
The grounds for the appeal of a follower notice penalty look remarkably like the grounds on which a taxpayer may seek to appeal a follower notice itself, were such an appeal to be provided for. To circumvent any suggestion that these government amendments provide a ‘back door’ method to appeal a follower notice, it is also expressly provided that the cancellation of a follower notice penalty does not affect the validity of the follower notice itself. Judicial review remains the only course of action for independent scrutiny of a follower notice.
Home >Articles > Follower notices penalties: grounds of appeal clarified
Follower notices penalties: grounds of appeal clarified
The accelerated payment and follower notice regime has drawn much comment, in particular due to the lack of a formal right of appeal against the issue of a notice, beyond making representations to HMRC to ask them to reconsider their position.
For the ‘payment on account of the understated tax’ due under an accelerated payment notice, there is no ‘right’ answer to the question of whether the taxpayer or HMRC should hold the tax whilst the substantive matter is determined by the courts. Different taxes and factual scenarios have always given different answers. Disputed VAT is paid before an appeal, and if a dispute concerns PAYE over-collected from an employee’s earnings, that tax will be held by HMRC unless and until the court decides otherwise.
For policy reasons, the follower notice provisions contain a substantial ‘stick’ in the form of a 50% tax geared penalty. In the short consultation on these provisions, HMRC expressed a concern that taxpayers hold out from settling a matter until the last moment, even where its chances of success are very slim. In a follower notice case, a follower notice penalty will be imposed if the taxpayer does not take ‘corrective action’ and concedes its substantive position within the given time frame. Any taxpayer that wants to continue with a substantive appeal will therefore face 100% of tax to be paid upfront, and a penalty of up to 50%.
Recognising that there are possible sensitivities around requiring a payment equal to 150% of tax potentially interfering with the right to a fair trial, Finance Bill 2014 contained a right to appeal against the follower notice penalty. Where the penalty is under appeal, it is not to be paid until the penalty appeal is determined. Where there is also a substantive tax appeal, it is expected (and hopefully this will be clarified in guidance, if not in primary legislation) that the penalty appeal will not be determined until after the resolution of the substantive tax appeal.
At Report Stage, the government introduced an additional clause into the right to appeal against a follower notice penalty, which sets out the grounds on which a penalty appeal may be taken. In addition to compliance with the procedural aspects of the issue of a follower notice penalty, there are two substantive, and evaluative, grounds of appeal.
A follower notice can be issued where ‘HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements’. This is the heart of the follower notice provisions and the one which gives rise to the most concern from a taxpayer/adviser perspective, particularly where that judicial ruling involves a complex evaluation of facts and law. The Report Stage amendment provides that a taxpayer can appeal against a follower notice penalty where the judicial ruling is not one which is relevant to the chosen arrangements. Presumably, a court will only be able to determine this having engaged fully with the taxpayer’s substantive appeal. However, the effect of this amendment should be that if the taxpayer is successful in the substantive appeal on the same principles or reasoning which are referenced in the judicial ruling by reference to which the follower notice was given, a follower notice penalty is unlikely to be upheld.
The greater concession by the government is the final ground of appeal, and this ground will be relevant even if the taxpayer is not successful on the substantive appeal, or is successful but on different grounds. A follower penalty will not be upheld if ‘it was reasonable in all the circumstances’ for the taxpayer not to have taken ‘corrective action’, and instead to have pursued the appeal. This gives the court some latitude to waive the penalty if the taxpayer was reasonable to think that its factual position, or the way in which the law should apply to those facts, was relevantly different to the court decision by reference to which the follower notice was issued.
The grounds for the appeal of a follower notice penalty look remarkably like the grounds on which a taxpayer may seek to appeal a follower notice itself, were such an appeal to be provided for. To circumvent any suggestion that these government amendments provide a ‘back door’ method to appeal a follower notice, it is also expressly provided that the cancellation of a follower notice penalty does not affect the validity of the follower notice itself. Judicial review remains the only course of action for independent scrutiny of a follower notice.
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