Locke, R. (On the Application of) v Revenue And Customs

A follower notice may be issued only where the earlier judicial ruling addresses a legal issue that, if applied to the taxpayer’s chosen arrangements, would deny the asserted tax advantage. It is not enough that the arrangements are materially similar or that the earlier ruling would be relevant to a different statutory route to relief.

HMRC’s opinion-making power permits analysis of factual differences and their legal significance. It does not permit HMRC to bypass an unresolved question of statutory interpretation or legal characterisation. Given the penalties and accelerated payment consequences, the regime must be kept within narrow bounds.

The appellant claimed income-tax relief for interest paid on borrowings used in connection with his investment in Eclipse Film Partners No 10 LLP. HMRC opened enquiries and issued follower notices under Chapter 2 of Part 4 of the Finance Act 2014, relying on the Court of Appeal’s ruling in Eclipse Film Partners No 35 LLP. Accelerated payment notices followed.

The appellant challenged the notices by judicial review. Lewis J dismissed the claim: [2018] EWHC 1967 (Admin). The appeal concerned the meaning of the asserted tax advantage and whether the Eclipse 35 ruling was relevant under section 205(3). The central issue was whether that ruling resolved the legal issue arising from the appellant’s reliance on section 362(1)(a) of the Income and Corporation Taxes Act 1988.

1. Appeal allowed. The follower notices and the consequential accelerated payment notices were quashed.
2. The asserted tax advantage was the broad advantage of relief for interest payments under section 353 of the Income and Corporation Taxes Act 1988. Sections 362(1)(a) and 362(1)(b) identified circumstances in which interest was eligible for relief under section 353; they did not create separate tax advantages.
3. Under section 205(3) of the Finance Act 2014, the question was whether the principles or reasoning in the earlier ruling, if applied to the chosen arrangements, would deny the asserted advantage. The inquiry focused on the legal issues arising from the taxpayer’s dispute, not merely on whether the arrangements were identical or sufficiently similar.
4. The Eclipse 35 litigation decided that the relevant partnership was not carrying on a trade. It did not decide whether a payment to obtain a new partnership interest was a purchase of a share under section 362(1)(a), rather than a contribution of capital or premium under section 362(1)(b). That issue had not been argued or judicially determined.
5. Following R (oao Haworth) v HMRC [2019] EWCA Civ 747, HMRC had to possess a substantial degree of confidence that the earlier ruling’s principles or reasoning would deny the advantage. The serious consequences of follower and accelerated payment notices required the statutory power to be kept within narrow bounds. The opinion-making power could not be used to bridge an unresolved legal issue.
6. The purpose of discouraging claims based on issues already decided did not justify extending the regime to this dispute. The unresolved characterisation issue could be pursued before the tribunal without the statutory consequences of a follower notice. Simler LJ and Underhill LJ agreed.

• Court of Appeal (Civil Division): Appeal allowed; the follower notices and accelerated payment notices were quashed.
• High Court of Justice, Queen’s Bench Division (Administrative Court): Lewis J dismissed the judicial review claim: [2018] EWHC 1967 (Admin).