Haworth, R (On the Application Of) v Revenue And Customs

For a follower notice, Finance Act 2014, section 205(3)(b), treats the principles laid down and reasoning given in an earlier ruling as alternative bases. HMRC may therefore rely on reasoning which is not part of the ratio, although its weight may differ.

However, HMRC must be of the opinion that the earlier ruling would deny the asserted advantage if applied. A view that this is merely more likely than not is insufficient. The power is confined to its statutory purpose because a notice can impose serious financial consequences and deter access to the tribunal. HMRC must also accurately understand the earlier ruling and give a sufficiently case-specific explanation in the notice.

HMRC issued Mr Haworth with follower and accelerated payment notices concerning a trust which had temporarily had Mauritian trustees during a share disposal. HMRC considered that Smallwood, concerning a similar tax arrangement, was a relevant judicial ruling.

Mr Haworth challenged the notices by judicial review. Sir Ross Cranston dismissed the claim in the Administrative Court: [2018] EWHC 1271 (Admin). He appealed to the Court of Appeal.

The principal issues were the meaning of section 205(3)(b) of the Finance Act 2014, whether HMRC had misdirected itself about Smallwood and the requisite certainty of denial, and whether the follower notice complied with section 206.

1. Appeal allowed. The follower notice and the accelerated payment notice founded upon it were quashed. Newey LJ gave the principal judgment, with which Sir Timothy Lloyd and Gross LJ agreed.
2. Section 205(3)(b) of the Finance Act 2014 refers separately and alternatively to the principles laid down and reasoning given in a judicial ruling. It is not confined to the ratio decidendi. HMRC may take account of other reasoning, although its non-ratio character may affect the weight to be given to it.
3. The word would requires HMRC to hold the opinion that the earlier ruling’s principles or reasoning will deny the asserted advantage if applied to the chosen arrangements. A view that denial is only more likely than not does not meet the condition. This construction reflects the exceptional and potentially deterrent consequences of follower notices, including penalties and their effect on access to the tribunal.
4. HMRC misdirected itself in two material respects. It overstated Smallwood by treating Hughes LJ as having found that the trust’s place of effective management was necessarily in the United Kingdom. Properly understood, he had held only that the Special Commissioners had been entitled to make that finding. HMRC also proceeded on the erroneous basis that a tribunal was likely to find similarly. The court could not conclude that HMRC would, or would be highly likely to, issue the notice if correctly directed.
5. Obiter, a follower notice under section 206 may be concise, but it must explain why the earlier ruling is relevant to the recipient’s particular arrangements. This notice was deficient because it did not explain why the Mauritian trustees’ real top-level management was thought to be in the United Kingdom. A breach of section 206 does not automatically cause invalidity. Applying the consequences-based approach in R v Soneji, the defect caused no prejudice here because Mr Haworth knew HMRC’s case and made detailed representations. That defect alone would not have justified quashing the notices.

• Court of Appeal (Civil Division): Allowed the appeal and quashed the follower and accelerated payment notices: [2019] EWCA Civ 747.
• Administrative Court, High Court: Sir Ross Cranston dismissed the judicial review claim: [2018] EWHC 1271 (Admin).