R v Commissioners for Her Majesty’s Revenue and Customs

HMRC may issue a follower notice only if it considers that there is no scope for a reasonable person to disagree that the earlier judicial ruling would deny the asserted tax advantage. An opinion that the ruling is merely likely to do so is insufficient.

The reasoning of an earlier ruling may include fact-sensitive conclusions upheld on appeal. HMRC must therefore compare all material facts and legal arguments rather than treat selected factual indicators as conclusive. A follower notice must briefly explain which features make the earlier reasoning applicable. A deficient explanation does not automatically invalidate the notice.

HMRC issued Mr Haworth with a follower notice under Part 4 of the Finance Act 2014. It relied on Smallwood v Revenue and Customs Comrs [2010] EWCA Civ 778, which concerned similar arrangements intended to avoid capital gains tax through the UK–Mauritius double taxation convention.

The Administrative Court dismissed Mr Haworth’s judicial review claim: [2018] EWHC 1271 (Admin). The Court of Appeal allowed his appeal and quashed the notice: [2019] EWCA Civ 747.

The Supreme Court considered the certainty required for HMRC to regard an earlier ruling as relevant; whether HMRC had misunderstood Smallwood; whether fact-sensitive findings could constitute reasoning given in a ruling; and whether an inadequate explanation invalidated the notice.

1. Appeal dismissed unanimously. Lady Rose, with whom Lord Briggs, Lady Arden, Lord Leggatt and Lord Stephens agreed, held that HMRC had not formed the opinion required by Condition C in section 204(4) of the Finance Act 2014.

2. The word “would” in section 205(3)(b) requires HMRC to conclude that there is no scope for a reasonable person to disagree that the earlier ruling denies the asserted advantage. It is insufficient to conclude merely that the ruling is likely to do so. This construction reflects both the statutory language and the severe penalty intended to discourage continued access to the tribunal. A statutory intrusion on access to justice extends only so far as reasonably necessary to achieve the legislation’s purpose.

3. The same high threshold applies when the First-tier Tribunal determines under section 214(3)(b) whether an earlier ruling was relevant. Whether it is met depends on such matters as factual sensitivity, disputed evidence, new legal arguments, concessions made in the earlier case, and the nature and clarity of the earlier ruling. HMRC had concluded only that Smallwood was likely to defeat Mr Haworth’s claim.

4. HMRC also materially overstated Smallwood. Hughes LJ had not held that seven identified features were necessary and sufficient to establish a UK place of effective management in every later case. His conclusion depended on the full primary facts. It was not highly likely that HMRC would have reached the same decision without that error, so section 31(2A) of the Senior Courts Act 1981 did not require refusal of relief.

5. Fact-sensitive findings may form part of the “principles laid down, or reasoning given” for section 205(3)(b). Where an appellate court upholds a tribunal’s conclusion, the tribunal’s reasoning becomes, to that extent, reasoning given in the appellate judgment. It is immaterial whether the appellate court merely finds the conclusion permissible or expressly endorses it.

6. The notice inadequately explained why Smallwood applied. It should briefly have identified the features of Mr Haworth’s arrangements that, in HMRC’s opinion, engaged the earlier reasoning. Section 206 did not, however, make every explanatory defect invalidating, and this defect did not itself invalidate the notice.

1. United Kingdom Supreme Court: HMRC’s appeal was dismissed unanimously; the order quashing the follower notice remained in place: [2021] UKSC 25.
2. Court of Appeal: Mr Haworth’s appeal was allowed unanimously and the follower notice was quashed: [2019] EWCA Civ 747; [2019] 1 WLR 4708.
3. Administrative Court: Sir Ross Cranston dismissed Mr Haworth’s judicial review claim: [2018] EWHC 1271 (Admin); [2018] STC 1326.