High Court dismisses challenge to follower notice

In its decision in R (Haworth) v HM Revenue & Customs [2018] EWHC 1271 (Admin) the High Court has dismissed a judicial review challenge to a follower notice (FN) and an accelerated payment notice (APN) issued under the Finance Act 2014, Part 4 Ch 2 and Ch 3. This was the first such judicial review challenge. The case has significance for operation of the FN and APN regime in a number of areas of tax avoidance.

The claimant, Mr Haworth, entered into a scheme designed to avoid charges to capital gains tax (CGT) on the disposal of assets by an off-shore settlement in which he, as settlor, retained an interest. The aim was, in short, to appoint Mauritius trustees who would dispose of the assets and be replaced by UK trustees within the same tax year. Had UK trustees not been appointed, so that the settlement remained non-resident for the whole year, there would have been a charge under the Taxation of Chargeable Gains Act 1992, (TCGA) s 86.

Without more, making the settlement UK resident in the year of the disposal would however have triggered a charge to CGT attributed to the settlor as a result of the operation of  TCGA s 77. The device was intended to avoid the charge under s 77 by exploitation of the terms of the UK/Mauritius double taxation convention, which attributed taxing rights to the “place of effective management” (POEM) of the settlement.

HMRC took the view that the scheme was essentially a replay of the “round the world” tax avoidance scheme, popular in around 2000-01, and that the POEM question had effectively been decided by the principles laid down or reasoning given by the Court of Appeal in Smallwood v HMRC [2010] EWCA Civ 778, [2010] STC 2045 (in which Timothy Brennan QC and Akash Nawbatt had appeared for HMRC). HMRC therefore issued a FN, the effect of which was to expose the taxpayer to a penalty if he failed to take the appropriate action to cancel the asserted tax advantage. Issue of the FN also entitled HMRC to issue an APN, requiring payment of some £9m of disputed tax.

All of the taxpayer’s various challenges to this course of action were dismissed by Sir Ross Cranston, sitting as a judge of the High Court, who accepted all the arguments on behalf of HMRC. The judge commented that HMRC’s explanation of its processes in the case had reached the high standard the courts expect from HMRC, referring to an observation in R (City Shoes (Wholesale) Ltd) v HMRC [2018] EWCA Civ 315, [2018] STC 762, [25], Henderson LJ (where Timothy Brennan QC and Akash Nawbatt QC had appeared for HMRC).

On the interesting question whether Smallwood was a “relevant judicial decision” for the purposes of the FN regime, or merely a decision on the facts, the judge said that the claimant had misunderstood the nature of the judgment of Hughes LJ (and Ward LJ) in that case. Hughes LJ was not simply concerned with a rationality challenge to the first-instance findings of fact that the POEM of the trust was in the UK. His judgment contained both “principles” and “reasoning”. He had accepted that the proper approach to determining POEM was that of the OECD – where key management and commercial decisions necessary for the conduct of the entity's business were in substance made. Further, Hughes LJ rejected as erroneous the approach that one considered as the POEM only where the trust company was resident at the instant of disposal. Those principles, and that reasoning, was applicable to the claimant’s present case.

The challenge to the FN was dismissed. The challenge to the APN was also dismissed. Permission to appeal was refused.

Timothy Brennan QC and Christopher Stone appeared for HMRC.

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