Follower notice penalty assessment? What can be done?
One of the most invidious aspects of the follower notice regime is the way that a follower notice penalty of up to 50% of the denied tax advantage is charged if the recipient of a follower notice fails to take “corrective action” by the specified deadline. Taxpayers who have received a follower notice in the past but have not taken the “corrective action” required by the follower notice (or have taken it after the deadline has passed) will receive from HMRC a notice headed: Follower Notice Penalty Assessment: Penalty for not taking corrective action in response to a follower notice.
The follower notice legislation gives no right of appeal against the follower notice itself. It is possible to make representations to HMRC within 90 days of the issue of the follower notice, and if those representations are accepted, HMRC will withdraw the notice. If it transpires that the notice was defective in detail but correct in principle, HMRC will almost certainly issue another notice. If HMRC refuses to withdraw the notice, that decision can only be challenged by judicial review within strict time limits.
However, Section 214 Finance Act 2014 does provide a right of appeal against a follower notice penalty assessment and I recommend that this should be exercised in nearly all cases.
The particular grounds of appeal against a follower notice penalty assessment are set out in section 214(3) Finance Act 2014 and include the following:
(a) that Condition A (open enquiry, appeal etc), B (a particular tax advantage results from particular arrangements) or D (no follower notice has previously been issued in relation to the same tax advantage for the same period) in section 204 was not met in relation to the follower notice,
(b) that the judicial ruling specified in the notice is not one which is relevant to the chosen arrangements,
(c) that the notice was not given within the period specified in subsection (6) of that section, or
(d) that it was reasonable in all the circumstances for [the taxpayer] not to have taken the necessary corrective action in respect of the denied advantage.
The calculation of follower notice penalties is complex so it is entirely possible that a follower notice penalty assessment may contain errors or be capable of being disputed for other reasons.
There may be circumstances which could support the argument that section 214(3)(d) applies so that it was “reasonable in all the circumstances for the taxpayer not to have taken the corrective action”. Taking corrective action involves giving up the right to pursue the claim, which might have been one which had a more than negligible prospect of success at the Tribunal. The judicial decision upon which the follower notice was based might not be directly relevant in the recipient’s circumstances, or other factors might have come into play: for example, there might have been carry-back claims which were arguably final (and therefore not capable of being withdrawn as the corrective action requires) on the authority of the Supreme Court’s decision in Cotter because HMRC had not enquired correctly into the claim (this is the subject of the De Silva case which is still making its way through the Courts). In any event, it seems that what was “reasonable in all the circumstances” must be determined by reference to the circumstances at the time corrective action had been required by the follower notice, and not with the benefit of hindsight.
While the recipient of an accelerated payment notice which has accompanied a follower notice is not entitled to defer payment of any associated Accelerated Payment Notice, the exercise of the right of appeal against the follower notice penalty assessment will allow payment of the penalty to be deferred until the charge is confirmed by a Tribunal or conceded by the recipient.
Appeals should be made promptly as there is a 30 day time limit, although late appeals can be made if a reasonable excuse for lateness can be demonstrated. If you need urgent advice regarding a follower notice penalty assessment you might have received, please contact us.