Tax Disputes: Follower Notices and Accelerated Payments

Out-Law Guide | 22 May 2014 | 3:27 pm | 6 min. read

HM Revenue & Customs (HMRC) has the power to require payment of tax upfront, before a dispute about the efficacy of a tax scheme has been settled by the courts. It can also require payment of tax where it has succeeded in the courts against another scheme user. 

This guide was updated in February 2017.

Anyone who has used a scheme disclosable under the Disclosure of Tax Avoidance Schemes (DOTAS) rules may have to make an accelerated payment of tax – even if the planning was disclosed under DOTAS many years before these changes became law and even if HMRC has not succeeded in any litigation against the scheme.

If HMRC succeeds in the courts against another scheme user it will be able to require a taxpayer to settle their dispute or if they wish to continue their dispute, to make an accelerated payment of tax and face potential penalties if they are ultimately unsuccessful.

Accelerated payment notices

HMRC can issue an 'accelerated payment notice' (APN) to a taxpayer if a tax enquiry or tax appeal is in progress and:

  • HMRC has issued a  DOTAS reference number in relation to the arrangements (or similar arrangements where the promoter is required to notify a scheme reference number to the taxpayer);
  • a follower notice (see below) has been given or is given at the same time in relation to the same return and same tax advantage; or
  • a general anti-abuse rule (GAAR) counteraction notice has been given in a case where the stated opinion of at least two members of the sub panel of the GAAR advisory panel was that the arrangements were not a reasonable course of action.

The accelerated payment notice will specify the amount of tax that must be paid on account of any final liability in respect of the enquiry or appeal. This will be determined to the best of the HMRC officer's information and belief. The accelerated payment provisions overrule the normal postponement rules in relation to tax appeals. The accelerated payment will be repaid (with interest) in the event that the scheme is ultimately proved to work.

The accelerated payment notice will be discharged by a settlement of the dispute with HMRC, and so for those who have also received a follower notice, will only be relevant to those who decide not to comply with the follower notice and to continue with their own dispute. 

The proposals are particularly controversial in relation to DOTAS schemes. A DOTAS scheme user could have to make an accelerated payment of tax in relation to a scheme entered into many years before these provisions become law, even though their use of the scheme is still under enquiry or being litigated and despite there being no other judicial ruling in respect of the scheme in question. 

There are penalties if you fail to pay the accelerated payment within 90 days of the issue of the notice.

For those who have invested through a partnership, an accelerated payment notice cannot be given to the representative partner, instead 'partner payment notices' (PPNs) may be issued to individual partners. These operate in a similar way to APNs.

There is no right of appeal against an accelerated payment notice. However, a recipient has 90 days from receipt of the notice to send written representations objecting to the notice to HMRC but only on the grounds that the conditions for the notice were not fulfilled – eg the scheme was not a DOTAS scheme or that the amount of the accelerated payment claimed is incorrect. HMRC must consider the representations and will then confirm or withdraw the notice or amend the amount of the accelerated payment. If written representations are made and the notice is confirmed by HMRC, the recipient has 30 days from receipt of HMRC's decision to make the payment (if this would be a later date than the end of the original 90 day period).

Although HMRC said that up to April 2016 it upheld 89% of APNs where it received written representations, it has withdrawn notices in some circumstances, including where a scheme was notified under DOTAS but was not technically 'notifiable'.

Some recipients of APNs and PPNs have challenged by way of judicial review the issue of the notices by HMRC, challenging in particular the retrospective nature of the rules. Pinsent Masons, the law firm behind is advising on a number of such challenges including the leading case (Rowe and others v HMRC), which is due to be heard in the Court of Appeal in July 2017.  

HMRC publishes a list of  DOTAS scheme reference numbers of schemes where it intends to issue APNs. The list is updated quarterly. HMRC was expecting to have issued 70,000 notices by the end of 2016. It has issued notices in relation to a wide range of schemes including film schemes, business premises renovation allowance (BPRA) investments, so called 'contractor loan' schemes and employer funded retirement benefit schemes (EFRBS).There are no specific provisions allowing tax to be paid in instalments. However, HMRC will consider requests for its normal 'time to pay' discretionary relief.

The new regime has applied since17 July 2014 – but it applies to schemes entered into before that time, as well as those entered into afterwards.

APNs apply in relation to  national insurance contributions, as well as other taxes.

Follower notices following a judicial ruling in another case

'Follower notices' are aimed at marketed avoidance schemes, where HMRC has succeeded in the courts against one scheme user.

HMRC can issue a follower notice where an enquiry or tax appeal is in progress in relation to 'arrangements' where it is reasonable to conclude that obtaining a 'tax advantage' was the main purpose or one of the main purposes of the arrangements.

The legislation is widely drawn and allows the issue of a follower notice where "HMRC is of the opinion that there is a judicial ruling which is relevant to [the taxpayer's] arrangements". A ruling is relevant if "principles" laid down or reasoning given in the ruling would, if applied to the arrangements, deny the asserted advantage, or part of it.

The judicial ruling must be a final determination. This means a decision where there is no right of appeal, such as from the Supreme Court, where permission to appeal is refused or where an appeal is not made within the time limits or is abandoned. The ruling could therefore be a ruling of the First Tier Tribunal, if the taxpayer does not appeal.

A follower notice requires the taxpayer to amend its return, if the return is still under enquiry, or enter into an agreement with HMRC to settle the dispute, where a closure notice or tax assessment is under appeal. The taxpayer is also required to give HMRC a notice stating that it has taken the necessary corrective action and notifying HMRC of the amount of additional tax which becomes payable as a result.  The taxpayer has 90 days in which to comply.

There is no right of appeal against a follower notice, just a right to send written representations to HMRC, within 90 days of the notice being given, objecting to the notice on the basis that the procedural conditions have not been complied with or that the judicial ruling is not relevant to your circumstances. If you submit representations and are unsuccessful, you have 30 days from being notified of the outcome to comply with the notice, assuming this period ends after the original 90 day period.

There is a maximum penalty of 50% of the tax due, if you fail to comply with the follower notice. This can be reduced if you co-operate with HMRC. You can appeal against a follower notice penalty. The grounds of appeal include that the procedural conditions for the follower notice were not met, that the judicial ruling is not relevant to the arrangements or that "it was reasonable in all the circumstances...not to have taken the necessary corrective action". This last ground should prevent a penalty arising where a taxpayer continues their own litigation and is ultimately successful.

HMRC has 12 months to issue a follower notice, beginning on the latest of the day of the judicial ruling, the day HMRC received the taxpayer's return or claim and the day the taxpayer made its appeal. If the ruling was before 17 July 2014, the limit is the later of 24 months from 17 July 2014 and 12 months from the return or appeal.

It began issuing follower notices in the 2015-16 tax year, when it issued 282. However, we expect that number to have increased in the 2016-17 tax year.

If the disputed tax has not already been paid, a follower notice will usually be accompanied by an 'accelerated payment notice' specifying an amount of tax that must be paid on account of the final liability..

Special provisions apply in relation to scheme participants who have invested through a partnership. In these circumstances, a follower notice will be issued to the representative partner of the partnership, and not to the individual partners. However, if the partnership does not comply with the follower notice, penalties of a maximum of 20% of the tax due will be assessed on the individual partners in accordance with their profit shares.

What should you do if you think you may be affected?

For more guidance on what you should do if you think you may be affected by these provisions see the FAQs on accelerated payment notices and follower notices prepared by Pinsent Masons.