ICAEW proposes further reforms to follower notice penalties
1 February 2021: ICAEW’s Tax Faculty has urged HMRC to rethink reforms of follower notice penalties and suggested better ways to target follower notices at taxpayers appealing cases concerning tax arrangements that match those already defeated at the courts.
Follower notices (FNs) are issued where HMRC believes that a taxpayer has entered into a tax avoidance arrangement which bears very similar characteristics to an arrangement that has been determined by the courts to be ineffective.
HMRC may issue penalties where the taxpayer fails to respond to an FN, such as by settling its tax affairs in line with the decision of the determined case.
In a consultation published in December, HMRC outlined its proposals to reform penalties for FNs, which included reducing the standard rate of such a penalty.
The proposals also suggest that a further penalty would be issued where:
- a tax tribunal or court makes a statement that the taxpayer has acted unreasonably in bringing or conducting proceedings in relation to the tax arrangement,
- a taxpayer’s appeal is stuck out on the grounds that it has no reasonable prospect of success or that there has been an abuse of process.
In its response, published as ICAEW REP 10/21, ICAEW welcomed the reduction in the standard rate of penalty but considered that further reform was needed to ensure that cases with genuine merit were not effectively prevented from being pursued further by the imposition of an FN.
It called for a facility to appeal to the First-tier Tribunal against FNs issued by HMRC on the grounds that the court decision upon which HMRC is relying to issue the FN is not relevant to the taxpayer’s arrangements.
The Tax Faculty also called for greater clarity to be given by HMRC to taxpayers in respect of their rights when FNs are issued, including all mechanisms and grounds for appeal.
ICAEW supports the imposition of a further higher penalty for failing to act in response to an FN but only in very limited circumstances, such as where the taxpayer has acted unreasonably in pursuing the case concerned.