Landmark Supreme Court ruling on 'round the world tax scheme' puts HMRC on notice

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Landmark Supreme Court ruling on 'round the world tax scheme' puts HMRC on notice

The UK's Supreme Court on 2 July rejected HMRC's approach to issuing follower notices over tax avoidance schemes in the case of R (on the application of Haworth) v HMRC.

Haworth had implemented a "round-the-world-scheme" designed to avoid a charge to capital gains tax to the tune of nearly £9m on the sale of the shares in his company.

A trust held the shares and the scheme involved appointing trustees in Mauritius who sold the shares and then appointed UK resident trustees in the same tax year.

This is an important limit to the use of follower notices. It ensures that taxpayers whose cases differ from the earlier ruling, perhaps because there are different facts or different legal arguments, are not denied, or discouraged from exercising, their right to pursue their own case in the courts."

Marilyn McKeever, partner at law firm BDB Pitmans, said: "The major issue in Haworth was whether a ruling could be "relevant" where HMRC considered it merely "likely" that the principles and reasoning of one case would apply to another, or whether a higher degree of certainty was necessary.

"What did it mean to say the principles and reasoning "would" deny the tax advantage in the other case. The Supreme Court held that "likely" is not enough."

Lady Rose, delivering the judgement of the Court said "…where a statutory power authorises an intrusion upon the right of access to the courts, it must be interpreted as authorising only such a degree of intrusion as is reasonably necessary to fulfil the objective of the provision in question….the use of the word "would" requires that HMRC must form the opinion that there is no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage….An opinion merely that it is likely to do so is not sufficient".

McKeever said this decision meant that HMRC cannot issue a follower notice unless it is clear that the previous case would result in the defeat of other, similar, cases.

"This is an important limit to the use of follower notices. It ensures that taxpayers whose cases differ from the earlier ruling, perhaps because there are different facts or different legal arguments, are not denied, or discouraged from exercising, their right to pursue their own case in the courts.

"Important in the context of the round-the-world schemes is that the Court also held HMRC had misunderstood Smallwood."

McKeever continued: "HMRC took the view that if the "seven pointers" were present, that inevitably meant that the POEM of the trustees was in the UK not Mauritius and they could issue a follower notice.

"The Court of Appeal in Smallwood did not say that. They considered that the POEM was a question of fact to be established by an examination of all the facts and circumstances.

"The Court's actual conclusion was that the First Tier Tribunal in that case had been entitled to find that the POEM was in the UK. A different case might have a different result.

"Thirdly, the Court held that factual findings can form part of the "reasoning given" in the relevant ruling.

She concluded: "Finally, although the follower notice issued to Mr Haworth was deficient in that it did not explain why the reasoning in Smallwood applied to his case, and in particular, the facts on which HMRC relied to determine the issue of the POEM in his case, that did not, of itself, invalidate the follower notice."

Background to the case

Mr Haworth had implemented a "round-the-world-scheme" designed to avoid a charge to capital gains tax to the tune of nearly £9m on the sale of the shares in his company. A trust held the shares and the scheme involved appointing trustees in Mauritius who sold the shares and then appointed UK resident trustees in the same tax year.

The scheme turned on the argument that the trustees' place of effective management (POEM) was in Mauritius which meant that the UK/Mauritius double tax treaty gave the exclusive right to charge tax on the gain to Mauritius which did not levy any capital gains tax.

In an earlier case, Smallwood v Revenue and Customs Commissioners, the Court of Appeal had held that a similar round-the-world scheme did not work and set out seven "pointers" relevant to that decision.

HMRC issued a follower notice to Mr Haworth and an accelerated payment notice. A follower notice is a draconian measure, designed to discourage participants in mass marketed avoidance schemes from pursuing their claim to a tax advantage under the scheme.

An accelerated payment notice requires a participant in a scheme to pay the disputed tax up front, before the issue has been determined by a tribunal or court.

HMRC can issue a follower notice where there is a "judicial ruling which is relevant to the chosen arrangements [the scheme being considered]'".

A ruling is "relevant" if, among other things, "the principles laid down, or reasoning given, in the ruling would, if applied to the chosen arrangements, deny the asserted advantage".

In other words, if HMRC have already defeated a scheme, they can issue a follower notice to users of that or a similar scheme, without going through the tribunals and courts.

The recipient of the notice can either abandon their claim and pay the tax or take their case to court, but if they do so they will have to pay a penalty of up to 50% of the disputed tax (which they get back if they win) and under an accelerated payment notice, they also have to pay the disputed tax up front.

There is no appeal against a follower notice. These are powerful deterrents to continuing with your case and letting the courts decide the issue.

HMRC considered that Smallwood was a relevant ruling in relation to round-the-world schemes.

Its Solicitor's Office advised "in another case, a Tribunal is on balance likely to find similarly" if the seven pointers were present."