Upper Tribunal Upholds Follower Notice Penalty – Introduction
In a significant ruling, the Upper Tribunal (UT) has upheld a penalty against Kevin John Pitt for failing to take corrective action in response to a follower notice (FN) issued by HM Revenue and Customs (HMRC).
The case, referred to as K Pitt v HMRC [2024] UKUT 21 (TCC), serves as a critical reminder of the stringent requirements imposed by HMRC concerning tax compliance.
Background of the Case
HMRC issued a follower notice to Mr. Pitt in 2016, based on the judicial ruling in Audley v HMRC [2011] UKFTT.
The FN identified that the tax avoidance arrangements Mr. Pitt had entered into, which involved the acquisition and disposal of loan notes and claimed a loss of £694,684, were similar to those previously ruled on.
HMRC contended that these arrangements did not warrant the claimed tax relief of £278,557.60.
When Mr. Pitt failed to amend his tax returns in line with the FN, HMRC subsequently imposed a penalty amounting to £83,547. This penalty was calculated based on a percentage of the tax advantage that had been incorrectly claimed.
Judicial Proceedings
Mr. Pitt challenged both the closure notice that denied his loss relief claim and the penalty at the First-tier Tribunal (FTT), but was unsuccessful.
He then escalated the challenge concerning the penalty to the UT, arguing that the FTT had erred by comparing evaluative conclusions and inferences rather than the primary facts of the Audley case.
UT’s Decision
The UT dismissed the appeal, affirming that the legislative intent required an analysis that extends beyond mere primary facts to include evaluative conclusions and inferences.
This approach aligns with the Ramsay principle, which advocates for a realistic view of facts in light of the legislative purpose.
The UT clarified that reconstituted facts, when construed purposively and realistically, are indeed facts and must be treated as such in the assessment of follower notices.
Implications of the Ruling
This ruling underscores the effectiveness and reach of the FN regime beyond just mass-marketed tax avoidance schemes.
It highlights the necessity for taxpayers to adhere strictly to the directives specified in FNs, especially when prior judicial rulings clearly delineate the bounds of permissible tax relief claims.
Upper Tribunal Upholds Follower Notice Penalty – Conclusion
The decision of the UT provides crucial insights into the interpretation and application of laws related to follower notices and corrective actions.
While FNs have been controversial since their introduction about ten years ago, the UT’s detailed narrative and analysis offer valuable guidance for taxpayers who might find themselves subject to such notices.
The ongoing legal narrative around FNs and the responsibilities they place on taxpayers continue to evolve, and this decision is a pivotal addition to the existing body of case law.
Taxpayers and tax professionals alike should note the implications of this ruling, as it not only affirms the breadth of the FN regime but also reinforces the need for compliance with its requirements.
Final th0ughts
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