Haworth, R (on the application of) v Revenue and Customs [2021] UKSC 25

Mr Haworth challenged a follower notice issued by HMRC under the Finance Act 2014, which relied on the Smallwood ruling to deny his claimed tax advantage from trust arrangements involving Mauritius. The Supreme Court held HMRC must form an opinion of sufficient certainty that the earlier ruling would deny the advantage, not merely that it was likely to do so.

Facts

Mr Haworth entered into tax arrangements involving a trust, whereby trustees resident in Mauritius disposed of shares before being replaced by UK-resident trustees within the same fiscal year. He claimed exemption from capital gains tax on the disposal, relying on the UK/Mauritius double taxation convention and provisions of the Taxation of Chargeable Gains Act 1992.

HMRC opened an enquiry into his 2000/2001 tax return and subsequently issued a follower notice under Part 4 of the Finance Act 2014, asserting that the Court of Appeal’s ruling in Smallwood v Revenue and Customs Comrs [2010] EWCA Civ 778 was relevant to his arrangements and would deny him the claimed tax advantage. The notice was based on HMRC’s view that certain ‘Smallwood pointers’ derived from that judgment were present in Mr Haworth’s case.

Issues

Primary Issue

Whether HMRC had formed the requisite opinion under Condition C in section 204(4) of the Finance Act 2014 that the judicial ruling in Smallwood ‘would’ deny Mr Haworth his asserted tax advantage, or whether an opinion that it was merely ‘likely’ to do so was sufficient.

Secondary Issues

Whether HMRC misdirected themselves as to the conclusions in Smallwood; whether factual findings form part of the ‘principles laid down or reasoning given’ in a ruling; and whether the follower notice complied with the requirements of section 206.

Judgment

The Supreme Court unanimously dismissed HMRC’s appeal. Lady Rose, delivering the lead judgment, held that the word ‘would’ in section 205(3)(b) required HMRC to form an opinion that there was no scope for a reasonable person to disagree that the earlier ruling denied the taxpayer the advantage.

“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.”

Lady Rose stated:

“What HMRC have to be able to show is first that they formed an opinion and secondly that that opinion was that Smallwood was a relevant ruling for the purposes of Mr Haworth’s tax arrangements.”

She concluded that HMRC’s evidence showed only that they considered it ‘likely’ the ruling would apply, which was insufficient:

“An opinion merely that is likely to do so is not sufficient.”

The Court also found that HMRC had overstated the conclusions in Smallwood, and that the follower notice was deficient in its explanation, though not invalid on that ground alone.

Factual Findings as Reasoning

The Court rejected Mr Haworth’s argument that factual findings cannot form part of the ‘reasoning given’ in a ruling, holding that evaluative conclusions on mixed questions of fact and law do have precedential value where the facts are materially similar.

Implications

This judgment significantly constrains HMRC’s use of follower notices. HMRC must form an opinion of certainty, not mere probability, that an earlier ruling determines the taxpayer’s case. The decision reinforces the constitutional right of access to justice by requiring a high threshold before measures that effectively discourage taxpayers from pursuing appeals can be deployed. It clarifies that fact-sensitive rulings may still be ‘relevant rulings’ but requires careful analysis of whether the factual circumstances are sufficiently analogous.

Verdict: The Supreme Court unanimously dismissed HMRC’s appeal. The follower notice issued to Mr Haworth was quashed because HMRC had not formed the requisite opinion that the Smallwood ruling ‘would’ deny his tax advantage; their opinion that it was merely ‘likely’ to do so was insufficient to satisfy Condition C.

Source: Haworth, R (on the application of) v Revenue and Customs [2021] UKSC 25