A taxpayer has lost his case at the Upper Tribunal (UT) concerning an appeal against a follower notice penalty.  The taxpayer had tried to generate income tax losses by using discounted securities, by acquiring discounted securities at a value greater than their present value from connected parties.

HMRC had disallowed the loss relief claimed by the taxpayer and had issued a follower notice to the taxpayer requiring him to amend his return within a specified period.  The taxpayer didn’t amend his return and eventually HMRC issued a penalty to the taxpayer.  The taxpayer appealed the penalty.

For HMRC to issue a follower notice requiring a taxpayer to amend their return, HMRC must disclose which judicial ruling renders the tax avoidance ineffective and this judicial ruling has to be relevant.  HMRC had quoted a case whereby a taxpayer had also used discounted securities and connected parties to generate a loss, but this case was slightly different in some of the underlying facts, trusts were the issuer of the discounted security as opposed to a company as was the issuer in the instant case.

The taxpayer argued that a Supreme Court (SC) ruling meant that the First-tier Tribunal (FTT) has erred by not taking accounting of the primary facts, i.e. the fact that a company was the issuer of the discounted security.  The SC case the taxpayer referred was a case where the SC found that access to justice can be impaired under the follower notice regime so if a judicial ruling is relevant, it must be relevant beyond any margin of doubt.  Our analysis of that SC case can be found here.

UT found that the FTT had not erred as it had applied the principles and reasoning in the earlier case to the facts of the instant case.  The UT also noted that if the FTT hadn’t applied to the principles and reasoning of the earlier case the fact, viewed realistically, then it would have erred in law.

The UT dismissed the taxpayer’s appeal as the judicial ruling relied by HMRC was relevant beyond any margin of doubt.

The decision can be found at: KEVIN JOHN PITT v THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS [2024] UKUT 00021 (TCC) – GOV.UK (www.gov.uk)

This is a hard decision for the taxpayer concerned; the penalty alone could amount to £139k.

Please contact us if you have any questions with tax avoidance schemes.  The taxpayer in the case hadn’t used a mass-marketed scheme but the results have been quite expensive.