Quick overview

In the matter of R (Locke) v HMRC, the Court of Appeal quashed the issue of Follower Notices (“FN’s”) and the subsequent Accelerated Payment Notices (“APN’s”) issued on the back of these Notices.

This was because the Eclipse Film Partners No 35 LLP (“Eclipse 35”) ruling upon which HMRC relied failed to comply with condition C (one of the four conditions set out under section 204 of the Finance Act 2014 which are required in order for notices to be valid).

Accordingly the FN’s were found to have been issued unlawfully and were ordered to be quashed.

Furthermore in this case, as the issue of APN’s (as per section 219 (4) (A) of the Finance Act 2014) was based on HMRC having “…. given (or at the same time has given) a follower notice …” these APNs were also judged to be invalid, and like the FN’s before them, were also ordered to be quashed.

This case centred around a specific point of law, namely whether loan interest relief had been claimed (as HMRC argued) under section 362 (1) (b) ICTA 1988 on loans to fund the contribution to a partnership are to be used “… wholly for the purposes of the trade, or profession carried on by the partnership”.

However Mr Locke’s representation successfully argued that regardless of whether his partnership was found to be carrying on a trade, he was entitled to claim tax relief on his borrowings under s362 (1) (a) ICTA 1988 on the basis of purchasing a share in the partnership. As a result, there was no relevant judicial ruling to support the issue of the FN’s, and HMRC were wrong to opine that should this point be heard at some point in the future, the courts would automatically agree with their interpretation.

Lady Justice Rose having reviewed the Eclipse 35 judgement, confirmed that in her opinion the structure was identical to that of Mr Locke’s partnership, but declined to comment on the question of on what basis loan interest relief could be claimed stating:

“No tribunal or court has yet laid down any principle that HMRC’s construction is the correct legal position or given any reasoning as to why Mr Locke’s payment cannot be characterised as the purchase of a share in Eclipse 10 for the purposes of section 362 (1) (a)”.


HMRC’s statement that it “…. Is of the opinion”, does not actually mean that prior judgement has been issued to support the fact and effectively stating that the principles and reasoning is “more likely than not” to result in the advantage being denied is not sufficient. By use of this form of words, HMRC are currently able to issue FN’s routinely with regards to any appeals pending an FTT hearing. As per Lord Justice Newey (in the matter of “R (oao Haworth v HMRC[2019] EWCA Civ 747), he noted that FN’s were meant to be available to HMRC only in relatively exceptional circumstances and therefore he concluded that the threshold for their issue must be a high one, considering the consequences of non-compliance.

The issue of FN’s is a major part of HMRC’s ordinance, and the risk of a 50% penalty was only intended to be applicable in limited and exceptional circumstances, and caution therefore must be shown by HMRC to ensure that precise and accurate “principles” are being drawn from court rulings.

The Court of Appeal has confirmed that HMRC must have a “substantial degree of confidence” that the taxpayers appeal would fail. Accordingly, whilst HMRC might believe their technical argument is correct, this does not entitle them to proceed with the issue of FN’s without a prior “judicial determination to that effect”!

Therefore if a tax payer has received a FN which quotes a judicial ruling in which the underlying arguments differ from those in which the tax payer participated, they should review their position and give due thought as to whether HMRC should now be asked to rescind this and any other notices issued on the back of the FN.

Newport has acted on behalf of its clients reviewing FNs and APNs and challenged HMRC’s issuance of them following the ruling in Locke. If you have been issued notices and would like us to review them, please contact me via DM or at clientservices@newporttm.co.uk.

Link to judgement – https://www.bailii.org/ew/cases/EWCA/Civ/2019/1909.html



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