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Upper Tribunal upholds penalty imposed for failing to take 'corrective action' in response to a follower notice

08 April 2024. Published by Alexis Armitage, Senior Associate

In K Pitt v HMRC [2024] UKUT 21 (TCC), the Upper Tribunal (UT) dismissed the taxpayer's appeal and upheld a penalty for failing to take corrective action in response to a follower notice (FN) as the final judicial ruling specified in the FN was relevant to the arrangements the taxpayer had implemented.


Under sections 204-218, Finance Act 2014, HMRC can issue a FN to a taxpayer informing them that some or all of the issues in dispute regarding their tax liability has been determined in HMRC's favour in another case. A FN directs the recipient taxpayer to take 'corrective action' by amending their return or claim to counteract the denied tax advantage and withdraw their appeal. 

Where a taxpayer fails to comply with a FN a penalty is payable, calculated on a percentage of the value of the denied advantage. An appeal can be made against a penalty on the basis, amongst other things, that the final judicial ruling specified in the FN is not relevant to the arrangements implemented by recipient taxpayer and it was reasonable in all the circumstances for the taxpayer not to have taken the necessary corrective action.

A judicial ruling is 'relevant' if the principles laid down, or reasons given in it would, if applied to the arrangements implemented by the recipient taxpayer, deny the tax advantage claimed by the taxpayer.

Kevin John Pitt (the Appellant) entered into certain arrangements involving the acquisition and disposal of loan notes.  HMRC disputed the Appellant's view that the arrangements generated a loss of £694,684 and that as a consequence of that loss he was entitled to relief of £278,557.60, in relation to his other income for the relevant tax year.

On 16 June 2016, HMRC issued a FN to the Appellant specifying the case of Audley v HMRC [2011] UKFTT as a judicial ruling that was 'relevant'. On 2 July 2018, after the Appellant failed to take corrective action in response to the FN, HMRC issued a penalty assessment in the sum of £83,547.  

On 3 October 2018, HMRC issued a closure notice denying the Appellant's loss relief claim.  

The Appellant unsuccessfully appealed against HMRC's closure notice and the penalty assessment to the First-tier Tribunal (FTT). He then appealed the FTT's decision in relation to the penalty assessment to the UT.

UT decision 

The appeal was dismissed. 

The Appellant appealed on the basis that the Audley decision was not a relevant judicial ruling on which the FN could be validly based. The Appellant argued that the FTT erred in its legal approach, in particular, the FTT should have only compared the primary facts of each case as opposed to the evaluative conclusions and inferences that the FTT had found once it had construed the legislation purposively and, in particular, viewed the facts 'realistically', in accordance with the Ramsay approach to legislative construction.

The UT held that the relevant legislation required the extraction of the principles and reasoning in the case of Audley to see whether they would, if applied to the Appellant's circumstances, similarly deny the tax advantage sought by the Appellant. The UT commented that it made no sense to apply that reasoning only to the primary facts because it was inherent in the reasoning that the facts should be looked at realistically in the light of the purpose of the legislation. There was no distinction between facts and facts found following a realistic approach. Such reconstituted facts were no less facts.  

The UT therefore concluded that there was no error in the FTT’s approach. 


Although FNs were introduced some 10 years ago, they remain controversial and the UT’s narrative and analysis of the legislation and case law will be useful to anyone who receives a FN. 

The UT rejected the Appellant's argument that Audley was fact-sensitive and the FTT had failed to find the material factual differences between the judicial ruling and his arrangements because it had erroneously compared the 'reconstituted' facts when it was only permitted to compare the primary facts. In the view of the UT, such an argument was not supported by the relevant legislation or the Supreme Court's decision in R (Haworth) v HMRC [2021] UKSC 25. Accordingly, as things currently stand and subject to the outcome of any further appeal, reconstituted facts are to be treated as findings of fact for the purposes of determining whether a final judicial ruling specified in a FN is relevant to the arrangements implemented by the recipient taxpayer.

It is also worthy of note that the UT confirmed, all be it obiter, that the FN regime is not confined to mass-marketed tax avoidance schemes.

The decision can be viewed here.