Locke – Court of Appeal quashes follower and accelerated payment notices

04 December 2019. Published by Adam Craggs, Partner

In R (ota of Locke) v HMRC [2019] EWCA Civ 1909, the Court of Appeal has quashed follower and accelerated payment notices issued to a participant in a film finance partnership, because HMRC had been wrong in considering that a judicial ruling was relevant to the arrangements under consideration.


Mr Locke had been a partner in Eclipse Film Partners No 10 LLP (Eclipse 10), a partnership involved in the acquisition and exploitation of film rights. His contribution was partly financed by borrowing and he claimed relief on the interest he paid in respect of his loans. 

Mr Locke's position was that he had used the loans to purchase an interest in Eclipse 10, and was entitled to interest relief pursuant to sections 353 and 362(1)(a), Income and Corporation Taxes Act 1988 (ICTA). 

HMRC opened enquiries into Mr Locke's tax returns for 2005/06 and 2014/15 and formed the view that the loans were not qualifying loans under section 362(1)(a) (which deals with contributing capital to a partnership). Mr Locke was therefore not entitled to income tax relief for the interest payments.

Section 204, Finance Act 2014 (FA 2014), enables HMRC to issue a follower notice to a taxpayer, requiring the taxpayer to take corrective action to relinquish a particular 'tax advantage' arising from the arrangements implemented by the taxpayer. Taxpayers who continue with a dispute where a validly issued follower notice has been issued face a potential penalty of up to 50% of the tax in question. HMRC can also issue an accelerated payment notice (APN) to a taxpayer under section 219, FA 2014. An APN requires a taxpayer to pay the disputed tax up front before any dispute has been resolved or determined by the tax tribunals.

In March 2017, HMRC issued follower notices and APNs to Mr Locke. HMRC stated in the follower notices that the Court of Appeal's decision in Eclipse Film Partners No 35 LLP v HMRC [2015] EWCA Civ 95 (Eclipse 35) determined the point of law arising in Mr Locke's case and, when applied to the facts of his case, would likely determine his appeal in HMRC's favour. 

In Eclipse 35, the court determined that the partnership in question was not trading, and its members were therefore not permitted to rely on its trading status to claim a deduction for interest on borrowings contributed to the partnership (under section 362(1)(b)). HMRC considered that Eclipse 35 demonstrated that Mr Locke was not entitled to relief in respect of the interest he had paid.

As there is no right of appeal against the issue of a follower notice, Mr Locke challenged HMRC's decision to issue to him the follower notices and APNs by way of judicial review, on the grounds that the statutory conditions for the issue of the follower notices had not been met. The High Court found in favour of HMRC, holding that the similarity between the Eclipse 35 arrangements and Eclipse 10 meant that HMRC had been entitled to form the view that it had. 

In his appeal to the Court of Appeal, Mr Locke argued:

(1) that his interest claim was based on section 361(1)(a), ICTA (a purchase of a share in a partnership), rather than section 362(1)(b), and that the former did not require the partnership to be trading and therefore his claim could not be determined by the decision in Eclipse 35; and

(2) the question of whether his investment was to be considered a purchase of a share in a partnership (or simply contributing money to a partnership) had not been determined in Eclipse 35, and that HMRC was not entitled to form the view that his interest relief claim would be precluded by Eclipse 35 in the absence of such a determination.

Court of Appeal judgment

The appeal was allowed. 

In relation to Mr Locke's first ground of appeal, the Court held that when drafting section 204, FA 2014, Parliament must have intended to refer to broad classes of tax advantage. The tax advantage in Mr Locke's case was interest relief in general and it was not necessary for HMRC to take a 'granular' approach to identifying the advantage.

However, in relation to Mr Locke's second ground of appeal, the Court was of the view that the question of whether Mr Locke's arrangements fell within section 362(1)(a), or section 362(1)(b), was an issue that needed to be determined in order to decide whether the interest relief arose from Mr Locke's investment. As this issue had not been considered in Eclipse 35, the Court decided that HMRC could not have lawfully formed the view that the ruling would prevent Mr Locke from claiming interest relief.


This decision confirms that a follower notice will only be valid if the judicial ruling relied upon by HMRC contains legal principles or reasoning that would determine the legal issues which arise in the dispute with the taxpayer. HMRC does not have the power to form an opinion that the legal issues will be determined in its favour without the issues first being determined in a final ruling, even in circumstances where it considers that the taxpayer's position is unsustainable.

The decision is further confirmation that the statutory provisions which enable HMRC to issue follower notices and APNs must be construed narrowly, given the serious consequences of such notices for  taxpayers.
Readers may also be interested in our blog on the Court of Appeal's decision in R (Haworth) v HMRC [2019] EWCA Civ 747, which confirms that when issuing follower notices HMRC must have a 'substantial degree of confidence' that a taxpayer's appeal would fail and cannot merely assert that an appeal would be likely to fail, particularly where a new point of law arises.

The decision can be viewed here.

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