Guidance

Tax avoidance schemes — penalties for follower notices

Updated 25 July 2023

This factsheet contains information about the penalty we’ll charge you if we’ve sent you a follower notice and you’ve not taken the necessary corrective action on time. Where this factsheet refers to tax, this includes National Insurance contributions (NICs).

This factsheet is one of a series. For the full list of factsheets in the series, go to www.gov.uk and search for ‘Compliance checks factsheets’. This factsheet is for:

• non-partnership cases where the tax avoidance scheme is for any of the taxes or NICs listed in ‘The taxes and NICs to which these penalty rules apply’ section
• partnership cases where the tax avoidance scheme is for Stamp Duty Land Tax or Annual Tax on Enveloped Dwellings

If you’re a member of a partnership that has used a tax avoidance scheme for another tax or NICs, you may also need to read factsheet CC/FS30b, ‘Tax avoidance schemes — penalties for partnership follower notices’.

When we’ll charge a penalty for not taking corrective action on time

We’ll charge you a penalty if we’ve sent you a follower notice, and you have not taken corrective action on time. The follower notice explains what corrective action you need to take.

The amount of the penalty

The penalty for not taking corrective action is equal to 30% of the value of the denied advantage. However, we can reduce the penalty percentage rate if you’ve co-operated with us. There’s more information about reduction and co-operation later in this factsheet.

How we tell you about the penalty

When we’ve decided the amount of the penalty that we’re going to charge, we’ll send you a notice of penalty assessment.

Before we send a notice of penalty assessment, we’ll normally write to tell you how we’ve worked out the amount of the penalty. If we do this and you think there’s something you have done to co-operate that we have not taken into account, you’ll be able to tell us so we can consider whether it affects the penalty. Once we’ve allowed time for this to happen, we’ll send you the notice of penalty assessment as soon as we can.

When you receive the notice of penalty assessment, you’ll be able to appeal if you disagree with it.

You’ll be able to appeal whether or not we wrote to you about the penalty before we sent the notice of penalty assessment. You can find more about this in the section headed ‘Appealing against the penalty if you disagree’ on page 5.

What’s the deadline for us sending the notice of penalty assessment to you

There’s a deadline for us sending the notice of penalty assessment to you. If the follower notice relates to a compliance check or relevant contributions dispute, the latest day on which we can send you a notice of penalty assessment is 90 days from the date on which the compliance check is completed or relevant contributions dispute is settled. If the follower notice relates to an appeal or a further appeal, the latest day on which we can send you a notice of penalty assessment is 90 days from the earliest of the following dates. The date on which:

• you took corrective action
• the final ruling was made on your appeal or further appeal
• the appeal or further appeal was abandoned or otherwise disposed of before it was determined by the court or tribunal

The tax legislation that deals with follower notices refers to compliance checks and relevant contributions disputes as ‘tax enquiries’.

How you can help us reduce the penalty

You can help us reduce the penalty by co-operating with us.

We can reduce the penalty percentage rate if you’ve co-operated with us before we send you the notice of penalty assessment. You’ve co-operated with us if you’ve done one or more of the following. You’ve:

• provided us with reasonable help in working out the amount of the tax advantage
• counteracted the denied advantage but after you have become liable to a penalty (or relinquished the denied advantage if your follower notice relates to an appeal)
• given us information that enables us to take corrective action
• given us information that enables us to enter into an agreement with you to counteract the denied advantage
• given us access to tax records so that we can make sure that the denied advantage is fully counteracted

We cannot reduce the penalty percentage rate to less than 10%.

The examples of co-operation shown at the previous 5 bullets, and later in this factsheet, refer to items (a) to (e) of section 210(3) of the Finance Act 2014, which is the legislation that sets out these reductions.

How we work out the penalty percentage rate

There are 4 stages in working out the penalty percentage rate.

Stage 1: Identifying the penalty range

The penalty range is the difference between the maximum and minimum penalty percentages that we can charge. The maximum is 30 and the minimum is 10, which gives us a penalty range of 20. The maximum and minimum penalty percentages are set out in sections 209 and 210 of the Finance Act 2014.

Stage 2: Working out the reduction to the penalty range for the quality of co‑operation

We use the term ‘quality of co-operation’ to describe the level of co-operation given. We can reduce the penalty range of 20 by anything up to 100% for the quality of co-operation. However, the penalty percentage rate that we charge can never be less than 10% — even if we reduce the penalty range by 100%. We take into account all co-operation given up to the point at which we send the notice of penalty assessment.

When working out the quality of your co-operation, we’ll consider what we needed you to do in respect of the denied advantage and how much of it you’ve done. We take into account the timing, nature and extent of what you’ve done. This means whether you:

• acted as soon as you reasonably could (timing)
• acted in a proactive and collaborative manner (nature)
• did all that you reasonably could have done (extent)

Once we’ve considered the types of co-operation shown in the following table, and decided the percentage reduction for each, this gives us the reduction to the penalty range for the quality of co‑operation. The reductions shown in the table are a guide.

Type of co-operation	Reduction to the penalty range if the follower notice relates to an appeal case	Reduction to the penalty range if the follower notice relates to a compliance check case
Providing us with reasonable help in working out the amount of the tax advantage. (Item (a) of section 210(3) of the Finance Act 2014.)	Up to 20%	Up to 20%
Counteracting the denied advantage (this will be described as ‘relinquishing’ the denied advantage if your follower notice relates to an appeal). (Item (b) of section 210(3) of the Finance Act 2014.)	Up to 70%	Up to 50%
Giving us information that enables us to take corrective action. (Item (c) of section 210(3) of the Finance Act 2014.)	Not relevant	Up to 10%
Giving us information that enables us to enter into an agreement with you to counteract (or ‘relinquish’) the denied advantage. (Item (d) of section 210(3) of the Finance Act 2014.)	Up to 10%	Up to 10%
Giving us access to tax records so that we can make sure that the denied advantage is fully counteracted. (Item (e) of section 210(3) of the Finance Act 2014.)	Not relevant	Up to 10%

Follower notices that relate to an appeal

If a follower notice relates to an appeal, we will not normally need to consider allowing any reduction for co-operation for items (c) and (e). This is because, in most cases where the follower notice relates to an appeal, all the person will need to do is relinquish the denied advantage. However if, exceptionally, we believe that items (c) or (e) are relevant, then we’ll take them into account.

Stage 3: Reducing the maximum penalty percentage

Once we’ve worked out the reduction for the quality of co-operation, we apply this to the penalty range of 20. This gives us the figure by which we will reduce the maximum penalty percentage. For example, if the reduction for quality of co-operation is 70%, the amount by which we reduce the maximum penalty percentage will be 14 (20 x 70% = 14).

Stage 4: Working out the penalty percentage rate

To work out the penalty percentage rate that we’ll charge, we deduct the figure established at stage 3 from the maximum penalty percentage. For example, if the amount established at stage 3 was 14, the penalty percentage rate will be 16% (30 less 14 = 16).

Example showing the 4 stages

The deadline for taking corrective action had passed. Before we issued the notice of penalty assessment, Mr B had co-operated with us. Taking into account the timing, nature and extent of that co-operation, we gave a reduction to the penalty range of 70%.

Stage 1: Identify the penalty range

30 to 10 = 20

Stage 2: Work out the reduction to the penalty range for the quality of co-operation

70%

Stage 3: Work out amount by which we reduce the maximum penalty percentage

20 x 70% = 14

Stage 4: Work out the penalty percentage rate

30 less 14 = 16%

How we work out the amount of your penalty

To work out the amount of your penalty, we multiply the value of the denied advantage by the penalty percentage rate.

The ‘value of the denied advantage’ is calculated by reference to the amount of the tax advantage on which your return, claim or appeal was made, but which would be denied if the principles of the relevant ruling are applied to your return, claim or appeal.

For example, if the value of the denied advantage in the previous example was £250,000 the penalty would be £40,000 (£250,000 x 16% = £40,000).

If you’ve taken corrective action for part of the denied advantage, the penalty will be charged on the remainder that is still in dispute. We’ll tell you how we’ve calculated the value of the denied advantage when we write to you about your penalty.

Restriction for other penalties

After working out the amount of the penalty for not taking corrective action on time, we take into account any other ‘relevant’ penalties that you’ve incurred that are calculated by reference to the same tax and/or National Insurance contributions (NICs). The legislation refers to this as ‘aggregate penalties’.

A ‘relevant’ penalty in this context is one charged under one or more of the following penalty provisions:

• Schedule 24 to the Finance Act 2007 — penalties for inaccuracies
• Schedule 41 to the Finance Act 2008 — penalties for failure to notify
• Schedule 55 to the Finance Act 2009 — penalties for failure to make a return
• section 98A of Taxes Management Act 1970 — special penalties in the case of certain returns (NICs only)
• any penalty in respect of relevant contributions specified in regulations made by the Treasury

If you incur a penalty for not taking corrective action in response to a follower notice, and you also incur one or more of the ‘relevant’ penalties, then the total amount of the penalties we charge (the ‘aggregate amount’) must not exceed the higher of:

• the ‘relevant percentage’ of the amount of tax and/or NICs
• £300 where one of the penalties incurred is under paragraph 5(2)(b), 6(3)(b), 6(4)(b) or 6(5)(b) of Schedule 55 to the Finance Act 2009

The ‘relevant percentage’ is the higher of the following:

• 100%
• the maximum percentage chargeable under the other penalty provisions (depending on the specific type of the other penalty, the maximum percentage chargeable can be up to 200%)

Example

Mrs C has incurred a penalty for not taking corrective action. She has also incurred a penalty under paragraph 5(2)(b) of Schedule 55 to the Finance Act 2009. The amount of tax is £100,000 and the relevant percentage is 100%.

The total amount of the penalties that we charge Mrs C in relation to that £100,000 must not exceed the higher of:

• £100,000 (the amount of tax £100,000 x the relevant percentage 100%)
• £300

So, in this case the aggregate amount of the penalties that we can charge Mrs C must not exceed £100,000.

After taking into account other penalties, this gives the amount of penalty that we’ll charge.

The rules about aggregate penalties are set out in section 212 of the Finance Act 2014 and paragraph 15 of Schedule 2 to the National Insurance Contributions Act 2015.

Interest for paying the penalty late

If we charge you a penalty and you do not pay it on time, we may charge you late payment interest on the amount of the penalty.

Stamp Duty Land Tax: partnerships and joint purchasers

For Stamp Duty Land Tax, each responsible partner or joint purchaser is responsible for paying the amount of penalty due. This is known as ‘joint and several liability’, or sometimes referred to as being ‘jointly and severally liable’. What this means in practice is that any one or more of the responsible partners or joint purchasers can be required to pay the penalty for not taking corrective action on time.

Annual Tax on Enveloped Dwellings: partnerships

For Annual Tax on Enveloped Dwellings, each responsible partner is responsible for paying the amount of penalty due. This is known as ‘joint and several liability’, or sometimes referred to as being ‘jointly and severally liable’. What this means in practice is that any one or more of the responsible partners can be required to pay the penalty for not taking corrective action on time.

Appealing against the penalty if you disagree

If we charge you a penalty for not taking corrective action, you’ll be able to appeal against it if you disagree.

You can appeal against the amount of the penalty. You can also appeal against the penalty if you believe that one or more of the following applies:

• condition A, B or D has not been met in relation to the follower notice (we explained those conditions in the follower notice)
• the final court or tribunal ruling specified in the follower notice is not relevant to the tax avoidance scheme that you used
• you received the follower notice after the deadline for us sending it to you
• it was reasonable, in all the circumstances, for you to have not taken the necessary corrective action

If you appeal you must do so in writing. You must make sure that your appeal reaches us within 30 days of the date that you receive the notice of penalty assessment. When you write to us, please:

• give us as much information as possible about what you disagree with
• send copies of any documentary evidence that supports your appeal

If your tax liability is settled on the basis that you:

• achieve the tax advantage, then we’ll cancel the penalty
• do not achieve the tax advantage, then you’ll have to pay the penalty unless you’ve successfully appealed against it

You can find more information about appeals in factsheet HMRC1, ‘HM Revenue and Customs decisions — what to do if you disagree’. You can get a copy online, go to www.gov.uk and search for ‘HMRC1’.

The Human Rights Act and follower notice penalties

Article 6 of the European Convention on Human Rights gives you certain rights when we’re considering charging penalties.

We always welcome your co-operation in taking corrective action, and in providing information about the tax advantage. The amount of penalty we charge will depend on the degree to which you co-operate with us. This is explained earlier in this factsheet.

We also welcome any help that you give us when establishing the amount of the penalty for not taking corrective action on time. When we’re considering penalties you have the right not to answer our questions. The degree to which you help us is entirely your choice. In making a decision about how much you’re going to help, you have the right to consult an adviser. If you do not already have an adviser, you may want to consider consulting one.

You have the right to have the matter of penalties dealt with without unreasonable delay. We’ll tell you how much penalty is due when we’ve established the full extent of the co-operation that you’ve given, and the amount of the tax advantage. If you disagree with the penalty you can appeal.

You can apply for publicly funded legal assistance or Legal Aid. In some circumstances, funding may be available to help you bring certain appeals before the tribunal. If you intend to appeal against the amount of the penalty, you may want to check whether your case qualifies for legal assistance and the type of help that may be available. We’re not involved in decisions about whether or not your case will qualify for legal assistance. The way you can check what help is available and the qualifying conditions depend on where you live in the UK. You can find more information from Citizens Advice or you can apply for funded legal assistance or Legal Aid through a solicitor anywhere in the UK.

If there’s anything you do not understand about these rights or what they mean for you, please tell the officer who gave you this factsheet straightaway.

The taxes and NICs to which these penalty rules apply

These penalty rules apply to follower notices for the following taxes and NICs:

• Annual Tax on Enveloped Dwellings
• Capital Gains Tax
• Class 1, 1A and 1B NICs through PAYE
• certain Class 2 NICs
• Class 4 NICs
• Corporation Tax
• Income Tax (Self Assessment)
• Inheritance Tax
• Income Tax (through PAYE)
• Stamp Duty Land Tax