Guidance

Tax avoidance schemes – partnership follower notices and accelerated partner payments

Updated 9 November 2022

We’ve given you this factsheet because you’re a member of a partnership that’s used a tax avoidance scheme, and we’ll soon write to the:

• representative partner to tell them about taking corrective action to avoid a penalty – this is explained below in the section ‘About followers, partnership follower notices and accelerated partner payments’
• relevant partners to ask them to make a payment of the amount that relates to their share of the partnership’s use of the scheme

The term ‘representative partner’ means the person who’s required to deliver the partnership return or a successor to that person. The term ‘relevant partner’ means a person who was a member of the partnership at any time during the period to which the return relates. A relevant partner can be an individual, a company or another partnership.

If you’re a member of a partnership that’s used a tax avoidance scheme that relates to Stamp Duty Land Tax or Annual Tax on Enveloped Dwellings, you’ll need to read factsheet CC/FS24, ‘Tax avoidance schemes – accelerated payments’ and/or CC/FS25a, ‘Tax avoidance schemes – follower notices and accelerated payments’.

Where this factsheet refers to tax, this includes Class 4 National Insurance contributions (NICs) that are collected through Self Assessment. From the tax year 6 April 2015 to 5 April 2016 it also includes most Class 2 NICs that are collected through Self Assessment.

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

If you need help

If you have any health or personal circumstances that may make it difficult for you to deal with us, please tell the officer who has contacted you. We’ll help you in whatever way we can. For more information about this, go to www.gov.uk and search ‘get help from HMRC if you need extra support’.

You can also ask someone else to deal with us on your behalf, for example, a professional adviser, friend or relative. We may however still need to talk or write to you directly about some things. If we need to write to you, we’ll send a copy to the person you’ve asked us to deal with. If we need to talk to you, they can be with you when we do, if you prefer.

About tax avoidance and avoidance schemes

Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law. Most tax avoidance schemes simply do not work. Those who engage in them can find they pay more than the tax they attempted to save when HM Revenue and Customs has successfully challenged them.

The term ‘tax avoidance’ includes NICs avoidance.

About followers, partnership follower notices and accelerated partner payments

Tax legislation that affects those who have used a tax avoidance scheme was introduced on 17 July 2014. The scope of that legislation was extended to cover NICs with effect from 12 April 2015. The legislation aims to:

• improve the rate at which disputes about avoidance schemes are settled where a principle on which the scheme relies has been shown in another person’s litigation to be ineffective
• remove the cash flow advantage from users of avoidance schemes by requiring an upfront payment of the disputed tax and/or NICs, so that it’s held by the Exchequer during the dispute

Followers

When we have many very similar avoidance cases, we often investigate ‘representative cases’, taking them to litigation if necessary. If the court or tribunal finds the scheme does not achieve the tax or NICs advantage in those cases, the disputes in those cases are settled. We can then recover the tax and/or NICs due.

‘Followers’ are people who have used:

• the same scheme that was used in a representative case
• a different scheme but where a principle in that scheme is sufficiently similar to the scheme used in a representative case

Before the legislation was introduced on 17 July 2014, there was little incentive for followers to accept that the court or tribunal’s findings in a representative case meant that their own use of the avoidance scheme did not achieve the tax or NICs advantage.

Follower notices and partnership follower notices

If a court or tribunal has made a final ruling that an avoidance scheme does not achieve the tax or NICs advantage, the legislation allows us to give follower notices to the followers. When the follower is a partnership, we’ll give a partnership follower notice.

A partnership follower notice tells the partnership that each relevant partner will be liable to pay a penalty if the partnership does not settle its dispute with us. In the partnership follower notice, settling the dispute is called ‘taking corrective action’.

The total amount of the penalty for not taking corrective action on time is equal to 20% of the value of the denied advantage. This is the amount by which the partnership return would be amended to apply the court’s or tribunal’s final ruling. You can find more information about this type of penalty in the section ‘Penalties for not taking corrective action’ on page 4 of this factsheet.

The legislation for partnership follower notices does not affect the partnership’s appeal rights to the tribunals and courts in relation to the partnership return or appeal. You can find more information about this in the section ‘What to do if the partnership disagrees with the partnership follower notice’ on page 3 of this factsheet.

Accelerated partner payments

If a partnership has used an avoidance scheme, the relevant partners may be required to make an accelerated partner payment. The payment will be the amount that relates to their use of the scheme before the final amount has been agreed, or determined by a tribunal or court.

If we require an accelerated partner payment, we’ll send a partner payment notice to each relevant partner. If the partnership is a follower, we may also send a partnership follower notice to the representative partner.

In some circumstances we charge penalties for not paying the accelerated partner payment on time. You can find more information about these on pages 5 to 7 of this factsheet.

When we may send a partnership follower notice

If a court or tribunal has made a final ruling that a tax avoidance scheme does not achieve the tax advantage, we may send a partnership follower notice to the representative partner if certain conditions are met. Those conditions are that:

• Condition A – there’s a current compliance check (referred to in the legislation as a ‘tax enquiry’) into the partnership return, or there’s an open appeal
• Condition B – the partnership return or appeal is made on the basis that there’s a particular tax advantage resulting from the partnership’s chosen arrangements – a tax advantage results if
  • the partnership return or appeal is made on the basis that an increase or reduction in the amounts in the partnership statement in a partnership return results from those chosen arrangements
  • that increase or reduction gives rise to a tax advantage for one or more of the relevant partners
• Condition C – we believe that the final judicial ruling is relevant to the partnership’s chosen arrangements (because it has used the same, or a similar scheme)
• Condition D – we have not previously sent the representative partner, or their successor, a partnership follower notice for the same scheme, the same tax advantage, the same tax period, and the same final judicial ruling – unless we’ve previously sent one and then withdrawn it

If a court or tribunal made the final ruling before the legislation was introduced on 17 July 2014, we can send a partnership follower notice at any time up to and including 16 July 2016, or 12 months after the return is received, or the appeal is made, whichever is later.

If a court or tribunal made the final ruling after the legislation was introduced, we can send a partnership follower notice up to 12 months after the later of the date on which:

• the court or tribunal made the final ruling
• we received the return, or the appeal was made

Telling the partnership that it is subject to the partnership follower notice rules

If the partnership is subject to the partnership follower notice rules, we’ll send a partnership follower notice to the representative partner, which will tell them how to take corrective action and when. It’ll also tell them what to do if they disagree with it.

Taking corrective action

The partnership follower notice will tell the representative partner about taking the necessary corrective action to remove the tax advantage from the partnership’s use of the avoidance scheme (the partnership follower notice uses the terms ‘counteract’ or ‘relinquish’). This will mean taking whichever of the following actions is relevant:

• amending the partnership return
• settling the appeal
• entering into a written agreement

If the representative partner objects to the partnership follower notice and makes representations, the date by which they need to take the corrective action may change. There’s more information about making representations in the section ‘What to do if the partnership disagrees with the partnership follower notice’ below.

What to do if the partnership disagrees with the partnership follower notice

There’s no right of appeal against a partnership follower notice. However, the representative partner can make representations to us if they believe that one or more of the following applies:

• Condition A, B or D has not been met
• the final court or tribunal ruling given in the notice is not relevant to the tax avoidance scheme that the partnership used
• they received the notice after the deadline for us sending it to them

There’s more information about these conditions and deadlines in the section ‘When we may send a partnership follower notice’, on page 2 of this factsheet.

Only the representative partner can make representations. The representations must be in writing, and the representative partner must make sure they send their letter no later than 90 calendar days from the date they receive the partnership follower notice. We’ll then consider what they say and let them know our findings. When the representative partner writes to us they need to:

• give us as much information as possible about the representations
• send copies of any documentary evidence that supports the representations

Representations cannot be made once the 90 calendar days has passed. This means that, once we’ve told the representative partner what our findings are, they will not be able to make any additional representations if the 90 calendar days has already passed. So the representative partner must make sure they give us all the relevant information when they make their representations.

If the representations are made before the date given in the notice, and we do not withdraw the notice, the deadline for taking corrective action may be extended. The deadline will be the later of:

• the date shown in the partnership follower notice
• 30 days after the date on which the representative partner receives our decision about the representations they made

If the deadline for taking corrective action is extended, any penalty for not taking that action will apply from the extended deadline date.

The legislation for partnership follower notices does not affect the partnership’s right of appeal to the tribunals and courts in relation to the partnership return, or appeal. If the partnership takes such action and is successful (meaning that it achieves the tax advantage result that was the basis on which the partnership return, or appeal was made), we’ll cancel any penalty that we’ve charged. We’ll cancel any penalty that we have charged the relevant partners for the representative partner not taking corrective action on time.

Penalties for not taking corrective action

If the partnership decides not to take corrective action on time, the relevant partners will be liable to pay penalties. Unless we or the tribunal agree that it was reasonable in the circumstances for the representative partner not to have taken corrective action (see the section ‘Appealing against the penalty if the partnership disagrees’ below).

The total amount of the penalties will be equal to 20% of the value of the denied advantage, and each relevant partner will be liable to their appropriate share of that amount. That share will be in proportion to their share of the partnership’s profits or losses. The value of the denied advantage is calculated by reference to the amount by which the partnership return would be amended to apply the court or tribunal’s final ruling.

If we charge penalties, we’ll send each relevant partner a notice of penalty assessment telling them how we’ve worked out the amount of their penalty. We’ll normally do this once the partnership’s tax affairs are settled, but may do it before then. In the case of an enquiry the partnership’s tax affairs will be settled once the enquiry is concluded, and in the case of an appeal, it’ll be once the appeal is finally determined.

Reducing the penalty if the partnership co-operates with us

We can reduce the penalty percentage rate if the partnership co-operates with us before we send a notice of penalty assessment to the relevant partners. In this context, co-operation means:

• providing us with reasonable help in working out the amount of the tax advantage
• counteracting the denied advantage (this will be described as ‘relinquishing’ the denied advantage if the partnership follower notice relates to an appeal)
• giving us information that allows us to take corrective action
• giving us information that allows us to enter into an agreement with the partnership to counteract the denied advantage
• giving us access to tax records so we can make sure the denied advantage is fully counteracted

We cannot reduce the penalty percentage rate to less than 4%.

Normally it would be the representative partner that co-operates with us on behalf of the partnership. However, if, exceptionally, another partner was to co-operate with us on behalf of the partnership, we may take into account that co-operation.

Appealing against the penalty if the partnership disagrees

If we charge the relevant partners a penalty and the partners disagree, only the representative partner can appeal.

The representative partner can appeal against the total amount of the penalties payable by the relevant partners. They can also appeal against the penalty if they believe that one or more of the following applies:

• Condition A, B or D has not been met in relation to the partnership follower notice
• the final court or tribunal ruling specified in the partnership follower notice is not relevant to the tax avoidance scheme that the partnership used
• the representative partner received the partnership follower notice after the deadline for us sending it to them (the deadline is shown in the partnership follower notice)
• it was reasonable, in all the circumstances, for the representative partner not to have taken the necessary corrective action

However, they cannot appeal on the grounds that one or more of the partners disagrees with how their share of the penalty has been calculated.

If the appeal or compliance check is settled on the basis that the partnership:

• achieves the tax advantage, then we’ll cancel the penalty
• does not achieve the tax advantage, then each relevant partner will have to pay a penalty unless the partnership has 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’. Go to www.gov.uk and search for ‘HMRC1’.

Please also read the following section ‘The Human Rights Act and partnership follower notice penalties’.

The Human Rights Act and partnership 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 any co-operation the partnership gives by taking corrective action, and by providing information about the tax advantage. The amount of penalty we charge each relevant partners will depend on the degree to which the partnership co-operates with us. This is explained earlier in this factsheet.

We also welcome any help the partnership gives 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 co-operation that the partnership has given, and the amount of the tax advantage. If you disagree with the penalty the representative partner can appeal on your behalf.

You have the right to 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 ask the representative partner to appeal against the amount of the penalty on your behalf, 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 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.

When we may send a partner payment notice

Where a partnership has used a tax avoidance scheme, we may send a partner payment notice to the relevant partners if certain conditions are met. Those conditions are that:

• Condition A – there’s a current compliance check into the partnership return, or there’s an open appeal
• Condition B – the partnership return or appeal is made on the basis that there’s a tax advantage from the avoidance scheme used
• Condition C – one or more of the following applies
  • we’ve given the representative partner, a partnership follower notice
  • the partnership has used arrangements that are disclosable under the disclosure of tax avoidance schemes (DOTAS) legislation
  • the relevant partner in question is subject to a counteraction notice under the general anti-abuse rule (GAAR)

The tax legislation that deals with accelerated payments refers to a compliance check as a ‘tax enquiry’.

Telling the relevant partners about their accelerated partner payment

If we require the relevant partners to make an accelerated partner payment, we’ll send each of them a partner payment notice. This will tell them how much they need to pay and when. It’ll also tell them how we’ve worked out the amount they need to pay. When we send the partner payment notice, we’ll tell the relevant partners what they can do if they disagree with it.

How we work out the amount of an accelerated partner payment

The amount payable will be the amount relating to the relevant partner’s share of the tax advantage that the partnership’s use of the avoidance scheme tries to achieve. The legislation refers to this as the “understated partner tax”.

We’ll work out the amount to the best of our information and belief. If we do not have all the information we need, we may not be able to work out the exact amount due. This means the amount shown in the partner payment notice may differ from the amount due when the compliance check is complete, or the appeal is settled.

We’ll normally repay any amount that’s been overpaid and any interest that’s due on the amount overpaid. We’ll do this if the amount in the partner payment notice is more than the amount we find to be due once the compliance check is complete, or the appeal is settled.

Paying what is due

Payment will be due 90 calendar days after the date the relevant partner receives the partner payment notice.

If the relevant partner makes representations objecting to the partner payment notice, the date the payment is due may change. There’s more information about this in the section ‘What to do if the relevant partner disagrees with the partner payment notice’ on page 7 of this factsheet.

If we send both:

• a partnership follower notice to the representative partner
• a partner payment notice to the relevant partners

each relevant partner should pay the accelerated partner payment whether or not the partnership decides to take corrective action. This is because each relevant partner may be liable to late payment penalties for late payment of the accelerated partner payment. The partner payment notice will tell them whether they’ll be liable to late payment penalties.

Problems paying

If any relevant partner thinks they may have problems paying, they should tell us straightaway.

Penalties for not paying the accelerated partner payment on time

If the relevant partner does not pay the full amount shown in their partner payment notice by the date it’s due, they may be liable to a penalty. If we charge them a penalty, they’ll have to pay it as well as the accelerated partner payment.

If the payment is not made in full on or before:

• the date it’s due, the relevant partner will be liable to a penalty equal to 5% of the amount they still owe
• 5 months of the date it’s due, they’ll be liable to a penalty equal to 5% of the amount they still owe – as well as the 5% explained in the bullet above
• 11 months of the date it’s due, they’ll be liable to a penalty equal to 5% of the amount they still owe – as well as the 2 earlier 5% penalties

General information about penalties for not paying the accelerated partner payment on time

How we tell the relevant partners about a penalty

We’ll send the relevant partner a notice to tell them how much the penalty is and how we’ve worked it out.

Letting us know about any special circumstances

If there are any special circumstances that the relevant partner thinks we should consider when calculating the penalty, they should tell us straightaway.

When we will not charge a penalty for not paying the accelerated partner payment on time

We will not charge any penalties for paying the accelerated partner payment late if the relevant partner had a reasonable excuse for paying late – as long as they paid without delay once the reasonable excuse had ended.

A reasonable excuse is something that has stopped a person from meeting a tax obligation on time, which they took reasonable care to meet. This might be due to circumstances outside their control or a combination of events. Once the reasonable excuse has ended, the person must put things right without any unnecessary delay.

Whether a person has a reasonable excuse depends on the particular circumstances in which they failed to meet the tax obligation, and their particular circumstances and abilities. This may mean that what is a reasonable excuse for one person, may not be a reasonable excuse for someone else.

If the relevant partner thinks they have a reasonable excuse, they need to tell us. If we accept that they have a reasonable excuse, we will not charge them a penalty. If we’ve already charged them a penalty for not paying on time, we’ll cancel it.

What if the relevant partner disagrees with any penalties that we’ve charged

If we charge a penalty for paying the accelerated partner payment late, the relevant partner will be able to appeal against it if they disagree. You can find out more information about appeals in factsheet HMRC1, ‘HM Revenue and Customs decisions – what to do if you disagree’. Go to www.gov.uk and search for ‘HMRC1’.

Interest for paying late

We do not charge interest for late payment of the accelerated partner payment itself. However, we do charge interest for late payment of tax – from the date the tax was originally due, until the date it’s paid.

When the partnership’s tax position is settled, we’ll work out whether there’s any interest to pay. For interest purposes, we’ll treat the amount paid in respect of the partner payment notice as if it were payment of the tax. This will mean that interest will stop accruing on the amount of tax equal to the amount of accelerated partner payment paid, from the date that it’s paid.

We also charge interest on the late payment of any penalties.

What to do if the relevant partner disagrees with the partner payment notice

There’s no right of appeal against a partner payment notice. However, each relevant partner can make representations to us if they believe that one or both of the following applies:

• the conditions for issuing the notice have not been met – these are shown in the section ‘When we may send a partner payment notice’ on page 5 of this factsheet
• the amount shown in the notice is not correct – if this is the case the relevant partner will need to tell us what they think the correct amount is and why

representations must be in writing, and the relevant partner must make sure they send their letter no later than 90 calendar days from the date they receive the partner payment notice. We’ll then consider what they say and let them know our findings.

If the relevant partner makes representations, they cannot ask for postponement of the amount shown in the partner payment notice.

However, if the relevant partner makes representations before the date the payment is due, and we do not withdraw the notice, the deadline for paying may be extended. Payment will be due on the later of:

• the due date shown in the partner payment notice
• 30 days after the date on which the relevant partner receives our decision about the representations they made

If the deadline for paying is extended, any penalties for paying late will apply from the extended deadline date.

What if the partnership wants to settle its tax affairs

If the partnership wants to settle its tax affairs once we tell the:

• representative partner that we’re going to send them a partnership follower notice
• relevant partners that we’re going to send them a partner payment notice

the representative partner should phone us straightaway and we’ll tell them what they need to do next.

It’s entirely up to the relevant partners whether the partnership settles. If the partnership does not want to settle, then the compliance check or appeal will stay open.

About the partnership’s appeal rights for the current compliance check or appeal

When the relevant partners pay their accelerated partner payments, even though the partnership may have decided not to take the corrective action referred to in the partnership follower notice, this does not mean that the current compliance check or appeal is settled.

Although the relevant partners cannot appeal against their partner payment notices, the legislation covering accelerated payments does not affect the partnership’s appeal rights to the tribunals and courts. This means that if the partnership has:

• a current compliance check, it will still have its full appeal rights if the partnership does not agree with the outcome of that check
• already appealed against the outcome of the compliance check or amendment to the partnership return, the partnership will still have its full appeal rights

If the partnership has appealed and we’ve informally stood over the relevant partners’ tax

If we’ve informally stood over any of the relevant partners’ tax because the partnership has appealed against either of the following:

• a closure notice sent in respect of a compliance check
• an amendment to the partnership return

then we may cancel the informal stand over when we send the partner payment notices. Each relevant partner will then have to pay their tax that has previously been stood over by paying the accelerated partner payment.

What will happen if the relevant partner pays the accelerated partner payment and a court or tribunal later rules that the scheme does produce a tax advantage

If a tribunal or court decides that the scheme produces the tax advantage, we would normally repay the amount the relevant partner has paid. We would repay the amount paid under the partner payment notice along with any interest that’s due to them.

However, if we appeal against the decision to a higher court or tribunal, we may, in certain cases, also ask for their permission not to repay the amount to the relevant partner. We would only do this if we believed there was a risk that, if we were successful with our appeal, the relevant partner would not then pay the amount they owe.

More information

The taxes to which this factsheet relates

This factsheet relates to accelerated partner payments for Income Tax (including Class 4 National Insurance contributions) and Corporation Tax.

The disclosure of tax avoidance schemes (DOTAS) regulations and the general anti-abuse rule (GAAR)

You can find more information online about:

• DOTAS, go to www.gov.uk and search for ‘disclosure of avoidance’
• GAAR, go to www.gov.uk and search for ‘GAAR arrangements’

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