Guidance

Tax avoidance schemes — penalties for partnership follower notices

Updated 11 July 2023

This factsheet gives information about the penalties we’ll charge if we’ve sent a partnership follower notice to the representative partner and they’ve not taken the necessary corrective action on time.

CC/FS30a, ‘Tax avoidance schemes – penalties for follower notices’ has information you may need if you’re a member of a partnership that has used a tax avoidance scheme that relates to Stamp Duty Land Tax or Annual Tax on Enveloped Dwellings.

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’.

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

If we’ve sent a partnership follower notice to the representative partner and they have not taken corrective action on time, we’ll charge each of the relevant partners a penalty. The partnership follower notice explains what corrective action the representative partner needs to take.

The amount of the penalties

The total amount of the penalties for not taking corrective action is equal to 12% of the value of the denied advantage, and each relevant partner will be liable to their appropriate share of that total amount. There’s more information about this in the section ‘How we work out the amount of the penalties’.

We can reduce the penalty percentage rate if the partnership has co-operated with us. There is more information about reduction and co-operation later in this factsheet.

How we tell the relevant partners about the penalties

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

Before we send a notice of penalty assessment, we’ll normally write to tell each relevant partner how we’ve worked out the amount of their penalty. If we do this and the relevant partner thinks there’s something the partnership has done to co-operate that we’ve not taken into account, they or the representative partner can tell us. We’ll then consider whether it affects the penalty. Once we’ve allowed time for this to happen, we’ll send the notice of penalty assessment to the relevant partner as soon as
we can.

When we’ve given each relevant partner their notice of penalty assessment, the representative partner can appeal if any of the partners disagree with their notice. The representative partner can appeal whether or not we wrote to the relevant partners about the penalty before we sent the notices of penalty assessment. There’s more about this in the section ‘Appealing against the penalties’.

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

There is a deadline for us sending the notices of penalty assessment to the relevant partners.

If the partnership follower notice relates to a compliance check, the latest day on which we can send a notice of penalty assessment is 90 days from the date on which the compliance check is completed.

If the partnership follower notice relates to an appeal or a further appeal, the latest day on which we can send a notice of penalty assessment is 90 days from the earliest of the dates on which:

• the representative partner took corrective action
• the final ruling was made on the partnership’s 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 a compliance check as a tax enquiry.

How the partnership can help us reduce the penalty

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

We can reduce the penalty percentage rate if the partnership has co-operated with us before we send notices of penalty assessment to the relevant partners. The partnership has co-operated with us if it has done one or more of the following:

• provided us with reasonable help in working out the amount of the tax advantage
• counteracted the denied advantage after the relevant partners have become liable to a penalty
  (or relinquished the denied advantage if the partnership 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 the partnership 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 to less than 4%.

The examples of co-operation shown above 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.

Normally it would be the representative partner that co-operates with us on behalf of the partnership.

If, exceptionally, another partner was to co-operate with us on behalf of the partnership, we may take into account that co-operation.

How we work out the penalty percentage rate

There are 4 stages in working out the penalty percentage rate. Each stage is explained below.

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 12 and the minimum is 4, which gives us a penalty range of 8. The maximum and minimum penalty percentages are set out in paragraph 5 of Schedule 31 to 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 8 by anything up to 100% for the quality of co-operation. However, the penalty percentage rate that we charge can never be less than 4%, 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 co-operation, we’ll consider what we needed the representative partner to do in respect of the denied advantage and how much of it they’ve done. We take into account the timing, nature and extent of what the representative partner has done. This means whether they:

• acted as soon as they reasonably could (timing)
• acted in a proactive and collaborative manner (nature)
• did all that they 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 this 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 the partnership 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%

Partnership follower notices that relate to an appeal

If a partnership follower notice relates to an appeal, we’ll not normally need to consider allowing any reduction for co-operation for items (c) and (e) above. This is because, in most cases where the follower notice relates to an appeal, all the partnership 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 8. This gives us the figure by which we’ll 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 5.6 (8 x 70% = 5.6).

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 5.6, the penalty percentage rate will be 6.4% (12 less 5.6 = 6.4). The following example shows the 4 stages.

Example

The deadline for taking corrective action had passed. Before we issued the notices of penalty assessment, the representative partner 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	12 to 4 = 8
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	8 x 70% = 5.6
Stage 4: Work out the penalty percentage rate	12 less 5.6 = 6.4%

How we work out the amount of the penalties

To work out the total amount of the penalties, we multiply the value of the denied advantage by the penalty percentage rate. Each relevant partner will be liable to their appropriate share of the total amount of penalties. The relevant partner’s appropriate share will be calculated by reference to the partnership’s profit sharing arrangements. If we do not have sufficient information about the profit sharing arrangements, we’ll determine the appropriate share to the best of our information and belief.

The value of the denied advantage is calculated by reference to the amount by which the partnership return would need to be amended to apply the court’s or tribunal’s final ruling.

Example

If the value of the denied advantage in the example above was £1,250,000, the total amount of penalties would be £80,000 (£1,250,000 x 6.4% = £80,000).

If there were 4 relevant partners and each had a 25% share of the partnership profits or losses, each relevant partner would be liable to a penalty of £20,000 (£80,000 x 25%).

If the representative partner has 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 each relevant partner how we’ve calculated the value of the denied advantage when we write to them about their penalty.

Restriction for other penalties

After working out the amount of the penalty for not taking corrective action on time, we look at each relevant partner separately to see whether they have incurred any other relevant penalties. If they have, we then have to consider whether to restrict the overall amount of penalties that we charge them.

The legislation refers to this restriction as aggregate penalties.

A relevant penalty in this context is one that is calculated by reference to the ‘same tax’ and 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

For the purposes of aggregate penalties, the same tax is the additional amount of tax due as a result of counteracting the denied advantage. If the partnership follower notice relates to an appeal, this will be described as relinquishing the denied advantage.

If a relevant partner is liable to pay a penalty for not taking corrective action on time, and they also incur one or more of the relevant penalties listed above, 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 National Insurance contributions
• £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

Partner A is liable to pay a penalty because the representative partner did not take corrective action. Partner A has also incurred a penalty under paragraph 5(2)(b) of Schedule 55 to the Finance Act 2009. The additional amount of tax is £100,000 and the relevant percentage is 100%.

The total amount of the penalties that we charge Partner A 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 for Partner A 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, and paragraph 5(6) of Schedule 31 to the Finance Act 2014.

Interest for paying the penalty late

If we charge the relevant partners a penalty and they do not pay it on time, we may charge them late payment interest on the amount of their penalty.

Appealing against the penalties

If we charge the relevant partners a penalty because the representative partner did not take corrective action, only the representative partner will be able to appeal if any of the relevant partners disagree.

The representative partner can appeal against the total amount of the penalties the relevant partners have to pay. They can also appeal against the penalties 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 (we explained those conditions in 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
• it was reasonable, in all the circumstances, for the representative partner not to have taken the necessary corrective action

However, the representative partner 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 representative partner appeals, they must do so in writing. They must make sure that the appeal reaches us within 30 days of the date that the relevant partners receive their notice of penalty assessment. When the representative partner writes to us, they should:

• give us as much information as possible about what the partnership disagrees with
• send copies of any documentary evidence that supports the appeal

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

• achieves the tax advantage, then we’ll cancel the penalties
• does not achieve the tax advantage, then each relevant partner will have to pay the penalty unless the representative partner has successfully appealed against it

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

The Human Rights Act and partnership follower notice penalties

Article 6 of the European Convention on Human Rights gives you certain rights when we are 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 that the partnership gives us when establishing the amount of the penalty for not taking corrective action on time. When we are 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 have established the full extent of the 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 are 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 United Kingdom (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 is 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 National Insurance contributions to which these penalty rules apply

These penalty rules apply to follower notices for the taxes and National Insurance contributions below:

• Capital Gains Tax
• Class 4 National Insurance contributions
• Corporation Tax
• Income Tax (Self-Assessment)