Penalties
Follower notice penalty upheld
The First-tier Tribunal (FTT) has upheld penalties for non-compliance with a follower notice, as although the taxpayer had paid the tax due he had not amended his return.
The taxpayer participated in a marketed tax avoidance scheme. When this scheme was found not to work in an appeal involving another participant, HMRC issued him with a follower notice and an advance payment notice (APN). The follower notice required him to amend his tax return to remove the tax advantage.
The taxpayer disputed these with HMRC, but eventually paid the amounts required by the APN. HMRC agreed to withdraw surcharges for this. He did not however amend his tax return, so penalties were charged for non-compliance with the follower notice. He appealed the penalties, arguing that his compliance with the APN showed that he accepted the scheme had failed, and had no tax advantage left.
The FTT dismissed the taxpayer’s appeal. The APN and follower notice are two separate regimes. The taxpayer had failed to take the corrective action defined in the follower notice legislation and had no reasonable excuse for this. The penalties were upheld.
This case reaffirms the principle from earlier cases that ‘reasonable in the circumstances’ is a broader subjective test than ‘reasonable excuse’. On the facts of this case, the FTT decided that the taxpayer’s decision not to take corrective action was not a properly informed choice, by reference to his correspondence with HMRC and the tax scheme promoter, Montpelier.
From Tax Update January 2026, published by S&W Partners LLP
Carelessness penalties on CGT and IHT
The Upper Tribunal (UT) has found that HMRC’s decision to refuse to suspend penalties for carelessness was not flawed. The taxpayers should have taken appropriate advice.
The taxpayers, a married couple, claimed entrepreneurs’ relief (now known as business asset disposal relief) on a sale of shares, despite their holdings being less than the minimum 5% required to qualify. HMRC issued penalties for careless inaccuracy.
Each taxpayer had held 6.4% of the shares when their exit from the business was agreed. The structure of the disposals was then settled as a gift of some of their shares to other shareholders, followed by a disposal, and then dispose of the remaining shares almost a month later. The share percentage in the second transaction was therefore under 5%.
The taxpayers had initially asked HMRC to suspend the penalties. Their fellow shareholders had asked a partner at the solicitors firm advising them on the transaction if they foresaw any problems with the transaction structure. He had said not at first glance, but that as he was not a tax expert he would need their authorisation to refer the matter to a tax specialist colleague for proper sign-off at extra cost. No further sign-off was requested by the taxpayers or their fellow shareholders.
The First-tier Tribunal (FTT) upheld the penalties, noting that the taxpayers had not sought appropriate advice after the structure of the transaction was agreed to be changed to the two disposal plan. Advice had only been sought on behalf of the company, not them as individuals. Both taxpayers were company directors, and one a financial adviser, so their behaviour was not reasonable.
The UT agreed. It considered which conditions might have been suitable if the penalty were suspended, but concluded that HMRC’s decision not to suspend the penalties was not flawed, which would be the threshold for the tribunals to intervene. However, the UT did make an important correction to the FTT’s decision-making on this, that in general principle a penalty for failure to take reasonable care can be suspended even if it relates to a ‘one-off’ tax error. As long as there are suitable conditions that can be put in place to improve certain processes and mitigate future errors occurring, then a suspension may be available even if it does not relate to the same error that occurred previously.
This case shows the importance of all parties to a transaction seeking their own advice. Pre-sale gifting of shares is quite common, either as between existing shareholders or perhaps to senior employees who previously had no equity, so the basic structure was not unusual. However, the taxpayers didn’t follow the recommendation to take further advice so and that was significant in terms of being able to show that they had taken reasonable care. The other key factor was that the lawyers advising on the transaction specifically excluded from their retainer any advice on the gifting of the shares. Unfortunately, the discussion with the other shareholders’ accountants focused around the capital gains tax (CGT) and inheritance tax (IHT) consequences of the pre-sale gift, not the ultimate sale itself. In hindsight, the reduction below 5% was an obvious consequence of the gifts but as no professional was specifically requested to consider the position, it fell through the cracks.
From Tax Update January 2026, published by S&W Partners LLP
Practical Points
Every month, the Tax Faculty publishes short, practical pieces of guidance to help agents and practitioners in their day-to-day work.
