If you’re a director of a UK limited company and have received a Follower Notice from HMRC, you’re likely feeling the pressure.
These notices are part of HMRC’s strategy to tackle tax avoidance schemes that have already been defeated in court.
Understanding what a Follower Notice entails is crucial, as it can have significant implications for your company. This guide will explain what a Follower Notice is, how it might affect your business, and the steps you should take next.
You’re not alone in this, and clear guidance is available to help you navigate these challenges effectively. Let’s delve into the details to ensure you’re well-prepared for what’s ahead.
An HMRC Follower Notice is a formal notification issued by Her Majesty’s Revenue and Customs (HMRC) to individuals or entities involved in tax avoidance schemes that have been legally defeated in another case. The notice informs the recipient that they must take corrective action, such as settling their tax dispute with HMRC, or face potential penalties.
The purpose of a Follower Notice is to prevent ongoing disputes over tax avoidance schemes that have already been adjudicated, reducing the burden on the legal system and ensuring timely tax collection.
The legal foundation for Follower Notices is the Finance Act 2014, which outlines the conditions under which they can be issued. Unlike Accelerated Payment Notices (APNs), which require immediate payment of disputed tax amounts, Follower Notices focus on compliance by leveraging judicial precedents.
While an APN demands upfront payment, a Follower Notice warns of penalties if corrective action is not taken. The government’s rationale is to discourage continued litigation on similar tax schemes once established legal precedent, promoting efficiency and compliance within the tax system.
Receiving a Follower Notice from HMRC can significantly impact your limited company in both the short and long term. Initially, there is immediate pressure to take corrective action within 90 days to avoid penalties. Non-compliance can lead to a penalty of up to 50% of the disputed tax amount, which could severely affect your company’s financial health.
In the long term, a Follower Notice can lead to increased scrutiny from HMRC. Your company might face more frequent audits and reviews, potentially disrupting business operations. The reputational risk associated with being flagged for tax avoidance can also damage relationships with stakeholders, including investors and clients.
As a director, you are responsible for ensuring your company responds appropriately to the notice. This involves reviewing the notice carefully, seeking professional advice, and deciding whether to take corrective action or challenge the notice’s validity. Ignoring a Follower Notice is not advisable, as it can lead to further legal complications and financial liabilities.
Key effects of receiving a Follower Notice include:
Potential penalties of up to 50% of the disputed tax
Increased scrutiny from HMRC
Director accountability for timely response
Reputational risks affecting stakeholder trust
Addressing these issues promptly and effectively is crucial to safeguarding your company’s future.
Common Triggers for Follower Notices
HMRC issues Follower Notices when a taxpayer is involved in tax avoidance schemes deemed non-compliant by the courts. These notices are part of HMRC’s strategy to discourage such schemes and ensure compliance with tax laws. A Follower Notice is typically triggered when a taxpayer’s arrangements resemble those already judged against in court, indicating a high likelihood of non-compliance.
HMRC identifies these cases through ongoing tax enquiries or appeals, often using data from previous court rulings. Directors might unexpectedly receive a Follower Notice if their company has participated in schemes once considered legitimate but now invalidated by legal precedents. This can be surprising for directors who believed their tax arrangements were compliant.
Common examples of tax schemes associated with Follower Notices include:
Employee Benefit Trusts (EBTs): These are used to provide employee benefits without immediate tax liabilities.
Film Partnership Schemes: Investments in film production to claim tax relief.
Contractor Loan Schemes: Loans given to contractors instead of salaries to avoid income tax.
Understanding these triggers can help directors anticipate potential issues and take proactive steps to ensure compliance.
Immediate Steps to Take
Swift and decisive action is crucial upon receiving a Follower Notice from HMRC. Here’s a step-by-step guide to help you navigate this situation:
Verify the Notice’s Accuracy: Start by checking the notice for any discrepancies. Ensure that all details align with your company’s records and the judicial ruling cited by HMRC.
Seek Professional Advice: Contact a qualified tax adviser or insolvency practitioner immediately. Their expertise can clarify your specific circumstances and guide you through the complexities of the notice.
Verify Deadlines: Note the deadline for taking corrective action, which is typically 90 days from the date of the notice. Missing this deadline can result in significant penalties.
Review Company Records: Examine your company’s financial records and tax arrangements thoroughly. This will help you understand the notice’s implications and prepare for any discussions with HMRC.
Gather Relevant Documents: Collect all documents related to the tax arrangements in question, including correspondence with HMRC and any legal advice you have received. This will be essential for your adviser to assess your position accurately.
Respond Within Deadlines: Adhere to the deadlines specified in the notice. Typically, you have 90 days to take corrective action or make representations. Missing these deadlines can lead to penalties.
Consider Making Representations: If you believe the notice is incorrect, you may make representations to HMRC within the 90-day period, challenging its validity based on specific grounds.
This guidance is general in nature and should not replace tailored professional advice. Always consult a professional to ensure your actions are appropriate for your situation.
Potential Consequences and Penalties
Ignoring or failing to comply with a Follower Notice from HMRC can lead to significant financial repercussions. If you do not take corrective action within the specified timeframe, you could face a penalty of up to 50% of the disputed tax amount.
This penalty is calculated based on the “denied advantage,” which represents the additional tax that would be due if corrective action were taken. Furthermore, if a court or tribunal determines that you have engaged in “time-wasting” litigation, an additional penalty of 20% may be imposed.
Beyond penalties, non-compliance can result in additional interest charges on the disputed tax amount, increasing your financial burden. HMRC may also pursue further legal action to recover the owed amounts, which could include enforcement measures similar to those used for unpaid taxes.
Therefore, it is crucial to address a Follower Notice promptly and seek professional advice to mitigate these potential consequences.
Appealing or Challenging a Follower Notice
If you receive a Follower Notice from HMRC, you can challenge it through written representations within 90 days of receiving the notice. The grounds for challenging a Follower Notice are limited and focus on procedural aspects rather than the merits of your tax arrangements. You can argue that one of the statutory conditions (A, B, or D) was not met, that the judicial ruling cited is irrelevant to your case, or that the notice was issued outside the 12-month time limit.
Evidence Gathering
When challenging a Follower Notice, gather evidence that supports your case. This includes documentation proving that the conditions for issuing the notice were not met or that the judicial ruling is irrelevant. Clear and concise arguments backed by solid evidence can strengthen your position.
It’s important to note that HMRC’s stance can be pretty strict, and appeals are not frequently successful. However, taking informed action and presenting a well-documented case can help protect your interests as a director.
Dealing with Financial Distress
When your company faces financial distress, it is crucial to act swiftly and strategically. Engaging an insolvency practitioner (IP) can be a vital first step. An IP provides expert advice on managing liabilities and exploring rescue options, such as a Company Voluntary Arrangement (CVA). A CVA allows a company to restructure its debts, potentially avoiding liquidation while continuing operations.
Seek help immediately if you are struggling to meet financial obligations. Early intervention can prevent further deterioration of your company’s financial health. An IP can assess the situation, negotiate with creditors, and help devise a plan that aligns with your business goals.
Financial distress does not have to mean the end of your business. With structured processes like CVAs and professional guidance, there are pathways to recovery. Acting promptly safeguards your company’s future and protects your personal interests as a director.
Seeking Professional Advice
Consulting a professional when dealing with a Follower Notice from HMRC is crucial. Engaging with insolvency practitioners, tax advisers, or solicitors can provide invaluable guidance on responding effectively. These experts can help you understand the implications of the notice, navigate the complexities of tax law, and liaise with HMRC on your behalf. Their insight is especially valuable if you need to challenge the notice or explore appeal options.
It’s essential to seek advice promptly to avoid errors and missed deadlines, which could result in penalties. Verify the credentials of any professional you consider by checking their registration with certified bodies or professional registers. Licensed practitioners are bound by strict standards and can offer reliable advice tailored to your situation.
Ultimately, expert advice can prevent costly mistakes and ensure your response to HMRC is timely and compliant. This proactive approach mitigates potential risks and provides peace of mind during what can be a stressful time for company directors.
FAQs
Are follower notices the same as Accelerated Payment Notices?
No, follower notices and Accelerated Payment Notices (APNs) serve different purposes. A follower notice warns of a potential penalty if corrective action is not taken after a similar scheme has been defeated in court. In contrast, an APN demands immediate payment of the disputed tax to HMRC while the dispute continues.
When should I expect to receive a Follower Notice from HMRC?
You can expect a Follower Notice if you’ve used a tax avoidance scheme that has been defeated in court in another case. HMRC issues these notices after a final judicial ruling relevant to your tax arrangements.
Do I have to pay the disputed tax immediately?
No, a Follower Notice does not require immediate payment of the disputed tax. However, if you also receive an Accelerated Payment Notice (APN), you must pay the disputed amount while the dispute is ongoing.
Can I ignore a Follower Notice if I believe HMRC is mistaken?
Ignoring a Follower Notice is not advisable. If you believe it was issued in error, you should make representations to HMRC within 90 days, challenging its validity based on specific grounds.
How do I appeal the penalty if I disagree with the notice?
While you cannot appeal the Follower Notice itself, you can appeal any penalties for non-compliance. Grounds for appeal include procedural errors in issuing the notice or incorrect penalty amounts.
What happens if my company is insolvent or cannot pay?
If your company is insolvent, it is crucial to seek professional advice immediately. Insolvency practitioners can help you navigate potential liabilities and explore options like administration or liquidation.
Do Follower Notices affect my personal credit rating or directorship status?
Follower Notices do not directly impact your personal credit rating or directorship status. However, failure to address them could lead to financial repercussions that might indirectly affect your standing.
What kind of professional advice do I need?
It is recommended that you consult with a tax adviser or insolvency practitioner. They can provide tailored advice on responding to the notice and managing any financial implications for your company.
Can I negotiate with HMRC on the timeframe?
Generally, HMRC sets strict deadlines for taking corrective action. While negotiation on timeframes is unlikely, making representations could extend your deadline slightly if they are under consideration.
What if I’ve already closed my company?
You should still address any outstanding Follower Notices if your company has been closed. Seek professional advice to understand how these notices might affect any remaining obligations or personal liabilities.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.
