Follower Notices when the taxpayer is insolvent
By David Menzies, Director of Practice
8 February 2019
HM Revenue & Customs have issued a statement relating to the processing of Follower Notices where the taxpayer is in a formal insolvency process. David Menzies, ICAS Director of Practice, looks at its implications.
HM Revenue & Customs (HMRC) have clarified their position in relation to issuing Follower Notices where an individual or a corporate taxpayer has been party to a scheme which HMRC believes constitutes a tax avoidance scheme against which there has been a judicial ruling and the taxpayer is subject to an insolvency process.
HMRC’s statement in full reads:
‘The Finance Act 2014 sections 199-218 provides HMRC with the power to issue a Follower Notice to taxpayers in circumstances where the taxpayer is:
- either subject to an enquiry into their tax return or claim: or
- has appealed against an assessment or amendment in relation to a tax advantage which it is claimed arises from certain arrangements; and
- the return, claim or appeal is made on the basis that a tax advantage arises from arrangements and
- there has been a judicial ruling which HMRC considers if applied to the tax payer’s arrangements would deny the tax advantage.
The Follower Notice gives the taxpayer 90 days within which to take corrective action – this can be achieved by amending the return or claim to remove the claimed tax advantage or by withdrawing the appeal and entering into an agreement with HMRC to settle. If the taxpayer does not take such corrective action within 90 days then they will become subject to a penalty, the penalty being up to 50% of the claimed tax advantage.
HMRC must issue a Follower Notice within 12 months of the judicial ruling, and in practice, this means that notices are issued in batches to all users who have used a particular scheme for whom HMRC consider it appropriate to issue a notice. Insolvency Practitioners have received such notices for taxpayers who are now in a formal insolvency process.
As mentioned above, the follower notice is intended to encourage the recipient to take corrective action otherwise they risk a significant penalty. In insolvency cases, this will not incentivise corrective action in the way intended by the legislation because:-
- The penalty will fall upon the insolvent estate which is held for the benefit of the insolvent’s creditors and not for the benefit of those who actually participated in or were responsible for the avoidance; and
- Those currently responsible for the affairs of the insolvent entity (the Officeholder) do not have first-hand knowledge of the insolvent’s affairs
Any penalty is therefore unlikely to ever be paid in an insolvency case and to the extent, it is, this that will dilute the distribution to other creditors rather than impact those who actually participated in the avoidance. HMRC will not, as a matter of course issue Follower Notices to either individual or corporate taxpayers who are in a formal insolvency process, unless there are reasons to do so.
Where a practitioner has received such a notice, they should contact the Counter-Avoidance Insolvency team to discuss how to proceed. We expect instances where corrective action needs to be taken in Insolvency to be extremely rare. In the vast majority of cases, there will be an underlying tax charge which will be a provable debt in the insolvency. This includes any penalties that have arisen as a result of a follower notice issued prior to an insolvency.’
The approach to be adopted by HMRC going forward is a sensible and pragmatic approach and will ensure that creditors, who will already be out of pocket following the insolvency of the taxpayer, will not be further penalised by the taxpayer's behaviour.