Matthew Smith’s recent loss at the first-tier tribunal (tax chamber) is a reminder that UK tax authorities expect taxpayers to actively resolve disputed tax positions. Smith’s case centred on a marketed tax avoidance scheme, the Montpelier tax scheme, promoted by Montpelier Tax Consultants. The scheme routed his earnings through an Isle of Man partnership and trust to claim UK–Isle of Man double‑taxation relief. HMRC concluded that the arrangement failed and issued Smith with follower notices and accelerated payment notices for tax years 2004/05–2007/08. When he did not take the corrective action required by the notices, HMRC assessed penalties. The tribunal dismissed Smith’s appeal, holding that his failure to act was not reasonable.
Background – The Montpelier Tax Scheme and HMRC’s Response
Montpelier tax scheme
Smith, an IT consultant, joined a scheme marketed by Montpelier Tax Consultants, which sought to exploit the UK–Isle of Man double‑taxation arrangements. Earnings were routed through an Isle of Man partnership and an Isle of Man trust; the offshore trust income was declared on Smith’s UK tax returns, and he claimed equivalent double‑taxation relief. HMRC argued that the scheme was ineffective following the FTT decision in the Huitson case.
Enquiries and closure notices
HMRC opened enquiries into Smith’s returns and in 2010 issued closure notices stating that additional income tax and National Insurance contributions (NICs) were due. Montpelier appealed the closure notices on his behalf.
Follower and accelerated payment notices (FNs & APNs)
After the Huitson decision became final, HMRC wrote to Smith on 18 October 2016, explaining that follower notices and accelerated payment notices would be issued. The notices (sent on 4 November 2016) warned that he must take corrective action by 7 February 2017 or face penalties. A reminder was sent on 23 December 2016.
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Multiple deadlines and failure to act
Further letters in October 2017 and October 2018 extended the deadline for taking corrective action. Smith, relying on Montpelier’s advice, challenged the notices but did not amend his tax returns or enter into an agreement with HMRC. His final deadline of 31 October 2018 passed with no corrective action. HMRC therefore issued follower‑notice penalties (FNPs) on 14 August 2019 and offered a review, which eventually reduced the penalties to exclude NICs and apply a 20% co‑operation reduction.
What is a Follower Notice?
A follower notice is a tool introduced in the Finance Act 2014 that allows HMRC to resolve avoidance cases quickly once a representative case has been decided. HMRC may issue a follower notice where a return or appeal claims a tax advantage and HMRC considers that a judicial ruling is relevant. Recipients must take corrective action (amend returns or agree with HMRC to relinquish the claimed tax advantage) within a specified time.
A follower notice penalty is charged when a taxpayer fails to take corrective action. The penalty can be up to 50% of the denied tax advantage. HMRC may reduce the penalty for co‑operation, but reductions cannot reduce the penalty to less than 10% of the denied advantage. Fact sheets published by HMRC explain that the base penalty is 30% of the denied advantage and can be reduced if the taxpayer assists HMRC.
Grounds of appeal against an FNP are limited. Section 214 of the Finance Act 2014 allows appeals only where conditions for issuing the follower notice were not met or where it was reasonable in all the circumstances not to have taken corrective action.
Smith’s Appeal and Arguments
Smith represented himself at the tribunal. He argued that:
Similarities with Baker case
He relied on the successful appeal of Roy Baker, another Montpelier client. In Baker v HMRC, the FTT cancelled follower‑notice penalties because mistakes and inconsistencies in HMRC’s dealings led the tribunal to conclude it was reasonable for the taxpayer to rely on Montpelier’s advice.
Reliance on Montpelier and lack of expertise
Smith contended that, as someone without tax expertise, it was reasonable to rely entirely on Montpelier’s advice, and he had no reason to doubt it.
Confusing correspondence and delays
He claimed HMRC’s notices were hard to understand and that delays and contradictory advice, including the lengthy review process, should be taken into account. He also mentioned financial pressures and mental‑health issues.
HMRC argued that the follower notices were validly issued and that there were fundamental differences between Smith’s situation and the Baker case. They maintained that Smith failed to take corrective action despite multiple opportunities and requested that the tribunal uphold the penalties with a 20% co‑operation reduction.
Tribunal’s Findings and Reasoning
Failure to engage with HMRC
The tribunal found that Smith did not properly read HMRC’s letters or factsheets until 2018 and did not fully engage with his tax position until May 2019. He therefore did not understand the difference between follower notices and accelerated payment notices, the potential penalties, or what corrective action meant.
Smith relied entirely on Montpelier’s advice until March 2018 and then relied on a contact at HMRC (RW) to assure him there was nothing further to pay. The tribunal concluded that such reliance without attempting to understand or seek independent advice was unreasonable. Unlike the Baker case, there were no significant HMRC errors, and Smith did not deliberately decide to continue the appeal; he simply failed to act.
Reasonableness of not taking corrective action
The tribunal analysed whether it was reasonable, in all the circumstances, for Smith not to take corrective action. It noted that the standard is objective and depends on the taxpayer’s individual circumstances.
Key points:
Failure to read and understand
Smith admitted he had been given three opportunities to take corrective action and acknowledged that penalties would arise if he failed. His confusion stemmed from not reading or understanding the correspondence and not seeking advice.
Reliance on Montpelier vs independence
The tribunal recognised Smith’s lack of tax expertise but said his complete reliance on Montpelier until March 2018 and subsequent failure to read HMRC’s letters meant he did not engage with his tax position. He only sought independent advice when he appointed new advisers in December 2019.
Payment plan confusion
He argued that the payment plan for the accelerated payment notices covered all liabilities. The tribunal found that paying accelerated payments does not amount to corrective action and that Smith would have understood this if he had properly read the correspondence.
Delays and mental‑health issues
While HMRC’s delay in concluding the review (over four years) was unfortunate, it had no bearing on whether Smith acted reasonably; he provided no evidence linking mental‑health issues to his failure to act.
The tribunal concluded that Smith did not demonstrate that it was reasonable not to take corrective action. The follower notices were validly issued, and he failed to act before the deadline, so the appeal against the penalties was dismissed.
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Penalty calculation
HMRC initially calculated the follower‑notice penalties at 50% of the denied income tax and NICs, totalling £42,369.80. During the review they removed the NICs element and applied a 20% co‑operation reduction under the Finance Act 2014, reducing the penalty percentage to 42%. The revised penalties totalled £32,541.32. The tribunal agreed with HMRC’s assessment, noting that Smith’s limited assistance did not justify a greater reduction. A breakdown of the final penalties is shown below:
| Tax year | Value of denied advantage | Penalty rate | Penalty |
| 2004/05 | £20,003.56 | 42% | £8,401.49 |
| 2005/06 | £24,529.77 | 42% | £10,302.50 |
| 2006/07 | £14,333.29 | 42% | £6,019.98 |
| 2007/08 | £18,612.76 | 42% | £7,817.35 |
| Total | £77,479.38 | 42% | £32,541.32 |
Lessons and Implications
The decision underscores several important points for taxpayers and advisers:
- Read and engage with HMRC correspondence – Follower notices and associated fact sheets clearly set out deadlines and consequences. Failing to read them or seek clarification is unlikely to be considered reasonable.
- Do not rely solely on scheme promoters – Montpelier and similar promoters have a vested interest in defending their schemes. The tribunal noted that Smith acted like a “post box”, forwarding Montpelier’s letters without understanding them. In contrast, in the Baker case, the taxpayer had a genuine reason to mistrust HMRC because of multiple errors.
- Corrective action differs from payment of APNs – paying accelerated payments does not counteract the denied advantage. Corrective action requires amending returns or agreeing with HMRC to give up the claim.
- Co‑operation can reduce penalties – HMRC has discretion to reduce follower‑notice penalties based on the quality of the taxpayer’s co‑operation, including helping quantify the tax advantage or counteracting it. Even limited co‑operation can secure a reduction; Smith’s penalties were reduced from 50% to 42%.
- Appeal rights are narrow – Section 214 FA 2014 provides limited grounds for appealing follower‑notice penalties. Taxpayers must show that HMRC incorrectly issued the notice or that failure to take corrective action was reasonable. Evidence and proactive engagement are critical.
How We Can Help
Apex Accountants helps individuals and businesses navigate complex tax legislation and compliance. Our services include:
- Tax investigations & disputes – guiding clients through HMRC enquiries, follower notices, accelerated payment notices and settlement negotiations.
- Tax compliance & planning – ensuring returns are accurate, compliant and optimised while avoiding the pitfalls of aggressive schemes.
- Contractor advisory services – advising on off‑payroll/IR35 status, double‑taxation agreements, and cross‑border structures.
- Appeals & litigation support – preparing evidence, drafting grounds of appeal and liaising with specialists to challenge penalties where appropriate.
- Regular updates & training – providing clients with updates on developments like the Montpelier scheme litigation and helping them understand their obligations.
If you have received a follower notice or are involved in a tax avoidance scheme, our team of experienced advisers can assess your situation and help you take the right corrective action.
Conclusion
The Smith v. HMRC decision underscores that follower notices are serious warnings, not mere formalities. Taxpayers who ignore them or leave matters entirely to scheme promoters risk substantial penalties. Smith’s reliance on Montpelier, failure to read HMRC’s correspondence, and failure to act after multiple deadlines led the tribunal to dismiss his appeal. By contrast, the tribunal in Baker cancelled penalties where HMRC had made multiple errors. The case highlights the importance of engaging with HMRC, seeking independent advice, and taking prompt corrective action when tax avoidance arrangements are challenged.
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FAQs
1. What is the Montpelier tax scheme?
The Montpelier scheme routed contractors’ earnings through an Isle‑of‑Man partnership and trust to claim double‑taxation relief. HMRC considered the arrangements ineffective after the Huitson case, and many users received follow-up notices requiring them to give up the tax advantage.
2. What is a follower notice penalty?
A penalty is charged when a taxpayer who has been issued a follow-up notice fails to take corrective action by the deadline. The maximum penalty is 50% of the denied advantage, though HMRC can reduce it for co‑operation. HMRC’s guidance states that the standard penalty is 30%.
4. How do follower notices differ from accelerated payment notices?
Accelerated payment notices (APNs) require taxpayers to pay disputed tax upfront while the dispute is resolved. Follower notices require them to give up the disputed tax advantage and amend returns; paying an APN does not count as corrective action.
5. What counts as corrective action?
Under section 208 FA 2014, corrective action means amending the tax return to remove the advantage or agreeing in writing with HMRC to relinquish it. The taxpayer must also notify HMRC that they have done so.
6. Can I appeal a follower notice penalty?
Yes, but only on specific grounds. Section 214 FA 2014 allows an appeal where HMRC failed to meet conditions for issuing the follower notice or where it was reasonable not to have taken corrective action. The appeal must normally be filed within 30 days.
7. How was the Baker case different?
In Roy Baker v HMRC, the FTT cancelled the penalties because HMRC’s numerous mistakes and inconsistent advice meant the taxpayer had good reason to trust his advisers and doubt HMRC. In Smith’s case, there were no similar errors, and he failed to engage with his tax affairs.
