Category: HMRC Tax Investigations

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.

For the latest on HMRC investigations, read: HMRC Fines Estate Agents, Highlighting AML Failures—What It Means for You

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.

Get Free Consultation

Call Anytime 0203 883 4777

Get Free Consultation

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.

Get Free Consultation

Call Anytime 0203 883 4777

Get Free Consultation

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.

Read About: Understanding HMRC Penalty Suspension Requests: Insights from the Cox v HMRC Case

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:

Get Free Consultation

Call Anytime 0203 883 4777

Get Free Consultation

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.

Get Free Consultation

Call Anytime 0203 883 4777

Get Free Consultation

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.

HMRC Update: HMRC has launched a £40 million enforcement campaign targeting sellers on Vinted and eBay.

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.

In February 2026, HM Revenue & Customs (HMRC) published its latest list of businesses that breached the Money Laundering Regulations. The update covers the period from 1 April to 30 September 2025 and shows that a total of 369 penalties were issued across all supervised sectors. The combined value of the fines reached £1.88 million. Estate agencies were the worst‑affected sector—HMRC fines estate agents the most, with 170 penalties levied against estate agency businesses, amounting to £835,842. Accountancy service providers were the second-largest group fined, receiving 134 penalties worth £513,930.

HMRC data shows that the majority of penalties arose because businesses traded without being registered for anti-money-laundering (AML) supervision. 332 of the 369 penalties were for unregistered trading, and the same pattern was highlighted in the specialist press. In many cases, businesses missed registration deadlines; registration failures are administrative issues that are avoidable. HMRC’s spokesperson stressed that AML supervision is “a vital line of defence” and that enforcement will continue.

Read: HMRC has launched a £40 million enforcement campaign targeting sellers on Vinted and eBay.

Why are estate agents being fined?

Estate agents are regulated under the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017. HMRC identified several recurring compliance failures, which have led to HMRC AML fines being imposed on businesses that failed to meet the necessary regulatory standards.

Get Free Consultation

Call Anytime 0203 883 4777

Get Free Consultation

• Failure to register or renew registration on time: Over 90% of recent HMRC money laundering penalties were for trading while unregistered. Estate agents must register with HMRC before conducting estate agency work and renew annually.
  
• Poor customer due diligence (CDD): Agents failed to verify the identity of buyers and sellers or establish the source of funds. HMRC guidance emphasises that estate agency businesses must carry out robust CDD and enhanced due diligence where risks are higher.
  
• Weak or outdated risk assessments: Businesses are required to maintain a written risk assessment covering money laundering, terrorist financing, and proliferation financing. Some firms rely on generic templates rather than assessing the actual risks posed by their client base.
  
• Inadequate policies, training, and records: The regulations demand that agents have documented policies and procedures, train staff to recognise red flags, and keep records for at least five years. HMRC inspections have found incomplete records and a lack of staff training.
  
• Failure to appoint a nominated officer (Money Laundering Reporting Officer): Each agency must appoint an MLRO and a deputy to handle suspicious activity reports. Many smaller firms overlook this requirement.

Also Read: Investors are at risk of tax fines due to the HMRC Capital Gains Tax Glitch

Broader risks in the property sector

Property transactions have long been a magnet for illicit funds. The National Risk Assessment 2025 notes that property transactions appear in almost every money laundering typology and predicate offence. The property sector overall is assessed as high-risk, with estate agents among the most exposed professions. Criminals use complex corporate structures, trusts, or special-purpose vehicles to hide beneficial ownership and move large sums. Super-prime property (worth £5 million in London or £1 million elsewhere) and residential property are considered particularly attractive to launderers.

Best-practice AML compliance for estate agents

HMRC and professional bodies outline steps that estate and letting agencies should take to stay compliant:

• Perform a written risk assessment—identify money laundering, terrorist financing, and proliferation financing risks based on customers, geographic areas, services offered, and transaction size. Keep the assessment current and document the reasoning behind each risk rating.
  
• Develop policies, controls, and procedures—Create a written AML policy that sets out how risks will be managed and update it when regulations change.
  
• Train your team—ensure all staff understand the regulations, know how to perform CDD, and recognise suspicious activity. Record training sessions and refresher courses.
  
• Appoint an MLRO and deputy—they must review internal reports and submit suspicious activity reports to the National Crime Agency without tipping off the client.
  
• Register and renew with HMRC – Register before you start trading and renew annually. Provide generic email addresses so renewal reminders are not missed.
  
• Conduct customer due diligence – Verify identity, check beneficial ownership of companies, and confirm the legitimacy of funds. Apply enhanced due diligence when dealing with politically exposed persons, higher-risk countries, or complex corporate structures.
  
• Keep records – Keep copies of identity documents, risk assessments, and transaction files for at least five years.
  
• Use technology wisely – Adopt reliable ID verification and sanctions screening tools. Document why you chose each tool and ensure your systems are calibrated to UK sanctions lists and AML regulations.
  
• Audit yourself – Run mock HMRC audits annually to identify gaps. Independent reviews can highlight weaknesses in policies and training.

Get Free Consultation

Call Anytime 0203 883 4777

Get Free Consultation

The Wider HMRC AML Fines and Regulations

Changes in 2025 and 2026 mean that AML compliance is evolving. May 2025 introduced mandatory sanctions checks for all letting and estate agents, meaning firms must screen every client against UK sanctions lists. In January 2026, the UK government consolidated sanctions designations into a single list to simplify checks. There are also proposals to refine the money laundering regulations to be more targeted and risk‑based; the direction of travel suggests stronger expectations for high‑risk areas.

At the same time, risk assessments show that criminals increasingly use super-prime property, corporate structures, and special-purpose vehicles to launder money. Estate agents therefore need to understand complex ownership structures and ask probing questions about the source of funds.

Read: Understanding HMRC Penalty Suspension Requests: Insights from the Cox v HMRC Case

How We Help Estate Agents Stay Compliant and Avoid HMRC Money Laundering Penalties

Apex Accountants supports estate agents, letting agents, and property professionals in meeting their AML obligations. Our specialist team combines accounting expertise with deep knowledge of AML regulations.

• Registration and renewal assistance – We handle HMRC registration, renewals, and “fit and proper” tests to ensure you are correctly supervised.
• Risk‑assessment workshops – Our consultants help you develop tailored risk assessments that reflect your business model and client base. We provide templates and walk you through risk factors identified by HMRC.
• Policy drafting and implementation – We write clear AML policies, controls, and procedures and assist with implementation across your branches.
• Staff training – We offer face-to-face training and online modules covering CDD, enhanced due diligence, sanctions screening, and reporting obligations. Training is recorded for audit purposes.
• Mock audits and compliance reviews—Our independent reviews identify weaknesses before HMRC does. We test your processes, document findings, and help implement corrective actions.
• Ongoing support—Our helpline provides prompt advice on complex transactions, suspicious activity reporting, and changes in the law. We also monitor regulatory updates and notify you of relevant changes.

Get Free Consultation

Call Anytime 0203 883 4777

Get Free Consultation

Conclusion

HMRC’s latest enforcement action shows that AML compliance is not just a regulatory box‑ticking exercise—it is a crucial defense against criminals exploiting the UK property market. More than 170 estate agency businesses were fined in the latest reporting period, mostly for administrative failings such as failing to register with HMRC. Yet the risk of money laundering in property remains high; the National Risk Assessment 2025 warns that property transactions are used in almost every money laundering typology.

For estate agents, the message is clear: register, assess your risks, train your team, and keep records. By embedding robust AML procedures and staying on top of regulatory changes, firms can protect their reputation, avoid costly fines, and help safeguard the integrity of the UK property market.

FAQs

1. Do estate agents really need to register with HMRC? 

Yes. Any UK‑based firm carrying out estate agency work (including dealing with overseas property for UK customers) must register with HMRC for AML supervision. Letting agents must also register if they handle rent or deposits above €10,000 per month.

2. What does AML compliance involve? 

Agents must conduct risk‑based CDD, maintain written policies and procedures, train staff, and appoint an MLRO. They should assess each client and transaction to decide whether simplified, standard, or enhanced due diligence applies.

3. Why were so many fines issued? 

HMRC emphasises that most penalties were for administrative failings—businesses had not registered or renewed on time. Compliance is not optional; ignorance of the rules is no defence.

4. How often should we review our risk assessment? 

HMRC guidance says estate agency businesses must keep their risk assessment up-to-date and modify it when services, client base, or operating model changes.

5. What are the penalties? 

Fines vary widely. Past HMRC penalty lists show amounts from a few thousand pounds to more than £50,000. Recent data shows an average fine of around £6,200 for estate and letting agents.

6. How can we avoid fines? 

Register on time, maintain accurate records, conduct CDD and sanctions checks, train staff regularly, and seek professional advice. Use a reputable AML tool or reminder service to track renewal dates.