Penalties: HMRC Get It Wrong Again!
By Mark McLaughlin, May 2017
Mark McLaughlin points out penalties for careless tax return errors may sometimes be suspended - even though HMRC may not agree. 

Mistakes happen. Fortunately, the penalty regime for errors in tax returns, etc., (FA 2007, Sch 24) makes certain allowances for mistakes. For example, there is no penalty if an error has been made in an individual’s tax return despite ‘reasonable care’ having been taken. 

Alternatively, if the error was careless, HM Revenue and Customs (HMRC) has the power to suspend a penalty imposed for the error (Sch 24, para 14). HMRC guidance instructs its officers to consider suspension for every penalty involving a careless inaccuracy (see HMRC’s Compliance Handbook manual at CH83131).

Conditions, conditions…
HMRC may suspend all or part of the penalty, but only if compliance with a condition of suspension would help the person to avoid becoming liable to further penalties for careless errors (Sch 24, para 14(3)). In addition to a specific suspension condition, HMRC will also set a generic condition that the person must file all of their returns on time during the suspension period. In HMRC’s view, the specific condition must be ‘SMART’ (i.e. specific, measurable, achievable, realistic and time bound (CH83153)).

Unfortunately, HMRC’s approach to suspending penalties often seems less than generous. However, there is a right of appeal if HMRC decides not to suspend the penalty, and also against the conditions set by HMRC for the penalty to be suspended (Sch 24, para 15(3), (4)). On appeal, the tribunal can order the penalty to be suspended, but only if it considers that HMRC’s decision not to do so was ‘flawed’ (i.e. flawed when applying the principles in judicial review proceedings) (paras 17(4)-(6)). 

HMRC’s fatal flaw
For example, in Miller v Revenue and Customs [2016] UKFTT 801 (TC), HMRC opened an enquiry into the taxpayer’s tax return for 2013/14. The taxpayer accepted that he made an error by omitting employment income from the return, following a misunderstanding about his requirement to disclose the income due to the fact that he had been non-UK resident for a number of years, and believing that he was already paying ‘the correct amount of tax’ (i.e. he thought that as his PAYE income had been taxed at source, he did not need to include it on the return).

HMRC issued a penalty assessment, on the basis that the taxpayer’s behaviour was careless. The taxpayer appealed. The First-tier Tribunal found that the taxpayer had completed his tax return carelessly, but went on to consider whether HMRC’s decision not to suspend the penalty was flawed. HMRC had adopted a test applied in an earlier case (Hackett v Revenue and Customs [2012] UKFTT 122 (TC)) that a suspension condition must be ‘something more than just a basic requirement that tax returns should be free from careless inaccuracies’. However, the tribunal considered that HMRC had not adopted the correct legal test towards the application of the suspension condition requirement (in para 14(3)).

The tribunal considered that if HMRC had applied the correct test, they might have come to the conclusion that the taxpayer could (and should) have: (1) made a disclosure in the ‘additional information’ box of the tax return to resolve any uncertainty about his position as a non-resident; (2) undertaken more detailed research by reviewing HMRC’s published materials; and (3) contacted HMRC. The taxpayer was likely to complete further tax returns. The tribunal concluded that HMRC had come to a decision that was flawed. HMRC was therefore ordered to suspend the penalty.

Not the first time…
The tribunal in Miller considered that HMRC’s approach to suspending the penalty was incorrect, and described the correct test as follows:

‘(1) Firstly, one must ask what the taxpayer could have reasonably (and proportionately) done differently that would have avoided the original inaccuracy;


(2) Having decided what could have been done in that respect, whether, educated by that answer, a condition may be imposed which will help avoid future careless inaccuracies.’ 

Miller is not the first case in which HMRC’s decision not to suspend penalties for careless errors was found to be flawed; for example, see Boughey v Revenue and Customs [2012] UKFTT 398 (TC), Testa v Revenue and Customs [2013] UKFTT 151 (TC) and Eastman v Revenue and Customs [2016] UKFTT 527 (TC). 

Practical Tip:
Unfortunately, First-tier Tribunal decisions do not set a binding precedent in other cases, and HMRC seems persistent in its approach. Nevertheless, taxpayers (and advisers) should not be afraid to consider appealing to the tribunal against an HMRC decision not to suspend penalties for careless errors in appropriate circumstances.

This article was first printed in Business Tax Insider in April 2017.

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