When Can Tax Return Penalty Be Suspended?

HMRC’s factsheet “Suspending penalties for careless inaccuracies in returns or documents” sets out the guidance for how tax officers should deal with cases where errors have been made on tax returns. Bear in mind that these requirements are not expressly stated in the legislation and that HMRC’s guidance does not carry the force of law, but that aside, the HMRC factsheet states that no penalty is charged in respect of a tax return error if “reasonable care” has been taken. It says that penalties will not be automatically suspended if a tax return shows “careless” error, and will definitely not be suspended if the error is “deliberate”. As a deliberate error is more serious than a careless error, the penalty for the former is generally higher than for the latter, but it should be borne in mind as well that the penalty charge for a tax return error also depends on whether the disclosure was prompted or unprompted, by the taxpayer. Penalties may be reduced, suspended, and in some cases cancelled.

Penalties:

The penalties regime has featured in our blogs in the past, warning how seriously they can damage your business, how they can mount up, and/or lead to an investigation. According to the HMRC factsheet, penalties can only be suspended in respect of careless errors, not for what are deemed deliberate errors, and while the HMRC factsheet instructs officers to consider the suspension of every penalty for a careless rather than a deliberate error, unsurprisingly this has not always been the case. So beware, and think about whether it would be wise to avoid the stress, as well as probably making a cost-effective decision, if you delegate the filing of your tax return to an expert.

Notification:

In cases where HMRC makes the decision to suspend all or part of a penalty, the taxpayer must be notified which part of the penalty is to be suspended, and a period of suspension must be specified, which should not exceed two years. There are normally strict conditions of the terms off suspension (e.g. action to be taken, and a timeframe), where the onus lies on the taxpayer to comply. At the end of this period, providing the conditions of suspension have been met, part or the whole of the suspended penalty is cancelled. Otherwise, the penalty becomes payable.

The Rehabilitation Approach:

HMRC’s approach to suspending penalties is whether the taxpayer has understood the conditions, can address the error, and learn from experience, therefore avoiding future careless error: in other words, the condition must be SMART (specific, measurable, achievable, realistic, and time-bound). For example, a penalty for a careless inaccuracy normally will only be suspended if a generic condition (such as filing all returns on time during the suspension period) and at least one specific condition (i.e. to help the person avoid becoming liable to a further penalty for a careless inaccuracy) can be set. The guidance reads: “You can only suspend a penalty for a careless inaccuracy where you can set at least one specific suspension condition that, if complied with, would help the person avoid a further penalty for a careless inaccuracy.”

At Tribunal

The wording of the suspension condition requirement quoted above has come under scrutiny. For example, in Fane v Revenue & Customs [2011] UKFTT 210 (TC), it was argued that the wording provides no restriction in respect of what is meant by a “one-off event”, when the suspension condition relates to ensuring the person makes no further careless errors. Thus while HMRC’s interpretation of the legislation seems to suggest that penalties cannot be suspended in respect of “one-off” errors, the tribunal stated that the statement beggars the question: “how can it be possible to know that an event will be a ‘one-off’”.

Redundancies

There have been a number of cases involving errors on tax returns for recipients of redundancy payments, which one would hope are “one-off”, or at least not “regular events”. At Cobb v Revenue & Customs [2012] UKFTT 40 (TC), for instance, the tribunal considered that HMRC should be able to suspend a careless error in the tax return of an individual who is made redundant.

Another example is in Boughey v Revenue & Customs [2012] UKFTT 398 (TC), where an HMRC officer informed a taxpayer that a condition needed to be set that was specific to the careless inaccuracy (in relation to a redundancy payment). However, the tribunal found that HMRC’s decision not to suspend the penalty was in this case “flawed” (based on a fact of law that there is no statutory requirement that a condition must be specific to the default, giving rise to the penalty).

The notion of “flawed”

There is a right of appeal to the first-tier tribunal if HMRC decides not to suspend a penalty. In any appeal against an HMRC decision to suspend a penalty, the tribunal can order the penalty to be suspended only if it considers that HMRC’s decision not to do so was “flawed”.

“Flawed” seems to come up relatively frequently in cases of these penalties suspensions. For example in the tribunal Testa v Revenue & Customs [2013] UKFTT 151 (TC), the taxpayer suggested a suspension condition to HMRC whereby his tax returns for the next two years would be submitted on his behalf by an appropriate professional adviser. The tribunal saw no evidence that HMRC had considered the taxpayer’s suggestion, and held that HMRC’s actions were therefore “flawed” for appeal purposes. Similar to the Boughey case above, the tribunal suspended the penalty for two years, on condition that the taxpayer’s returns must be prepared during that period on his behalf by an accountant.

Conclusion:

To avoid errors, delegate your tax return to DNS, we will very likely save you money, and you will certainly avoid the hassle that making errors creates.

As an afterword, HMRC does not have the exclusive right to propose conditions for suspended penalties, as the tribunal system can set suspension conditions when it is found that HMRC’s conditions are flawed. The question is, then, whether it is worth finding out whether you can overturn HMRC’s decision at tribunal, or whether it would be better to leave other taxpayers to the mercy of the penalties system while you remain safely remote from it, with experts handling your tax return and all your statutory filing with guaranteed zero error.