Don’t you just love a good suspense!

By | 24 August 2021

Tax compliance is difficult and complex. Making a mistake in a tax return is a distinct possibility for many taxpayers.

Was it a penalty?

The penalty regime for errors in tax returns, etc. states that no penalty is charged in respect of a tax return error if ‘reasonable care’ has been taken.

However, penalties can be charged by HM Revenue and Customs (HMRC) if a tax return error was ‘careless’ or ‘deliberate’. A deliberate error is more serious than a careless error, so the level of penalties for deliberate errors can be much higher than for careless errors.

The amount of penalty otherwise chargeable for a tax return error may be subject to a discount depending on the quality of disclosure by the taxpayer and may also be subject to a ‘special reduction’ at HMRC’s discretion in special circumstances.

Suspended sentence!

HMRC has the power to suspend penalties in cases involving careless error (FA 2007, Sch 24, para 14). Note that penalties can only be suspended in respect of careless errors; penalties cannot be suspended for deliberate errors.

HMRC officers are instructed to consider the suspension of every penalty for a careless error (see HMRC’s Compliance Handbook manual at CH83131). However, a gentle reminder may be necessary in some cases.

If HMRC decides to suspend all or part of a penalty for a tax return error, the taxpayer must be notified about what part of the penalty is to be suspended. HMRC must also specify a period of suspension not exceeding two years and set out the conditions of suspension (e.g., action to be taken, and a timeframe for taking it), which the taxpayer must comply with throughout the suspension period.

At the end of the suspension period, if HMRC is satisfied that the conditions of suspension have been satisfied, the suspended penalty (or part) is cancelled. Otherwise, the relevant penalty becomes payable. If the taxpayer makes another careless (or a deliberate) tax return error and becomes liable to a further penalty during the suspension period, the suspended penalty (or part) becomes payable.

Strings attached

HMRC may only suspend a penalty if a condition can be set that would help the person to avoid becoming liable to a further penalty for a careless error in the future (FA 2007, Sch 24, para 14(3)).

There is detailed guidance on HMRC’s approach to suspending penalties at CH83110-83220. For example, HMRC’s view appears to be that whether penalties can be suspended for one-off errors will depend on the circumstances. HMRC’s guidance states (at CH83133):

‘Where the careless inaccuracy that you are penalising in this compliance check will not recur in future returns, the person may propose that specific suspension conditions could help him to avoid a different inaccuracy. So you will need to establish how likely it is that the underlying cause of the inaccuracy that you are penalising would result in that different inaccuracy in a future return.’

There is no explicit provision in the legislation about one-off errors; however, in Fane v Revenue and Customs [2011] UKFTT 210 (TC), the tribunal commented that HMRC’s guidance about one-off errors not normally being suitable for suspension was ‘…understandable and, in our view, justified.’

Practical point

There is a right of appeal if HMRC decides not to suspend a penalty, and against the conditions set by HMRC for the penalty to be suspended (FA 2007, Sch 24, para 15(3), (4)). Taxpayers (or their advisers) who are appealing against a penalty for a careless error should also consider appealing against HMRC’s decision not to suspend the penalty in appropriate cases, to ensure that the tribunal also considers the matter of suspension.   

The above article was first published in Tax Insider (October 2020) (