Penalties: A special reduction!

By | 23 November 2021

It is worryingly easy to inadvertently incur penalties for non-compliance with tax obligations. The eye-watering powers of HM Revenue and Customs (HMRC) are underpinned by penalty regimes for non-compliance with various statutory requirements.

However, some penalties are subject to exceptions and ‘let-outs’ in certain circumstances where a tax compliance failure has occurred. This potentially applies to various categories of penalty, including for errors in returns, failure to notify HMRC of chargeability to tax, late filing of tax returns and failure to make tax payments on time. This article considers penalties for errors in individuals’ tax returns.

A ‘special’ occasion?

In each case, there are ‘special reduction’ rules, which provide that if HMRC ‘think it right because of special circumstances’ they may reduce certain penalties (FA 2007, Sch 24, para 11). The legislation does not define ‘special circumstances’, but states what they do not include (i.e., the ability to pay, or the fact that a potential loss of revenue from one taxpayer is balanced by a potential overpayment by another).

A special reduction includes HMRC ‘staying’ a penalty (i.e., stopping or postponing enforcement of a penalty) or ‘agreeing a compromise’ (i.e., foregoing all or part of a penalty).

What circumstances are ‘special’? HMRC considers that special circumstances are either ‘uncommon or exceptional’; or ‘where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law’ (see HMRC’s Compliance Handbook manual at CH170100).

HMRC cites examples in the Compliance Handbook manual where special circumstances ‘may’ exist (see CH170800), and where they do not (see CH170900). Importantly, HMRC states it is ‘unlikely’ that a special reduction will apply to a penalty where behaviour is considered deliberate.

Are you appealing?

Taxpayers are generally protected by an appeal process. In the above example of a tax return error, the taxpayer’s rights allow for an appeal against HMRC’s decision that a penalty is payable, and as to the amount of a penalty (FA 2007, Sch 24, para 15).

If HMRC does not allow a special reduction in penalties, or if the reduction is too low, the tribunal can apply a special reduction due to special circumstances, but only if HMRC’s decision is considered flawed. ‘Flawed’ has the same meaning for these purposes as when considered in judicial review proceedings (FA 2007, Sch 24, para 17).

For example, the failure by HMRC to even consider whether a special reduction applied has been held to be a flaw (e.g., Hardy v HMRC [2011] UKFTT 592 (TC)). Furthermore, in White v HMRC [2012] UKFTT 364 (TC), the HMRC officer did not explain why a special reduction was not given. The tribunal considered that the HMRC officer’s failure to give reasons for concluding that there were no special circumstances (and hence that no special reduction should be made) meant that his decision was flawed. In both cases, the tribunal reduced the penalties (i.e., from 15% to 2.5% and 6% respectively).

Practical point

Check that HMRC at least considers whether special circumstances exist. If HMRC does not do so (or does so without explaining its decision) a special reduction by the tribunal may be possible on appeal, depending on the circumstances.

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