The penalty regime for errors in tax returns, etc. (FA 2007, Sch 24) includes an important potential ‘let-out’ from penalties in certain circumstances. HM Revenue and Customs (HMRC) has the power to suspend penalties in cases involving ‘careless’ errors (Sch 24, para 14).
The maximum period of suspension is two years. If the taxpayer satisfies the suspension conditions set throughout that period, the suspended penalty is cancelled.
What’s the catch?
That seems fairly straightforward on the face of it. Clearly, the facility for HMRC to suspend penalties is potentially good news for honest taxpayers who have made a genuine but careless mistake in their tax return. However, there is a catch.
The suspension provisions broadly state that HMRC may suspend a penalty only if a specific condition can be set that would help the taxpayer to avoid becoming liable to further penalties for careless errors (Sch 24, para 14(3)).
A problem with this requirement is that it calls for HMRC officers to exercise their judgment as to whether a suitable condition is capable of being set. This can result in disagreements between taxpayers and HMRC, and in some cases appeals to the First-tier Tribunal.
For example, HMRC sometimes contend that a careless error in a tax return is a ‘one-off’, and that no condition is capable of being set to avoid another careless error.
For example, in Havercroft v Revenue & Customs  UKFTT 0389 (TC), the taxpayer’s tax return for 2012/13 failed to disclose pension income, which he had commenced receiving during that tax year. Following an enquiry into the return, HMRC imposed a penalty of 15% of the additional tax for a careless error in his tax return. The taxpayer appealed.
HMRC had decided not to suspend the penalty, on the grounds that the carelessness was a ‘one-off’. The First-tier Tribunal held that the error was indeed an isolated one, caused by the taxpayer not carefully reading the return or notes describing how to fill in the return. The tribunal concluded that, in the circumstances, it was reasonable for HMRC to conclude that there were no conditions that would help the taxpayer avoid future penalties, and that it was not appropriate to suspend the penalty. The taxpayer’s appeal was dismissed.
Is it really a one-off?
Aside from the fact that HMRC’s approach concerning one-off careless errors is only based on its interpretation of the suspended penalty legislation (albeit that, in Fane v HMRC  UKFTT 210 (TC), the tribunal noted that there is no restriction in FA 2007, Sch 24, para 14(3) for one-off errors, but still considered that HMRC’s approach was justified), was the error in Havercroft really a one-off?
For example, whilst a taxpayer would be unlikely to carelessly repeat one particular error, what about the possibility that he might make a different type of error in future tax returns?
In Havercroft, after making the error, the taxpayer engaged an accountant to ensure that his future tax returns were correctly completed. It is perhaps unfortunate that Mr Havercroft’s conscientiousness in doing so prevented him from advancing the above argument.
In Boughey v Revenue & Customs  UKFTT 398 (TC), the taxpayer’s suggested suspension condition that (during the suspension period) his tax returns should be prepared by qualified accountants was accepted by the tribunal. Similarly, in Patel v Revenue & Customs  UKFTT 445 (TC), a penalty for a careless tax return error was suspended by the tribunal for 24 months on condition that the taxpayer engaged a professional accountant or tax adviser to prepare his tax returns (and also that the returns would be filed, and the tax paid, by the due dates).
Thus there may be a potential escape route for unrepresented taxpayers who are potentially liable to a penalty for a careless tax return error.
The above article was first published by Tax Insider (November 2015) (www.taxinsider.co.uk).