Everyone makes mistakes; no-one is perfect. Fortunately, the penalty regime for errors in tax returns, etc (FA 2007, Sch 24) recognises that fact. For example, no penalty is charged in respect of a tax return error if ‘reasonable care’ has been taken.
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, and in general terms the level of penalties for deliberate errors is accordingly higher than for careless errors.
The calculation of penalties for errors is beyond the scope of this article, although it should be noted that 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 (FA 2007, Sch 24, paras 9, 11).
Even if a penalty is reduced, that is not necessarily the end of the story. A penalty may also be suspended in some cases, and possibly cancelled at a future time.
No penalty…for now
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 (within FA 2007, Sch 24, para 1); penalties cannot be suspended for deliberate errors.
The good news for taxpayers is that HMRC officers are instructed to consider the suspension of every penalty for a careless error (CH83131). However, in the author’s experience this does not always happen. A gentle reminder might therefore be required in some cases.
If HMRC decides to suspend all or part of a penalty for a tax return error, the taxpayer must be notified as to what part of the penalty is to be suspended. HMRC must also specify a period of suspension, which cannot exceed two years. HMRC will set conditions of suspension (e.g. action to be taken, and a timeframe for taking it), which the taxpayer must comply with throughout the relevant 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 (under Sch 24, para 1) during the period of suspension, the suspended penalty (or part) becomes payable.
Don’t do it again!
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)).
HMRC guidance instructs its staff (at CH83131): “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.” This requirement effectively means that penalties cannot be suspended in respect of one-off errors, based on HMRC’s interpretation of the legislation.
In Fane v Revenue & Customs  UKFTT 210 (TC), it was noted that the wording of the suspension condition requirement (in Sch 24, para 14(3)) provides no restriction in respect of a one-off event on the face of it. However, the tribunal added that HMRC’s guidance about one-off errors not normally being suitable for suspension was “…understandable and, in our view, justified.” This begs the question: how can it be possible to know that an event will be a ‘one-off’?
An example in HMRC’s guidance (at CH83143; see Example 3) involves an error in respect of a termination payment. HMRC’s view appears to be that there are no suspension conditions that can be set to avoid the taxpayer making a careless error in respect of a termination payment. This is presumably on the basis that termination payments are examples of ‘one-off’ events.
A number of tribunal cases have considered whether penalties for careless errors involving redundancy payments are suitable for suspension. Analysis of those cases is beyond the scope of this article, but it is worth noting that in Cobb v Revenue & Customs  UKFTT 40 (TC) the tribunal considered that HMRC should be able to suspend a careless error in the tax return of an individual who is made redundant, particularly in relation to more complex redundancy settlements, on the footing that being made redundant may not be a one-off event.
Is that SMART?
HMRC states that a penalty for a careless inaccuracy can only be suspended if a generic condition (i.e. that the person must file all their 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. In HMRC’s view, the specific condition must be ‘SMART’, i.e. Specific, Measurable, Achievable, Realistic and Time bound (CH83151).
However, it should be borne in mind that these requirements are not expressly stated in the legislation, and that HMRC’s guidance does not carry the force of law.
In Boughey v Revenue & Customs  UKFTT 398 (TC), an HMRC officer informed the taxpayer that a condition needed to be set that was specific (i.e. the ‘S’ in ‘SMART’) to the careless inaccuracy (i.e. in relation to a redundancy payment). However, the tribunal held that HMRC’s decision not to suspend the penalty was ‘flawed’ (see below). It was based on an error of law, as there is no statutory requirement that a condition must be specific to the default giving rise to the penalty in question.
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)).
On an appeal against HMRC’s decision not 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. In addition, the tribunal can vary suspension conditions only if it thinks that the conditions set by HMRC are flawed (Sch 24, para 17(4), (5)).
‘Flawed’ is defined for these purposes as flawed when applying the principles in judicial review proceedings (Sch 24, para 17(6)). In Testa v Revenue & Customs  UKFTT 151 (TC), the taxpayer suggested a suspension condition that his tax returns for the next two years would be submitted on his behalf by an appropriate professional adviser. The tribunal noted (among other things) there was no evidence that HMRC gave any proper consideration to the taxpayer’s suggestion, and held that HMRC’s actions were therefore ‘flawed’ for appeal purposes.
Even if the taxpayer’s careless error is a one-off (i.e. for which HMRC considers that it is not possible to set a penalty suspension condition), if the error occurred because of a record keeping weakness, the HMRC example mentioned above (in its guidance at CH83143) suggests that the penalty could still be suspended if a condition can be set to correct that weakness and avoid a possible future penalty arising.
HMRC does not have the exclusive right to propose conditions for suspended penalties. The tribunal can set suspension conditions, if HMRC’s conditions are considered to be flawed. In addition, in the Boughey case mentioned above, the taxpayer proposed his own suspension condition, which was that during any period of suspension his tax returns should be prepared by a qualified accountant. The tribunal decided that the penalty be suspended for two years, on condition that the taxpayer’s returns must be prepared during that period on his behalf by a chartered or certified accountant. As noted, a similar suspension condition was proposed by the appellant in the Testa case.
Finally, 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 (see Cobb v Revenue & Customs).
The above article was first published by Tax Insider (May 2015) (www.taxinsider.co.uk).