Case study: HMRC change decision regarding suspension of a careless penalty.

In this case study, we describe how our Tax Investigations & Dispute Resolutions team recently helped a client get her penalty for a ‘careless error’ suspended, after almost a year of unsuccessful negotiation (with only one letter to the HMRC caseworker).

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On 13 November 2015, HMRC wrote to the taxpayer (Mrs J) advising her, that both a car benefit and a medical benefit were undeclared on her 2011 tax return. Mrs J’s accountant subsequently advised HMRC that she had overlooked reporting the benefits on her Tax Return.  Mrs J accepted HMRC’s assessment for the benefits in relation to the year ended 5 April 2011. A request was made that should a penalty be applied in respect of the omission it be suspended on the basis that Mrs J would take appropriate steps to ensure that any such omission would not happen again.

The HMRC caseworker confirmed that it was their intention to charge a penalty under Schedule 24 Finance Act 2007 due to Mrs J’s perceived ‘careless behaviour’ and, furthermore, that there were no grounds for suspending the penalty. HMRC’s reasons for the non-suspension were that HMRC did not believe there was any realistic possibility of careless inaccuracies occurring within a suspension period, which could cause a penalty to be charged. HMRC also advised that they could not identify a specific (practical and measurable) condition or conditions that could be set to avoid an error in the future and that it was not enough for Mrs J to simply improve her systems and checks by retaining all tax related documents.

Our team advised HMRC that its reasons for the non-suspension were flawed. Mrs J continues to receive relevant taxable benefits and, therefore, without her making any corrective measures, further errors relating to the original inaccuracy could recur. We also advised that specific measurable conditions in addition to addressing the deficiencies of the underlying cause(s) could be set to encompass all risks of future careless inaccuracy that could be reasonably be identified. In summary, these conditions would bring Mrs J’s compliance up to the standard of a robust compliant taxpayer.

Our team also raised concerns that HMRC in mounting its technical argument had lost sight of the penalty quantum. Almost a year’s worth of correspondence had been exchanged with regards to the suspension issue for a potential penalty of under £1,000 and that no degree of common sense has been applied by HMRC in this case.

HMRC accepted our representations without substantive challenge and offered very generic suspension conditions in order to bring the matter to a conclusion. This was obviously great news for both Mrs J and her accountant and highlights the impact specialists can have on cases where such correspondence has become protracted.

Mark Taylor's view on the case

Buzzacott’s Head of Tax Investigations and Dispute Resolution, Mark Taylor gave his view on this case.

“I have seen a growing number of cases on suspended penalties where HMRC’s approach is inconsistent. Although I appreciate that each case should be dealt with on its own facts, it is only fair that a consistent approach is in operation by HMRC on suspension cases and where HMRC caseworkers do not interpret legislation or HMRC guidance instructions correctly we should not hesitate to challenge HMRC’s decisions.

Although I have some sympathy for HMRC officers attempting to follow Compliance Handbook instructions, which are HMRC’s interpretation of statute and case law, these are not updated to address Tribunal decisions and criticism. There have been numerous tribunal cases where HMRC has been held to have a flawed approach with regard to suspending penalties. Although I understand such cases may not set a legal precedent, HMRC is more than prepared to publicise First-tier tribunal decisions and rely on them when the decision is in its favour but not when the reverse is the case.”

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