Tax Return Penalties: HMRC’s Fatal Flaw

Everyone makes mistakes. Fortunately, HM Revenue and Customs (HMRC) has the power to suspend a penalty for a ‘careless’ error in a tax return (FA 2007, Sch 24, para 14). HMRC officers are instructed to consider the suspension of every penalty for a careless error (see HMRC’s Compliance Handbook manual at CH83131).

Suspending penalties

However, HMRC can only suspend a penalty broadly if compliance with the suspension condition would help the taxpayer to avoid becoming liable for further penalties for careless errors (Sch 24, para 14(3)). HMRC apparently interprets this condition to mean (among other things) that penalties cannot be suspended in respect of ‘one-off’ errors. This approach has resulted in a number of cases before the tribunal.

There is a right of appeal if HMRC decides not to suspend a penalty (and also against the conditions set by HMRC for the penalty to be suspended). On an appeal against HMRC’s decision not to suspend the penalty, the tribunal can order the penalty to be suspended only if it considers that HMRC’s decision not to do so was ‘flawed’ when applying the principles in judicial review proceedings (Sch 24, paras 17(4), (6)).

Professional help

Taxpayers who have made careless errors when preparing their own tax returns might propose a suspension condition that future tax returns are prepared by a suitably qualified professional. This has been considered to be an acceptable condition in some cases (e.g. Testa v Revenue and Customs [2013] UKFTT 151 (TC)). However, despite the tribunal’s comments in Testa, HMRC has not always looked favourably upon this suspension condition.

For example, in Duncan v The Commissioners for Revenue and Customs [2016] UKFTT 709 (TC), the taxpayer made careless errors in his tax return for 2012/13 (i.e. the omission of employment income of £30,000 paid as part of a severance payment, the omission of a beneficial loan of £1,466 from an employer, and the overstatement of pension contributions by £15,988). HMRC sought to impose a penalty in respect of those errors. The taxpayer requested that the penalty be suspended on certain conditions, which included that he appointed a qualified adviser to prepare his tax return for the next two years.

Flawed decision

HMRC refused to suspend the penalty, on the basis that they would only suspend a penalty where the inaccuracy resulted from a weakness in the person’s accounting or record keeping system, and where they could identify specific improvements which would help to prevent the person making the same or similar errors in future. HMRC considered that as the failure was mainly due to a lack of knowledge on termination payments and personal pension contributions, there was no weakness in the taxpayer’s accounting or record keeping system which could be addressed by a suspension condition.

The First-tier Tribunal noted that HMRC had apparently disregarded the taxpayer’s main proposed condition that he appoint a qualified adviser to assist with completing his tax returns for two years. The tribunal also found that HMRC erroneously considered that the purpose of the suspension provisions was to correct record keeping systems, rather than the wider purpose of enabling taxpayers to produce tax returns without careless errors. HMRC’s decision not to suspend the penalty was therefore flawed, as it was based on an error of law. The tribunal considered that a condition requiring the taxpayer to retain a qualified tax adviser to assist in the completion and submission of self-assessment tax returns for two years would assist him in producing tax returns free from careless errors. HMRC was ordered to suspend the penalty on that basis.

Practical point

HMRC appears to rely on its own guidance when considering whether to suspend penalties, which states its interpretation of the law. However, in Duncan the tribunal commented: “…while guidance on how to apply that discretion, such as department policy, can be helpful, it is still the case that HMRC should exercise that discretion and not simply follow policy without considering whether it is appropriate to a particular case where they have discretion.” Taxpayers and advisers should consider whether HMRC has applied the law correctly if it refuses to suspend a penalty for a careless error, and be prepared to appeal its decision to the tribunal, if necessary.

The above article was first published in Tax Insider in February 2017 (

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