A “special reduction” can reduce a penalty to nil, and can be made in unusual or exceptional circumstances, or where the size of the penalty would clearly be at odds with HMRC’s underlying motive to encourage compliance.
Given those criteria, one might expect a special reduction to be rare. However, HMRC gives the qualifying example of the transfer of a VAT-registered business involving father and son, which could incur a VAT penalty if not properly notified to HMRC but where there was no overall loss of VAT because the son effectively stepped into his father’s shoes (as fellow author and VAT specialist Andrew Needham will testify, this occurs all too frequently in practice!).
HMRC has the power to “suspend” a penalty for careless (not deliberate) errors. Broadly, the taxpayer is on probation, and provided he can prove that he has obeyed the conditions imposed on him and no further careless errors are made during the suspension period (which can be up to 2 years), the penalty is cancelled.
This is valuable because a substantial number of careless mistakes come to light during the enquiry process: as such, even if the taxpayer makes a full disclosure, etc., then the penalty cannot normally be reduced below 15%. In such cases, suspension may be the only route to (eventually) reducing the penalty to nil.
Not only does HMRC have the power to suspend those penalties, its own manuals say inspectors must consider suspending errors for careless mistakes (see HMRC’s Compliance Handbook manual at CH83110).
This is important because there have been tax tribunal cases which have found in the taxpayer’s favour, at least partly because HMRC did not properly consider whether or not a penalty could be suspended.
Conditions for suspension
HMRC’s guidance manual requires:
•A “generic condition” that all tax returns (for any tax) must be filed on time within the probationary “suspension period” (CH83155).
•At least one condition tailored to the case that helps the taxpayer avoid a further inaccuracy penalty (CH83154).
• “One-off” mistakes that are unlikely to happen again cannot be suspended (CH83143).
The legislation states:
•HMRC may suspend all or part of a penalty only if compliance with a specified condition will help the taxpayer avoid further careless error penalties
•...that’s about it!
The legislation does not require all tax returns to be filed on time (HMRC’s “generic condition”) although it is easy to see why HMRC might want to impose the condition.
The legislation does not say that a “one-off” mistake cannot be suspended.
The tax tribunal says…
There have admittedly been some cases that have followed HMRC’s line and rejected the suspension of penalties for one-off errors; but the more recent case of Testa v HMRC should help. The judge happily found that the penalty for omitting a redundancy payment from the taxpayer’s return (which everyone agreed was unlikely to happen again in the near future) could be suspended provided a meaningful condition could be set to avoid careless errors in future – in this case, having the returns prepared by a qualified professional adviser.
Practical Tip :
In enquiries, penalties can catch out the unwary – do keep them in mind.
We have set out a number of possible routes above to counter the imposition of penalties – or to reduce them by taking prompt action.
Even if a penalty is charged, it can often be suspended, potentially more often than HMRC currently accepts – but do bear in mind that telling HMRC “it’ll never happen again” might then mean they will try to argue it cannot be suspended!