Self Assessment – Suspension of HMRC Penalties

HMRC penalties could be suspended – conditions apply

Where a tax return contains an inaccuracy that was due to the taxpayer failing to take reasonable care, then that error is deemed to be ‘careless’ and carries a maximum penalty of 30% of the tax lost due to the error. HMRC do however have the power to suspend such penalties where the conditions allow them to.

Suspension of HMRC penalties is seen as a way of encouraging taxpayers to improve their systems and procedures. A careless penalty can be suspended for a maximum of two years provided the person complies with a number of conditions. These conditions relate to eradicating further problems. Provided the conditions are adhered to, then the penalty is cancelled at the end of the suspension period.

This would appear to be good news for the honest person who has made a genuine mistake in completing their tax return. Ah yes but here’s the catch. A HMRC penalty can only be suspended if it will help a person to avoid becoming liable to further penalties for careless errors.

Where an error is a one-off, e.g failing to report a capital gain, HMRC’s stance is that no condition is capable of being set to avoid another careless error of this type.

Failed to include pension

In the First Tier Tax Tribunal (UKFTT) case of Havercroft v HMRC (2015), Mr Havercroft failed to include pension income on his 2013 Self Assessment Tax Return which he had only started to receive in the year ended 5th April 2013. Following an enquiry into the return, HMRC levied a penalty of 15% of the additional tax due to Mr Havercroft’s carelessness, which the taxpayer duly appealed.

HMRC refused to suspend the penalty as they maintained that it was a ‘one-off’ and the tribunal agreed. The judge concluded that the error was brought about by Mr Havercroft not paying attention to the tax return or the accompanying notes and that it was therefore reasonable for the Revenue to take the view that there were no conditions that would help Mr Havercroft to avoid future HMRC penalties.

HMRC’s attitude to one-off careless errors is only based on their interpretation of the legislation and in Fane v HMRC (UKFTT 2011), the tribunal stated that the suspended penalty legislation did not prevent one-off errors from being included, although they still took HMRC’s side!

In Boughey v HMRC (UKFTT 2012), the taxpayer, Mr Boughey accepted that he made a careless mis-statement that led to understating his tax liability by £12,000 and a subsequent penalty imposition of £1,800. In response to HMRC’s rejection of his request for suspension of the penalty, Mr Boughey suggested that a condition could be imposed whereby his tax returns would be prepared by qualified accountants during the suspension period. This was accepted by the tribunal.

Certain parallels occurred in Patel v HMRC (UKFTT 2015), where a penalty for careless inaccuracies contained in Mr Patel’s tax return were suspended by the tribunal for a period of 24 months on condition that not only did Mr Patel use a professional accountant or tax adviser to prepare his tax returns but also that the returns would be filed, and the tax paid, on time.

Whilst being vigilant in preparing your tax return is the best policy, we are all human and, by definition, all make mistakes. Whilst carelessness is best avoided it won’t spell disaster if any subsequent penalty can be suspended.

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