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Special Reduction of penalties

2nd Apr 2013
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FA 2007, Sch 24, para 11 provides that HMRC may reduce a penalty in the event of special circumstances. The legislation gives some example of what cannot constitute special circumstances (e.g: inability to pay, or the fact that an output tax error is reflected by an input tax error with a different taxpayer); however, it does not indicate what might be a special circumstance!

HMRC online guidance (CH170600) provides two specific areas where the reduction may apply:

  • An uncommon or exceptional event. Usually this would fall within the reasonable excuse provisions. However, the Tribunal has, in some cases, made a distinction between the two. Circumstances which cannot be considered a reasonable excuse have been accepted as special circumstances, and the penalty adjusted as a result.
  • Where the strict application of the penalty law gives a result which is contrary to the clear intention of the legislation.
  • HMRC guidance at CH170800 gives some further examples.
  • In one Tribunal case, a taxpayer had failed to register for VAT.  Income tax on profits was therefore overstated, but, due to a change in law, it could not be adjusted.  The overpaid income tax exceeded the VAT penalty. The Tribunal reduced the penalty to nil. (Robert Wells, TC02172)

HMRC Officers should consider whether a Special Reduction applies in any case where they apply a penalty.  I recommend that an adviser write to HMRC to ask them whether a Special Reduction may be appropriate. Further, if there are particular aspects of the case that may be relevant, you should ask HMRC to consider whether these might constitute special circumstances. If HMRC refuse the request it actually creates a further appealable decision, should the taxpayer client wish to take matters further.  I have found that the Tribunal is quite open to consider the issue of a Special Reduction, even if the usual ‘reasonable excuse’ option is unsuccessful.

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