Gabelle Tax Analysis: First-tier Tribunal allows suspension of a VAT penalty

The First-tier tribunal’s decision in Shelfside (Holdings) Ltd (published on 22 May 2012) highlights the availability of ‘suspended’ penalties and that HMRC do not always apply them correctly.

The case involved errors in the company’s partial exemption calculations (for the VAT periods 8/10 and 11/10) with potential lost tax revenue of £53,160.60. In HMRC’s opinion, the company’s actions were deemed to have been ‘careless’ and HMRC raised a 15% penalty.

The company appealed on the basis that, first, they had not been careless and, secondly, even if the tribunal were to find they had not taken reasonable care, the penalty should be suspended under paragraph 14, Schedule 24 FA2007, or mitigated in some way.

The tribunal found that the company had not taken reasonable care by not seeking professional VAT advice; however, due to the confusing and difficult nature of the partial exemption calculation, it found that the penalty should have been suspended.

Suspended penalties were introduced in the 2007 Finance act. Paragraph 14, Schedule 24 provides HMRC with the power to suspend all or part of the penalty, provided the person complies with the conditions imposed. The conditions could be on a specific action which may need to be completed – sometimes within a specified time scale.

It is important to note that a penalty cannot be suspended if the actions resulting in the inaccuracy are found to be deliberate.

Advisers who are entering penalty negotiations may wish to consider requesting a suspension of the penalty and then working with HMRC to put together achievable compliance conditions for their clients going forward.

Vaughn Chown is a Partner at Gabelle LLP. He can be contacted at vaughn.chown@gabelletax.com or via TaxDesk on 0845 4900 509.

John Hood is a Director at Gabelle LLP. He can be contacted at john.hood@gabelletax.com or via TaxDesk on 0845 4900 509.