Penalties for errors: here we go again!

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In a recent issue of ‘HMRC Enquiries, Investigations and Powers’, Mark McLaughlin highlighted a case in which HMRC’s approach to the imposition of a penalty for careless tax return errors was severely criticised by the First-tier Tribunal. Here’s the story…

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Some taxpayer appeals before the First-tier Tribunal should probably not reach that stage. For example, there may have been undue optimism on the taxpayer’s part about their prospects of success, or possibly a desire by the taxpayer to ‘have their day in court’.

Conversely, on some occasions, HMRC takes taxpayer appeals forward to a tribunal hearing where the circumstances are such that the matter should have been resolved before then. However, it is important that taxpayers stand their ground and are not deterred by the prospect of a tribunal hearing.

Severely criticised

For example, HMRC’s approach to the imposition of penalties for tax return errors (under FA 2007, Sch 24) was severely criticised in Pandey v Revenue and Customs [2017] UKFTT 216 (TC). Indeed, the tribunal pointed out that this was by no means the first case in which HMRC had suffered such criticism (which prompted the tribunal judge to begin his decision with: “Well, here we go again”!).

In Pandey, the appellant was an NHS paediatric heart surgeon. HMRC opened an enquiry (under TMA 1970, s 9A) into her tax return for 2009/10. The only figures entered on the return were for employment income from a hospital (CDD) of £12,179 and tax deducted of £2,590, and fees and subscriptions of £1,250. The self-assessment showed tax repayable of £1,699.

On completion of the enquiry, HMRC issued a closure notice (under TMA 1970, s 28A) showing additional tax of £11,567, on the basis that the appellant’s tax return for 2009/10 omitted employment income and PAYE tax deducted from two employments not shown on the return, and that tax relief for professional subscriptions was refused as supporting information had not been provided. HMRC subsequently issued a penalty assessment for careless tax return errors.

The First-tier Tribunal considered that the omission of the employment income and tax deducted from the appellant’s tax return was due to the carelessness of her agents at the time, which was attributable to the appellant, and that the appellant was careless in not checking what they had done for her.

No penalty

However, the tribunal noted a document from CDD, which clearly showed that the figures on the return for 2009/10 actually belonged to 2008/09. This overstatement of income and tax deducted had to be taken into account in the ‘potential lost revenue’ (PLR) calculation for penalty purposes. Furthermore, some net tax remained in the PLR calculation, which in the tribunal’s view had arisen because one or both of the employers in 2009/10 operated ‘BR’ tax codes and failed to deduct the amount of tax they should have done. The appellant would be entitled to a credit for the tax not so deducted (by virtue of SI 2003/2682, reg 185(5)). In the circumstances, the PLR became nil or negative.

The tribunal stated that even if it had not decided there was no PLR, it would have held that HMRC’s enquiry of ‘special circumstances’ (within FA 2007, Sch 24, para 11) was flawed in the judicial review sense, and the tribunal would have reduced the penalty to nil on that basis. HMRC had also given an incorrect reason for not suspending the penalty. The tribunal cancelled HMRC’s decision that the appellant was liable to a penalty.

After observing that the appeal should never have reached the tribunal, the judge directed HMRC to make representations to explain why costs should not be ordered against it, on the basis that its actions in ‘bringing, defending or conducting the proceedings’ were unreasonable (the appellant had flown from India to attend the tribunal hearing in Bristol).

Must do better!

The tribunal’s criticisms of HMRC in Pandey did not end there. It was considered ‘astonishing’ that HMRC has issued a determination of tax (under TMA 1970, s 28C) for the tax year 2007/08 in the sum of £50,000 to a PAYE only employee earning in the region of £60,000, with PAYE fully deducted in that year (NB HMRC had also applied for an attachment of earnings order for £53,108). The tribunal commented that the determination could not have been made to the best of HMRC’s information and belief (within s 28C(1A)).

The message from Pandey is to carefully monitor HMRC’s actions and consider challenging them in appropriate circumstances, including checking HMRC’s penalty notices (including its calculations of PLR, and penalty percentages), and whether HMRC has properly considered suspension of a careless penalty and/or whether HMRC’s consideration (if any) of special circumstances for a reduction in penalties was flawed (within FA 2007, Sch 24, para 17(3)(b)).