Andy Keates examines the various ways in which the taxpayer might oppose a penalty notice for carelessness, where there hasn’t been a deliberate error.
This website recently covered the case of Simon Fry, who appealed against a penalty for a careless error charged under FA 2007, Sch 24. While the first-tier tribunal (FTT) was able to settle the case fully by looking only at two of its aspects, the actual notice of appeal listed several other things which might – in other circumstances – have been material.
This article looks at penalty notices for carelessness, not those for deliberate errors. I have assumed the taxpayer will have co-operated as fully as possible with HMRC in establishing the correct tax position and has made all necessary disclosure following the detection of the error. This reduces the scope of the penalty to an amount between 15% and 30% of the potential lost revenue (PLR).
Carelessness, according to FA 2007, Sch 24, means failing to take reasonable care. The courts tell us that this should be looked at in terms of the level of care which it is reasonable to expect from a normal, typical taxpayer.
We don’t expect the taxpayer to have any special level of knowledge or insight, but we do expect them to be diligent – to appreciate the importance of getting things right to the best of their ability. Fry, incidentally, failed on this because he overlooked something which – in the opinion of the FTT – no reasonable person would forget.
If a third party supplies erroneous information to HMRC on the taxpayer’s behalf, a penalty may be charged to the taxpayer. However, the taxpayer has valid grounds to appeal if they can show that they personally had taken due care, and the failure was solely down to his agent (FA 2007, Sch 24, para 18(3)).
If there are special circumstances, HMRC can reduce or stay (ie not charge) a penalty, or agree to compromise terms (such as extra time to pay, instalments etc).
An inability to pay is definitely not a special circumstance. Equally, it is no use arguing that your under-assessed tax is balanced out by someone else having paid too much tax: two wrongs don’t make a right, and in any case, the legislation specifically prevents it.
What might special circumstances look like? Ill health perhaps, or a close family bereavement which made the taxpayer take their eye off the ball.
It will all depend on the facts, but if you can think of any external factors which prevented your client from exercising their normal high levels of care it may be worth appealing. Just be aware that HMRC doesn't want to use this provision too widely, so make it good.
HMRC too late
HMRC has to issue a penalty notice within 12 months of the under-assessment being rectified. If they issue the penalty later it is invalid. This is hardly ever going to happen, but you never know.
HMRC can suspend all or part of a penalty by specifying a time period (up to two years) and some conditions which the taxpayer must meet throughout that period. If the conditions are satisfied, and as long as the taxpayer doesn’t incur any other penalties for the full period, the suspended penalty is quashed. Otherwise, it becomes payable.
HMRC can only issue a suspension if they are able to impose conditions which “would help [the taxpayer] to avoid becoming liable to further penalties”. This means that HMRC can’t offer a suspended penalty for genuinely unique, unrepeatable or “one off” failures.
There is a specific right of appeal against a decision not to suspend a penalty, so it might be worth appealing and suggesting suitable behaviours which the taxpayer might adopt (such as use a recognised accounting software package for business records) to justify suspending the penalty (FA 2007, Sch 24, para 15(3)).
When the new penalty regime was introduced in 2009, HMRC’s policy staff made it very plain that they did not wish it simply to become a sort of stealth tax. The policy preference would be to educate taxpayers to get things right next time, and suspension was seen as a valuable tool. That preference may not have fully filtered down to all operational staff, so an appeal might just remind them.
It’s too much
One of the advantages of being in the European Union is that the UK is subject to the judicial principle of “proportionality”. The state cannot lawfully impose a penalty which is excessive by reference to the alleged failure.
This is probably not going to be a viable ground for appeal in most instances of carelessness. Where the PLR is simply an amount of tax which wasn’t paid, or was repaid in error, no court is going to agree that a 15-30% penalty is excessive.
Where it may be appropriate is cases (such as Simon Fry) where the error relates to a loss incorrectly claimed and carried forward: in such cases, the PLR is 10% of the carried forward loss. For Fry, there was a £10m loss, carrying a minimum penalty of over £150,000 (the actual tax relief he had claimed, on the small part of the loss which he had so far used, was only £35,000).
It would be worth advancing an appeal on the grounds that charging the taxpayer a penalty based on 15% of some tax relief they haven’t yet claimed was a bit disproportionate.
No reasonable prospect
Mr Fry didn’t need to convince the FTT that his penalty was disproportionate to his carelessness. Instead, the judges used a separate provision which applies specifically to these instances of an incorrect loss being carried forward.
If, given “the nature of… [the taxpayer’s] circumstances, there is no reasonable prospect of the loss being used to support a claim to reduce a tax liability”, the penalty must be reduced to zero (FA 2007, Sch 24, para 7(5)).
Fry had left the UK and was planning to settle long term in the USA, and there was very little likelihood that he would ever need to use those losses. The judges pointed out that you don’t need to show that it’s impossible to use the losses in future; all you need to show is that any hypothetical scenarios in which you do get to use the losses are so unlikely as to be unreasonable.
HMRC’s official policy is that the penalty regime is not just a fund-raising mechanism; there are various ways to oppose a penalty and – in the right circumstances – reduce, postpone or eliminate it altogether.