What powers does HMRC have to suspend tax penalties?
John Flood considers what powers HMRC has to suspend penalties and how this can result in taxpayers avoiding the financial penalty completely.
In cases involving careless inaccuracies in returns or documents, HMRC may agree a suspension of the penalty instead of its immediate imposition. If the conduct leading to the default has been deliberate, or deliberate and concealed, then there is no power to suspend the penalty.
A penalty may be suspended for a period of up to two years. The period of suspension is determined by how long the HMRC officer believes the taxpayer will need to meet the imposed conditions.
If the suspension conditions imposed are met and the taxpayer has complied with all their obligations to make timely and error-free returns during the suspension period, then the penalty is discharged. If suspension conditions are not met or there has been non-compliance in regard current tax returns, then the penalty becomes payable together with any new penalties due.
HMRC can suspend a penalty if it determines that one or more conditions will help the taxpayer to avoid penalties for similar defaults in the future.
The Revenue will, therefore, consider suspension if conditions can be imposed which are SMART, which stands for:
- Specific: it must be directly related to the cause of the inaccuracy
- Measurable: the taxpayer must be able to show whether they have met the condition
- Achievable: the taxpayer must show HMRC that they are able to meet the condition
- Realistic: HMRC can realistically expect that the taxpayer will meet the condition
- Time-bound: the taxpayer must meet the condition by the end of the suspension period
HMRC factsheet CC/FS10 explains that it must be possible to impose a specific condition which is related to the cause of the inaccuracy, and that condition must be measurable. This is sensible as it must be known whether the taxpayer has met the conditions imposed, or not, before further action is taken.
The conditions must also be achievable for that particular taxpayer, as they will be expected to be able to meet conditions imposed otherwise there is no point in the suspension.
Finally, the conditions must be realistic.
HMRC will require a positive agreement to any conditions imposed. The conditions can be discussed between the taxpayer and HMRC and it is important to make sure everything is clear to avoid any future difficulties.
The HMRC officer will encourage the taxpayer’s adviser to be involved. Once everything has been agreed then a formal Notice of Suspension will be sent out. This will show the conditions imposed and for how long.
To determine whether the penalty is actually payable the taxpayer will be approached by HMRC at the end of the suspension period. If the taxpayer can satisfy HMRC that the conditions imposed have been met and no further penalty has been incurred, the penalty will be discharged at the end of the suspension period.
HMRC’s factsheet CC/FS10 mentions that penalties arising from careless inaccuracies involving tax avoidance schemes are unlikely to be suspended.
Chance to appeal
If the matter is disputed then there is an opportunity to provide further information to HMRC to seek an independent review of the decision not to discharge the penalty and a right of appeal. For an appeal to succeed it must be shown that HMRC’s decision not to suspend the penalty was flawed when considered in the light of the principles for judicial review.
In other words, that no reasonable body could have reached that decision, took into account an irrelevant factor, or disregarded something to which they should have had regard. If the tribunal allows an appeal then there can be a further appeal as to the conditions which HMRC decide to impose following the tribunal case.
When the tribunal decides
Many disputes in this area have come before the first tier tribunal (FTT). Some involve the failure by HMRC to consider the issue of suspension at all, in these cases the FTT will make the decision on suspension themselves, generally in favour of HMRC as there is usually no material to suggest the decision was incorrect.
A common issue before the tribunals is whether a one-off error precludes the question of suspension. HMRC contends this is correct and although a number of cases support this view, other decisions have allowed an appeal where a condition has required the use of a third party to check and submit a return.
The key issue is whether the condition is simply not to submit careless returns in the future or whether there is a condition to seek accountancy advice before submitting a return, (Ian Hall  UKFTT 412), the latter being a proper basis for suspension.
In Eric Eastman ( UKFTT 527), the tribunal considered the acid test is to ask whether the taxpayer could have reasonably done differently something that would have avoided the original error.
In Paul Steady ( UKFTT 473), it was said that it could be argued the question is whether the purpose of the suspensive conditions is to bring the standard of compliance up to the level of a prudent taxpayer.
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John Flood is a retired barrister and ex-employee of HMRC. He is a co-author with George Rowell (Exchange Chambers, Manchester) of the new book, Tax Penalties: A Practitioners Guide (Sweet & Maxwell Thomson Reuters).