The First-tier Tribunal (FTT) decision in the case of David Testa v HMRC (2013 UKFTT 151 TC, published on 1 March 2013) highlights the subject of suspended penalties and challenges the usual principles applied by HMRC when deciding whether such a penalty is appropriate.
David Testa (DT) negotiated a severance payment with his employer and received a P45, which included his salary. After his employment ceased he received the severance payment and a payslip showing the gross payment and tax deducted at the basic rate. DT completed his own tax return and unfortunately missed off the severance payment from his 2009/10 tax return. HMRC enquired into the return and the error was admitted and corrected. HMRC accepted that DT fully cooperated and proposed that a 15% penalty would apply.
DT wrote to HMRC asking for the penalty to be suspended on the basis that he would appoint a qualified adviser to complete his tax return for the next two years in order to avoid any further errors in the future. HMRC rejected his proposal on the basis that the error related to a ‘one-off’ event such that they could not therefore set specific, time bound and measurable conditions, to prevent it occurring again in the future. The FTT highlighted this as being a general policy of HMRC, not just the view of the case officer reviewing DT’s individual request.
DT appealed to the FTT stating that he was prepared to take steps to prevent the error occurring again (as detailed above) and that therefore the penalty should be suspended.
The FTT ruled that the penalty should be suspended on the basis that DT had proposed the ‘positive’ step of appointing a qualified adviser to prepare his tax return for the next two years – a request which could be viewed as being both time bound and measurable.
The FTT was critical of HMRC’s application of the suspended penalty legislation – which appeared to exclude all cases involving ‘one-off’ events – and stated that HMRC’s general policy in these cases ‘sits uneasily’. The FTT described the logic applied by HMRC as being ‘flawed’ and that HMRC were ‘in danger of taking too narrow a view of the legislation’ – legislation which was deliberately drafted to ensure it covered a wide variety of cases.
The FTT’s decision in this case is a welcome one and it is to be hoped that it will lead to a more sensible HMRC policy in this area. In DT’s case the penalty was £5,829 – making a trip to the tribunal worthwhile. Many penalties are not high enough to warrant the professional costs of doing this, so taxpayers need to rely on HMRC deciding to act fairly.
‘Suspension’ is an integral component of the penalty regime and should be considered and, where necessary, requested by advisers at the settlement stage of all enquiries. It is important to remember, however, that HMRC will review any suspended penalty cases to ensure that all the conditions for suspending a penalty are met. Should one condition be broken, HMRC will immediately impose the penalty and, with the exception of an expensive and time consuming judicial review, there is no right of appeal.
Gabelle specialises in advising clients and advisers where HMRC deem that a careless or deliberate error has occurred. For further information of this decision and the imposition of penalties generally, please contact TaxDesk on 490 0509 and ask for John Hood.