HMRC floored and flawed

Tribunal not impressed with HMRC’s stubbornness

It was another bad day at the office for HMRC as they lost another appeal at the First Tier Tax Tribunal, this time over their refusal to suspend a penalty of a few hundred pounds in respect of a careless error made on a personal tax return.

At the end of each tax year, Paul Steady would visit or telephone the banks and building societies with whom he held savings accounts and ask for certificates of interest paid to him for the tax year just ended. In May 2014 he went into Lloyds Bank and asked for such a certificate for interest paid in the year ended 5th April 2014. However, neither he nor his accountant noticed that the certificate showed interest paid out in the tax year 2014/15, ie year ending 5th April 2015. Consequently, he declared the wrong amount of interest in 2013/14 which led to an underpayment of tax by £2,458.

Mr Steady had also made a similar error on his previous years’ tax return but the tax calculation was in HMRC’s favour and he had overpaid tax and therefore due a refund.

HMRC determined that the error in the 2013/14 tax return was due to carelessness and assessed Mr Steady to a penalty of £369.

Where a tax return contains an inaccuracy that was due to the taxpayer failing to take reasonable care, then that error is deemed to be ‘careless’ but HMRC have the power to suspend such penalties where the conditions allow them to.

Suspension of penalties is seen as a way of encouraging taxpayers to improve their systems and procedures and a careless penalty can be suspended for a maximum of two years, provided the person complies with a number of conditions. These conditions relate to eradicating further problems. Provided the conditions are adhered to, then the penalty is cancelled at the end of the suspension period.

Before HMRC agree to suspension of a penalty a taxpayer must be able to satisfy SMART conditions:

• Specific – the condition must be directly related to the taxpayer.
• Measurable – the taxpayer needs to be able to demonstrate that the conditions have been met. At the end of the suspension period the onus is on that person to satisfy HMRC that they have met the condition.
• Achievable – the taxpayer must be able to meet the conditions. The aim is to encourage future compliance so there is no point in setting a condition which can never be met.
• Realistic – which means HMRC can realistically expect that a taxpayer will meet the condition.

A penalty can only be suspended therefore if it will help a person to avoid becoming liable to further penalties for careless errors.

HMRC refused to suspend the penalty levied on Paul Steady, giving the reason:

“We cannot suspend any of this penalty. As the error arose through lack of care no measurable suspension conditions can be set. There are no specific, time bound, measurable conditions that can be set to help you avoid careless inaccuracies in the future.”

Mr Steady’s accountant disagreed and challenged HMRC as to whether her clients’ behaviour was careless and their decision not to suspend the penalty. She said that it was possible for measurable conditions to be set which could help Mr Steady avoid penalties in the future and suggested, for instance, that her client could maintain a schedule of all investments held and monitor this annually to ensure that interest was accurately recorded and returned in each tax year. HMRC rejected this and confirmed their view that Mr Steady’s behaviour was careless and stated:

“As the inaccuracy arose simply due to a lack of sufficient care and attention from Mr Steady……I do not consider that any SMART conditions can be put in place to prevent future occurrences of this.”

Even though a review of this decision was requested, the reviewing office simply upheld their colleagues’ original decision and so an appeal was progressed to Tribunal.

The Tribunal judge found that HMRC’s refusal to suspend the penalty was flawed as they reached a decision that was Wednesbury unreasonable (or irrational).  A reasoning or decision is Wednesbury unreasonable if it is so unreasonable that no reasonable person acting reasonably could have made it. HMRC had argued that because Mr Steady was careless in filing his returns it was impossible to set SMART conditions but penalties only arise in the case of careless or deliberate behaviour and it is only penalties for carelessness that can be suspended. It was therefore not impossible to establish suspension conditions. In fact, quite the contrary, as it was because Mr Steady was careless that he was entitled to have his penalty suspended.

The judge found in favour of Mr Steady and ordered HMRC to suspend the penalty.

Although Mr Steady had only appealed against the penalty suspension and not whether his actions were careless, the judge believed that he had a strong case for arguing that his behaviour was not careless. Just because there is an error in a tax return does not mean that a taxpayer has been careless.

In criticism of HMRC’s behaviour, the judge said:

“To levy a penalty of £368.65 on a taxpayer who heretofore has had a good compliance record over many years, and then to refuse to consider suspension of those penalties, does not reflect well on HMRC.”