Surprise ruling when a self assessment penalty can be suspended
When a penalty is imposed by HMRC for careless inaccuracies in a self assessment tax return it can, in certain cases, be suspended for two years. The intention is to support those who try to meet their tax obligations by allowing them time to improve their systems, thereby helping people to avoid penalties for inaccuracies in the future.
Penalties will only be suspended where HMRC:
- can set conditions to help a taxpayer avoid penalties for similar inaccuracies in the future; and
- believe that a taxpayer can meet these conditions.
If a penalty is suspended then the taxpayer will not have to pay it if they satisfy HMRC that they have met the conditions at the end of the suspension period and they have not incurred another penalty within that time.
HMRC will not suspend penalties for an error that was deliberate or deliberate and concealed. Nor will they suspend penalties for careless inaccuracies if:
- HMRC cannot set specific conditions to help a person avoid similar inaccuracies in the future; or
- past behaviour indicates that it is unlikely they will comply with the suspension conditions; or
- the penalty arises from an attempt to use an avoidance scheme.
Given this criteria it was surprising that a First Tier Tax Tribunal ruled that the omission of a 'one-off' severance payment qualified for suspension.
David Testa was employed as a Chief Executive of Gatehouse Bank PLC up until August 2009 when the employment was terminated. Mr Testa was issued with his P45 and shortly afterwards he received a severance payment of £213,600. He also received a further payslip from Gatehouse showing the payment to him of the severance payment plus a small amount of basic pay and accrued holiday pay.
The last payslip was filed with the other Gatehouse papers and the P45 kept with Mr Testa's tax papers for the purpose of filling in his tax return, which was similar to his previous practice of keeping and using his form P60 for completing his tax return. When he came to completing his 2010 self assessment tax return he only entered the figures shown on his P45, leaving out the severance payment. As a result of this omission Mr Testa under-declared income tax of nearly £39,000.
When HMRC checked his return and wrote to Mr Testa he immediately acknowledged the error and provided a full explanation as to how it arose and accepted that it was a careless error. The explanation was accepted and HMRC reduced the penalty down to 15% of the under-declared tax, ie nearly £6,000.
Mr Testa made several representations to HMRC to have the penalty suspended on the condition that he would engage a tax adviser to avoid future inaccuracies in his tax returns. Each time however HMRC refused on the grounds that the termination payment was a 'one-off' which would probably not occur again in the future and as such no conditions could be set by the Revenue to prevent similar inaccuracies in the future.
On the two occasions that Mr Testa had put forward his proposals for suspension of penalties HMRC failed, each time, to give any indication as to why they did not consider it met the requirements of the legislation beyond their standard statement that isolated incidents were not appropriate to be considered for suspension. No evidence existed that the Revenue had considered the taxpayer's suggestion leading the tribunal to conclude that HMRC's actions were flawed for the purposes of the penalties legislation.
Furthermore Mr Testa's past compliance record was good and he would use a tax adviser to assist him with future tax returns.
All this was enough for the tribunal to order HMRC to suspend the penalty.
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