HMRC has significant powers to issue penalties for a wide range of reasons (which include imprisonment, but this is not the subject of this article). A summary of the penalty regime here and an overview from HMRC here.
In some circumstances, HMRC can decide to suspend a penalty, or suspension can be requested by a taxpayer.
I thought it worthwhile to look closer at suspension and the guidance HMRC has issued to its officers.
Suspension can only apply to errors which are “careless inaccuracies” in tax declarations, so a penalty for a deliberate error cannot be suspended.
Penalty suspension only applies if HMRC is able to set at least one suspension condition, with the intention that it will help a business avoid penalties for similar inaccuracies in the future.
When can a penalty be suspended?
HMRC use the standard SMART test
- Specific – it must be directly related to the cause of the inaccuracy
- Measurable – a business will need to demonstrate that it has met the condition
- Achievable – a business will need to show that it is able to meet the condition
- Realistic – HMRC must realistically expect that a business will meet the condition
- Time based – a business must meet the condition by the end of the suspension period
These conditions are in addition to the condition that all returns are filed on time during the suspension period.
When HMRC will not suspend a penalty
- HMRC will not suspend penalties if it is not possible to set any SMART conditions
- If HMRC believes that it is unlikely a business will comply with any of the suspension conditions
- If a business is penalised for an error which arose because it attempted to use a tax avoidance scheme
An example is if HMRC do not believe that an improved record keeping system will/can be put in place.
If HMRC decide not to suspend a penalty, it represents an appealable decision.
Agreement to suspension
Before HMRC will suspend a penalty, a business will need to agree conditions with it. A business will need to:
- understand the conditions
- meet the conditions
- agree that the conditions are proportionate to the size of the inaccuracy
- agree that the conditions take a business’ circumstances into account
- be clear to both the business and HMRC when the conditions have been met
After a taxpayer has agreed the conditions HMRC will send a Notice of Suspension (NOS).
Length of the suspension period
The length will depend on how long HMRC considers that it will take a business to meet the specific suspension conditions. The maximum suspension period allowed by law is two years but normally it would be less than this.
Action during the suspension period
During the suspension period, a business must meet the conditions it agreed to. It must also ensure that it does not submit any other inaccurate returns, as this is likely another inaccuracy penalty will apply. If another inaccuracy penalty is incurred during the suspension period, the previously suspended penalty must be paid in full.
End of suspension period
At the end of the suspension period HMRC will ask whether the conditions have been fully met. Officers will check records and ask for other evidence, to ensure compliance. If HMRC agree that the conditions have been met, the original penalty will be cancelled. If it is decided that they have not, the penalty must be paid in full. A business cannot appeal against such a decision; however, it may be the subject of judicial review.
Appeal
An appeal may be lodged against:
- any Penalty Notice (and/or ask for it to be suspended)
- HMRC’s refusal to suspend a penalty
- the conditions HMRC have set relating to a suspension
Special reduction
In addition to suspension, HMRC is able to reduce a penalty in “special circumstances”.
Penalty legislation provides for common circumstances and these are therefore taken into account in establishing the liability to and/or level of a penalty.
Special circumstances are either:
- uncommon or exceptional, or
- where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law
To be special circumstances, the circumstances in question must apply to the particular individual and not be general circumstances that apply to many taxpayers by virtue of the penalty legislation.
It is very common that HMRC will not offer special reduction. This does not prevent a taxpayer asking it to consider one. Inspectors are supposed to consider special reduction before deciding on the amount of a penalty, but experience insists that this is uncommon and many are unaware of this particular area of internal guidance.
Summary
If a Penalty Notice is received, we highly recommend that it is reviewed and challenged as appropriate. In a significant number of cases it is possible to mitigate or remove a penalty. If that is not possible, suspension or special reduction may be possible. Never just accept a penalty!