DECISION
1.
This is an appeal by Ms Roche against penalties for careless
inaccuracies in her 2008/9 tax return. The amount of penalties under appeal is
£5,490.62. But contained within the penalty assessment is an amount of £160.65
which has been suspended by HMRC and is not under appeal.
2.
We heard evidence from Ms Roche and a bundle of documents was presented
to us.
Background Facts
3.
The background facts are not in dispute and we find them to be as
follows.
4.
Ms Roche is a surveyor by profession and was employed by Legal and
General Resources Limited. She had purchased a derelict house which she was
renovating, with a view to moving into it as her home once the renovations had
been completed. Ms Roche had taken out a mortgage to pay for the renovations.
During 2007 she undertook a stressful project at work outsourcing her
department and relocating it to a new office. She was then suddenly and
unexpectedly made redundant in late April 2008. This came as a complete shock
to her. She had not yet completed the renovation of the derelict house, but no
longer had any income to meet the costs. She considered selling an investment
property that she owned, but the property market crashed, and she was unable to
sell the property. She was worried that she would not be able to sell her old
house at all. She tried to transfer her mortgage from her old to her proposed
new home, so that she could rent out her old home, but because of her reduced
financial circumstances, her mortgage lender refused consent. She was under
considerable stress, as she did not know if she could finish the refurbishment
of her house or sell her properties.
5.
In the end Ms Roche decided to sell her home. In order to do so she had
to "de clutter" by putting books, furniture and paperwork into
storage. Included amongst the papers that were boxed up and placed into
storage were the documents relating to her redundancy payment. Ms Roche took
the view that she did not need these, as she believed that tax had been
deducted from the payment, and so no further tax was due, and the amounts would
be included in the P60 and other tax records that she retained specifically so
that she could complete her tax return in due course. Eventually, after
reducing the price for her home, she was able to sell it.
6.
Ms Roche completed her tax return for 2008/09 online on 22 January
2010. Before starting to complete the forms online, Ms Roche checked that she
had all relevant paperwork. She did not seek assistance from HMRC or a tax
advisor as she did not consider that there were any issues arising out of her
tax affairs that needed clarification.
7.
As part of the online process, taxpayers are required "tailor"
their tax return by answering a series of "yes/no" questions about
the kinds of income and payments they had received during the year. The
answers to these questions are then used by HMRC's system to decide which
sections of the tax return are set out on screen for the taxpayer to complete.
The intention is that taxpayers are not burdened with having to review and
consider sections of the tax return that are irrelevant to them. When
"tailoring" her return, Ms Roche answered "no" to the
question "did you receive any other UK income, for example employment lump
sums, share schemes, life insurance gains, any other income?" In
consequence, the section of the tax return which included "redundancy and
other lump sums and compensation payments" was supressed. Ms Roche told us
that she had answered "no" to this question as she considered that a
redundancy payment was of the nature of "salary" and was not
"other income".
8.
In completing her tax return online, Ms Roche neglected to include the
following items of income
(a)
Redundancy payment £194,748.65
(b)
Tameside MBC pension £332.79
(c)
Health insurance (benefit in kind) £31.00
(d)
Bank interest £4,284.88
9.
Ms Roche explained that she had omitted the redundancy payment from the
tax return because it was not included in the P60 or any other tax papers
provided by Legal and General Resources Limited. In any event she had assumed
that as tax had been withheld from the payment, there was nothing further to
declare.
10.
We note that her former employer was correct in omitting the payment
from the tax papers was because it was paid after her employment had ceased.
And for this same reason, tax would have been withheld under the PAYE
regulations from the redundancy payment at basic rate only, and not at Ms
Roche's marginal rate.
11.
Ms Roche could give no explanation as to why the Tameside MBC pension
was omitted from the return. She had obtained a copy of the P60 from Tameside
MBC, and the payment was included on the working sheet she had prepared before
transferring the amounts onto the online system.
12.
Ms Roche did not declare the benefit-in-kind relating to her health
insurance as she had thought that the benefit had ceased at the end of the
2007/08 tax year, but in fact the benefit had continued for a short period into
2008/09. As with the redundancy payment, the benefit-in-kind had also not been
included in her P60 or other tax papers that she had received from Legal and
General Resources Limited.
13.
HMRC opened an enquiry into Ms Roche's tax return on 2 December 2010,
and the enquiry notice told Ms Roche the amounts that it believed she had
failed to return.
14.
Following correspondence and telephone calls between Ms Roche and HMRC,
HMRC issued a closure notice on 21 July 2011 adjusting Ms Roche's
self-assessment to take account of the omitted items of income. On 2 February
2011 HMRC calculated penalties at £5490.62, and offered to suspend penalties of
£160.65 in respect of the bank interest. The reason given by HMRC not to
suspend the other penalties was because the occurrence was unlikely to be
repeated, and therefore there were no measurable suspension conditions that
could be set.
15.
The penalties were calculated on the following basis.
Potential lost revenue (PLR): £36,604.37
Quality of disclosure: 100%
(telling 30%, helping 40% and giving access 30%)
Penalty calculation
|
1
|
Quality
of disclosure
|
100%
|
(a)
|
|
2
|
Maximum
disclosure reduction
|
|
|
|
|
Maximum
penalty percentage
|
30%
|
(b)
|
|
|
Less
|
|
|
|
|
Minimum
penalty percentage
|
15%
|
(c)
|
|
|
Equals
|
|
|
|
|
Maximum
disclosure reduction
|
15%
|
(d)
|
|
3
|
Reduction
for disclosure percentage (d)x(a)
|
15%
|
(e)
|
|
4
|
Penalty
to be charged (b)-(e)
|
15%
|
(f)
|
|
5
|
Penalty
chargeable PLR x (f)
|
£5490.65
|
|
16.
A formal assessment for the penalties was issued on 8 August 2011. The
penalty assessment was then subject to a review by the HMRC Appeals and Reviews
team. By a letter dated 13 May 2011 the assessment was upheld on review on the
same grounds as the original decision.
The Law
17.
Since 1 April 2008, penalties for errors in tax returns have been
governed by Schedule 24, Finance Act 2007.
18.
The paragraphs of Schedule 24 that are relevant to this appeal are set
out below:
1(1) A penalty is payable by a person (P) where—
(a) P gives HMRC a
document of a kind listed in the Table below, and
(b) Conditions 1 and 2
are satisfied.
(2) Condition 1 is that the document contains an
inaccuracy which amounts to, or leads to—
(a) an understatement of
P's liability to tax,
(b) a false or inflated
statement of a loss by P, or
(c) a false or inflated
claim to repayment of tax.
(3) Condition 2 is that the inaccuracy was careless
or deliberate (within the meaning of paragraph 3).
[…]
|
Tax
|
Document
|
|
[…]
|
|
|
Income tax or capital
gains tax
|
Return under section 8 of
TMA 1970 (personal return).
|
|
[…]
|
|
[…]
3(1) Inaccuracy in a document given by P to HMRC is—
(a) “careless” if the
inaccuracy is due to failure by P to take reasonable care,
[…]
4(1) The penalty payable under paragraph 1 is—
(a) for careless action,
30% of the potential lost revenue,
[…]
5(1) “The potential lost revenue” in respect of an
inaccuracy in a document or a failure to notify an under-assessment is the
additional amount due or payable in respect of tax as a result of correcting
the inaccuracy or assessment.
[…]
9(1) A person discloses an inaccuracy or a failure
to disclose an under-assessment by—
(a) telling HMRC about
it,
(b) giving HMRC
reasonable help in quantifying the inaccuracy or under-assessment, and
(c) allowing HMRC access
to records for the purpose of ensuring that the inaccuracy or under-assessment
is fully corrected.
(2) Disclosure—
(a) is “unprompted” if made
at a time when the person making it has no reason to believe that HMRC have
discovered or are about to discover the inaccuracy or under-assessment, and
(b) otherwise, is “prompted”.
(3) In relation to disclosure “quality” includes
timing, nature and extent.
10(1) Where a person who would otherwise be liable
to a 30% penalty has made an unprompted disclosure, HMRC shall reduce the 30%
to a percentage (which may be 0%) which reflects the quality of the disclosure.
(2) Where a person who would otherwise be liable to
a 30% penalty has made a prompted disclosure, HMRC shall reduce the 30% to a
percentage, not below 15%, which reflects the quality of the disclosure.
[…]
11(1) If they think it right because of special
circumstances, HMRC may reduce a penalty under paragraph 1 or 2.
(2) In sub-paragraph (1) “special circumstances”
does not include—
(a) ability to pay, or
(b) the fact that a
potential loss of revenue from one taxpayer is balanced by a potential
over-payment by another.
[…]
13(1) Where P becomes liable for a penalty under
paragraph 1 or 2 HMRC shall—
(a) assess the penalty,
(b) notify P, and
(c) state in the notice
a tax period in respect of which the penalty is assessed.
[…]
(3) An assessment of a penalty under paragraph 1
must be made within the period of 12 months beginning with—
(a) the end of the
appeal period for the decision correcting the inaccuracy, or
(b) if there is no
assessment within paragraph (a), the date on which the inaccuracy is corrected.
[…]
14(1) HMRC may suspend all or part of a penalty for
a careless inaccuracy under paragraph 1 by notice in writing to P.
(2) A notice must specify—
(a) what part of the
penalty is to be suspended,
(b) a period of
suspension not exceeding two years, and
(c) conditions of
suspension to be complied with by P.
(3) HMRC may suspend all or part of a penalty only
if compliance with a condition of suspension would help P to avoid becoming
liable to further penalties under paragraph 1 for careless inaccuracy.
(4) A condition of suspension may specify—
(a) action to be taken,
and
(b) a period within
which it must be taken.
15(1) P may appeal against a decision of HMRC that a
penalty is payable by P.
(2) P may appeal against a decision of HMRC as to
the amount of a penalty payable by P.
(3) P may appeal against a decision of HMRC not to
suspend a penalty payable by P.
(4) P may appeal against a decision of HMRC setting
conditions of suspension of a penalty payable by P.
16(1) An appeal under this Part of this Schedule
shall be treated in the same way as an appeal against an assessment to the tax
concerned (including by the application of any provision about bringing the
appeal by notice to HMRC, about HMRC review of the decision or about
determination of the appeal by the First-tier Tribunal or Upper Tribunal).
(2) Sub-paragraph (1) does not apply in respect of a
matter expressly provided for by this Act.
17(1) On an appeal under paragraph 15(1) the
tribunal may affirm or cancel HMRC's decision.
(2) On an appeal under paragraph 15(2) the tribunal
may—
(a) affirm HMRC's
decision, or
(b) substitute for
HMRC's decision another decision that HMRC had power to make.
(3) If the tribunal substitutes its decision for
HMRC's, the tribunal may rely on paragraph 11—
(a) to the same extent
as HMRC (which may mean applying the same percentage reduction as HMRC to a
different starting point), or
(b) to a different
extent, but only if the tribunal thinks that HMRC's decision in respect of the
application of paragraph 11 was flawed.
(4) On an appeal under paragraph 15(3)—
(a) the tribunal may
order HMRC to suspend the penalty only if it thinks that HMRC's decision not to
suspend was flawed, and
(b) if the tribunal
orders HMRC to suspend the penalty—
(i) P may appeal against
a provision of the notice of suspension, and
(ii) the tribunal may
order HMRC to amend the notice.
(5) On an appeal under paragraph 15(4) the
tribunal—
(a) may affirm the
conditions of suspension, or
(b) may vary the
conditions of suspension, but only if the tribunal thinks that HMRC's decision
in respect of the conditions was flawed.
(5A) In this paragraph “tribunal” means the
First-tier Tribunal or Upper Tribunal (as appropriate by virtue of paragraph
16(1)).
(6) In sub-paragraphs (3)(b), (4)(a) and (5)(b)
“flawed” means flawed when considered in the light of the principles applicable
in proceedings for judicial review.
(7) Paragraph 14 (see in particular paragraph 14(3))
is subject to the possibility of an order under this paragraph.
Ms Roche's submissions
19.
Ms Roche exercises her appeal rights under paragraphs 15(1), (2) and
(3), Schedule 24 – namely her liability to a penalty, the amount of the
penalty, and the decision of HMRC not to suspend the whole of the penalty. She
does not appeal against the decision of HMRC to suspend that part of the penalty
relating to bank interest.
20.
Ms Roche does not dispute that her tax return omitted items of income,
and was therefore inaccurate.
21.
Ms Roche submitted that her actions in preparing her tax return were not
careless. She had an exemplary record in preparing and submitting her tax
returns, and this was the first and only circumstance where an error had been
made.
22.
Ms Roche drew our attention to the considerable stress that she had
suffered as a consequence of her redundancy, and that this continued for some considerable
time until she had managed to resolve her finances.
23.
Although Ms Roche acknowledged that errors had been made, she submitted
that she took reasonable care in preparing and submitting her return, and the
errors were not made carelessly. She had collated all documents that could be
relevant to the return, and used the P60 and other tax documents provided by
her former employers to compile her tax return. It was only because the
redundancy payment and benefit-in-kind were missing from these documents that
they were omitted from the online tax return. Ms Roche submitted that as tax
had been deducted from the redundancy payment she had assumed that no further
tax was payable in any event. Ms Roche had not answered "yes" to the
question "did you receive any other UK income … ?" on the online
return because she regarded the redundancy payment as salary and not as other
income. She had not sought help from HMRC or a tax advisor, as she did not
appreciate that she needed any assistance.
24.
As regards suspension, Ms Roche submitted that if the penalties were
upheld, it was appropriate for them to be suspended in their entirety. She
considered that the reasons why HMRC were not prepared to suspend penalties
were wrong. At the time the penalties were levied, there was every possibility
that she might return to work – particularly as she needed funds to pay for the
renovation of the derelict house. And if she returned to work, there was a
potential risk of her becoming redundant once again. She considered that it
was possible for HMRC to specify appropriate conditions to the suspension, for
example to keep all relevant paperwork to hand and to maintain spreadsheets of
payments received.
HMRC's submissions
25.
HMRC submit that Ms Roche's tax return was inaccurate. The inaccuracy
was due to Ms Roche failing to take reasonable care, and was therefore
careless. A penalty is therefore chargeable under paragraph 1. HMRC referred
us to the case of Blyth v Birmingham Waterworks Co (1856) 11 Exch 781 on the basis that taking "reasonable care" can be likened to the
concept in general law of "negligence".
26.
Ms Roche did not take "reasonable care", as she had boxed-up
and placed into storage the key documents relating to her redundancy payment.
Those documents were therefore not available to Ms Roche at the time she
completed her tax return. HMRC contend that a reasonable person receiving a
large payment from their employer would take all necessary steps to ensure that
it was properly recorded on their tax return. This would include taking
professional advice if s/he was unsure of the correct tax treatment.
27.
HMRC submit that Ms Roche was careless in failing to answer
"yes" to the question " did you receive any other UK income … ?" when tailoring her tax return online. The question specifically
mentions employment lump sums. Having been asked a direct question, Ms Roche
must have been careless when she answered the question incorrectly.
28.
HMRC submit that Ms Roche's argument, that because tax had been deducted
from the redundancy payment, she did not need to include it in her tax return,
did not stand up to scrutiny. Ms Roche had received other income from which
tax had been deducted (such as basic salary, pensions and investment income),
and had included these in her tax returns. There was no logical reason why the
redundancy payment should be omitted. In addition if Ms Roche had reviewed the
documents relating to her redundancy payment, she would have seen that tax had
been deducted at 20%, yet Ms Roche would have been aware that she was a higher
rate taxpayer, paying tax at 40%, and therefore further tax would be due.
29.
HMRC acknowledge that in the period following her redundancy, Ms Roche
had suffered considerable stress. However the tax return was filed 21 months
after her redundancy, and the stress would have diminished in this time –
particularly as by the time she filed her tax return, she had sold one property
which would have alleviated her worries.
30.
The penalty for careless errors is 30%. HMRC considered the reduction
in penalty for disclosure under paragraph 9, and as the disclosure was prompted
by the enquiry, the minimum penalty payable was 15%. HMRC reduced the penalty
percentage to the 15% minimum allowed. HMRC submit that they have no
discretion to reduce the penalty below 15%.
31.
We asked Mr Reeve if consideration had been given as to whether there
were "special circumstances" which would justify a reduction of the
penalty under paragraph 11(1), as there was nothing in HMRC's letter setting
out the penalty calculation or the subsequent review decision on the point. Mr
Reeve told us that paragraph 11 did not apply. Ms Roche had managed to
correctly complete the rest of her tax return. The reason for the failure to
include the redundancy payment was due solely to her carelessness, as she had
packed away the relevant paperwork, and had not taken the time to retrieve it.
32.
As regards suspension, HMRC submit that it is inappropriate to suspend
penalties in this case. Suspension is only appropriate if the conditions are
practical and measurable (such as improvements to accounting systems). A
condition that the taxpayer must file accurate returns is not appropriate. We
were referred to the decision of this Tribunal in Fane v HMRC [2011] UKFTT 210 (TC).
Discussion
33.
Our analysis of the issues in this appeal falls into a number of
stages.
34.
First, were Ms Roche's actions within the scope of the penalty regime in
Schedule 24?
35.
Second, had Ms Roche disclosed the inaccuracy to HMRC, as disclosure
operates to reduce the amount of the penalty otherwise payable. The amount of
the reduction depends on (a) whether the disclosure was unprompted; and (b) the
"quality" of the disclosure (paragraph 9, Schedule 24).
36.
Third, were there any special circumstances justifying a reduction in
the amount of the penalty? (paragraph 11, Schedule 24)
37.
Finally, are there any reasons to justify suspension of all or part of
the penalty? (paragraph 14, Schedule 24)
Inaccurate Document
38.
A penalty is payable if:
(1)
a person gives HMRC a document of a kind listed in the table in
paragraph 1 (paragraph 1(1)(a) , Schedule 24),
(2)
which contains an inaccuracy which leads to an understatement of P's
liability to tax (paragraph 1(2) , Schedule 24), and
(3)
the inaccuracy is careless or deliberate (paragraph 1(3)) , Schedule 24
39.
It is not in dispute that Ms Roche gave HMRC a tax return under s8 Taxes
Management Act 1970. Tax returns are listed in the table in paragraph 1. Nor
is it disputed that the return was inaccurate (by omitting the items of income
mentioned in paragraph 8 above), and that as a result of those omissions, the
self-assessment understated Ms Roche's liability to income tax.
40.
HMRC content that Ms Roche was careless in the preparation of her tax
return. Ms Roche contends that she took reasonable care in preparing her tax
returns, and therefore the inaccuracy was neither careless nor deliberate.
41.
Paragraph 3, Schedule 24 defines an inaccuracy as being
"careless" if it is due to a failure by the taxpayer to take
reasonable care. HMRC in their submissions referred us to the case of Blythe.
In that case the issue was whether damage sustained was by reason of the
negligence of the waterworks company in not keeping their water pipes and
equipment in proper order. The Blythe case is not binding on us as it
concerns a different legal issue (negligence) and wholly different factual
circumstances. We consider that reference to 19th century cases relating to
negligence is misplaced in the context of the interpretation of a statutory
provision for tax penalties enacted by the Finance Act 2007. It is clear that
Parliament deliberately chose not to set the standard required in the
preparation of documents by reference to "neglect" or
"negligence" (the terms used previously in tax legislation), but instead
by reference to carelessness.
42.
The approach to penalty appeals under Schedule 24 can be derived from
more relevant case law, such as David Collis v HMRC [2011] UKFTT 588 (TC), where the tribunal found that the standard by which reasonable care fell
to be judged is that of a prudent and reasonable taxpayer in the position of
the taxpayer in question. The test is therefore an objective one; an error may
be innocent, but nevertheless careless. Furthermore, the tribunal in that case
went on to say that it is of the essence of the reasonable care test that in
normal circumstances this should avoid simple errors of omission, or mere
oversights.
43.
We consider that the omission by Ms Roche of the Tameside MBC pension
from her tax return was careless. She admitted that the payment was included
on the working sheet that she had prepared, but that she had neglected to
transfer the amount onto the online return.
44.
We also consider that the omission of the redundancy payment from the
return was careless. A prudent and reasonable taxpayer would not have boxed-up
her redundancy papers and placed them into storage, with the consequence that
they were not available when preparing her return. In addition, we do not
accept that the fact that tax had been deducted from the redundancy payment justifies
any failure to include the payment on the tax return. Many payments are
received after deduction of tax (such as normal employment income and
investment income), and there is no question of such payments being excluded
from a tax return.
45.
We do not consider that Ms Roche was careless because she did not seek
the assistance of a tax advisor or HMRC. Given that she reasonably thought
that she understood what she had to do, it was not careless for her to proceed
without taking further advice.
46.
We note that Ms Roche did not answer "yes" to the "other
income" question when she "tailored" her tax return. However we
do not consider that the fact that she was careless in giving this answer, as
the question is not clearly expressed, and we consider that it is not
unreasonable for Ms Roche to have considered that her redundancy payment ought
to be included within her employment income (indeed the redundancy payment is
described as being "pay" by HMRC in their enquiry notice).
47.
However we do not consider that the omission of the health insurance
benefit-in-kind was careless. Ms Roche had not boxed-up the P60 and other tax
papers relating to her normal salary and benefits-in-kind, and used the
information on these when preparing her tax return. The reason the benefit-in-kind
was omitted from her return was because (a) the amount was not included in the
P60 or other tax papers, and (b) Ms Roche had a genuine and reasonable belief
that the benefit had finished at the end of the previous tax year. Although Ms
Roche made a mistake in failing to include this benefit in her tax return, this
omission was not made carelessly.
Disclosure
48.
The standard percentage penalty for careless inaccuracies is 30% of the
potential lost revenue. If the taxpayer has disclosed the inaccuracy to HMRC,
paragraph 10, Schedule 24 requires that HMRC must reduce the standard
percentage to one that reflects the quality of the disclosure. However the
penalty cannot be reduced below a specified minimum depending upon whether the
disclosure is prompted or unprompted.
49.
HMRC acknowledge that Ms Roche disclosed the inaccuracies immediately
following the opening of the enquiry into her tax return. The HMRC letter
informing Ms Roche of the enquiry referred to the missing income. So Ms
Roche's disclosure was "prompted", as it was made at a time when Ms
Roche was aware that HMRC had discovered the inaccuracy. HMRC therefore have
no discretion to reduce the penalty below 15% (paragraph 10(2), Schedule 24).
If fact HMRC reduced the penalty to 15% - the maximum reduction allowed.
50.
We agree that the maximum reduction is appropriate in this case, as Ms
Roche co-operated fully and promptly. The timing, nature and extent of her
disclosure (paragraph 9(3), Schedule 24) was the best that could be expected in
the circumstances.
Special circumstances
51.
A crucial feature of Schedule 24 is that it does not include a defence
of a "reasonable excuse". So although penalties for late filing of
returns or late payment of tax are subject to such a defence, there is no such
concept in the case of penalties for inaccuracies. That said, it may be that
the particular circumstances of the case are such that the actions of the
taxpayer are not careless, or they might constitute "special
circumstances" justifying a reduction in the amount of the penalty.
52.
Paragraph 11, Schedule 24 gives HMRC discretion to reduce the amount of
a penalty because of special circumstances.
53.
Special circumstances do not include the (in-)ability of the taxpayer to
pay the penalty itself (paragraph 11(2)(a) , Schedule 24), or the fact that the
loss of revenue from one taxpayer is balanced by an overpayment by another
(paragraph 11(2)(b) , Schedule 24). Neither of these circumstances is in point
in this case.
54.
The jurisdiction of the Tribunal in an appeal relating to special
circumstances is limited. We can only apply a reduction on account of special
circumstances (to a different extent than that applied by HMRC) if we consider
that HMRC's decision is "flawed" when considered in the light of principles
applicable to proceedings for judicial review (paragraph 17(3)(b), Schedule
24). HMRC applied no reduction on account of special circumstances. We need
to consider whether HMRC, in exercising their discretion not to make any
reduction, acted in a manner that no reasonable body of Revenue commissioners
could have acted. Did the HMRC take into account any irrelevant factors, or
fail to take into account relevant factors, in reaching their decision?
55.
In our view HMRC's decision to apply no reduction was flawed.
56.
Mr Reeve in his submissions told us that HMRC had considered that
paragraph 11 did not apply, as the reason for the inaccuracies in Ms Roche's
return was her carelessness. However we find that HMRC did not give proper
consideration to the issue of special circumstances. Although both the
original letter calculating the amount of penalties (dated 2 February 2011) and
the review letter (dated 13 May 2011) mention Ms Roche's redundancy, it is only
to state that the redundancy occurred 21 months before the date of the tax
return, and that therefore Ms Roche's stress would have diminished by then. No
consideration was given to the reasons why Ms Roche had boxed-up her papers,
and the stress she was under at the time she packed-up her home – even though
these issues were raised by Ms Roche in her correspondence with HMRC.
57.
In particular no reference is made in any of HMRC's letters to their
discretion to reduce penalties to take account of special circumstances, and
there is no statement that they had reached a decision that no such
circumstances existed. Nor can the letters be read in any way that might
suggest that, although no express reference is made in the correspondence to
special circumstances, HMRC had in fact applied their mind to the issue and had
reached the conclusion that there were none.
58.
We therefore find that HMRC had not given proper consideration to the
potential for there to have been special circumstances, and we find that HMRC's
failure to turn their mind to this issue amounts to a "flaw".
59.
Even if (contrary to our finding) HMRC had made a considered decision
that no reduction for special circumstances was appropriate, we find that this
decision was flawed, as HMRC had not taken into account the stress suffered by
Ms Roche at the time she packed-up her home (including boxing-up her redundancy
papers), and that it was the fact that these papers were therefore not
available at the time she completed her tax return that led to the redundancy
payment being omitted from her self-assessment. Ms Roche had found herself
suddenly and unexpectedly made redundant. Her redundancy occurred at a time
when she was part way through refurbishing a derelict house to create a new
home. She was therefore placed under severe financial pressure. This occurred
during the financial crash, which made it difficult for her to refinance her
mortgage or sell her old house and investment property, thus increasing her
financial stress. Although it may have been careless of Ms Roche to have
boxed-up her redundancy papers (as judged by the objective standard of a
reasonable and prudent taxpayer), we can understand why she did so, given the
stress that she was under and her desperate need to de-clutter her home to make
it as saleable as possible. Because Ms Roche had boxed-up her redundancy
papers, they were not available to her at the time she completed her tax return
online. As the redundancy payment was not included in the P60 or other tax
papers, when she transcribed her income as stated in those papers to the tax
return, so the redundancy payment came to be omitted from the tax return.
60.
As we have decided that HMRC's decision was flawed, under paragraph
17(3)(b), Schedule 24 we have discretion to rely upon paragraph 11 to a
different extent to that applied by HMRC. We consider that it is right for
some reduction to be made for special circumstances. We consider that the
penalty attributable to the omission of the redundancy payment should be
reduced by 50% to take account of special circumstances. Although the stress
suffered by Ms Roche explains the reasons for the default, we consider that it
should not completely excuse her conduct. A reduction of 50% is therefore in
our opinion appropriate.
Suspension
61.
As regards the issue of suspension of the penalty we can only overturn
HMRC's decision on suspension if we consider it to be "flawed"
(paragraph 17(4), Schedule 24). We agree with the reasoning of the Tribunal in Fane
v HMRC [2011] UKFTT 210 (TC).that:
58. The important feature of paragraph 14(3) is the
link between the condition and the statutory objective: there must be a
condition which would help the taxpayer to avoid becoming liable for further
careless inaccuracy penalties. In other words, if the circumstances of the case
are such that a condition would be unlikely to have the desired effect (e.g.
because the taxpayer in question has previously breached other conditions or
has a record of repeated non-compliance) HMRC cannot suspend a penalty. The
question therefore is whether a condition of suspension would have the required
effect.
[…]
60. On the face of the wording of paragraph 14(3)
there is no restriction in respect of a "one-off event". Nonetheless,
it is clear from the statutory context that a condition of suspension must be
more than an obligation to avoid making further returns containing careless
inaccuracies over the period of suspension (two years). Paragraph 14(6)
provides:
"If, during the
period of suspension of all part of a penalty under paragraph 1, [the taxpayer]
becomes liable for another penalty and that paragraph, the suspended penalty or
part becomes payable."
61. If the condition of suspension was simply that,
for example, the taxpayer must file tax returns for a period of two years free
from material careless inaccuracies, paragraph 14(6) would be redundant.
62. Moreover, it is difficult to see how a taxpayer
could satisfy HMRC that the condition of suspension, if it contained no
requirement other than a condition not to submit careless inaccuracies in
future tax returns, had been satisfied as required by paragraph 14(6). This
would, effectively, require the taxpayer to prove a negative will require HMRC
to conduct a detailed review of the taxpayer's tax returns.
63. For these reasons we do not agree with Mr
Lever's suggestion that a suitable condition of suspension would be a
requirement that the Appellant correctly returned other income (e.g. rental
income) on his tax return for the next two years.
64. A condition of suspension, therefore, must
contain something more than just a basic requirement that tax returns should be
free from careless inaccuracies. This suggests, therefore, that the condition
of suspension must contain a more practical and measurable condition (e.g.
improvement to systems) which would help the taxpayer to achieve the statutory
objective i.e. the tax returns should be free from errors caused by a failure
to exercise reasonable care.
65. Bearing these considerations in mind, HMRC's
guidance indicating that a one-off error would not normally be suitable for a
suspended penalty is understandable and, in our view, justified.
62.
As with the taxpayer in Fane, the only potential condition
attaching to a suspension of penalties in this case could be that Ms Roche
would not repeat the mistake again. For the same reasons as those adopted by
the Tribunal in Fane, we consider that HMRC did not misdirect herself
when deciding that penalties relating to the redundancy payment, Tameside MBC
pension or the health insurance benefit cannot be suspended.
Conclusions
63.
The penalties for failure to declare bank interest (and HMRC's decision
to suspend those penalties) are not being appealed.
64.
We have found that Ms Roche had given HMRC a tax return under s8 Taxes
Management Act 1970 which contained inaccuracies.
65.
We have found that Ms Roche was not careless in failing to include the
health insurance benefit-in-kind in her tax return. Her appeal against the
penalties for that inaccuracy is allowed.
66.
We have found that Ms Roche was careless in failing to include her
redundancy payment and Tameside MBC pension in her tax return. We agree with
HMRC that Ms Roche gave prompted disclosure of these inaccuracies. We also
agree with HMRC that the quality of her disclosure was very good, and she
should be given the maximum reduction for the quality of her disclosure.
67.
We have found that HMRC's decision not to give a reduction for special
circumstances was flawed. We have found that there were special circumstances
which resulted in the failure of Ms Roche to include her redundancy payment in
her tax return, and that it would be appropriate to give a further 50%
reduction in the amount of the penalty relating to this.
68.
We have found that HMRC's decision not to suspend the penalties
attributable to redundancy payment, Tameside MBC pension and health insurance benefit
was not flawed.
69.
Therefore penalties should be charged as follows:
(a)
On the potential lost revenue attributable to the redundancy payment, at
the rate of 7.5%
(b)
On the potential lost revenue attributable to the Tameside MBC pension
and the bank interest, at the rate of 15%
(c)
Penalties in respect of the bank interest should be suspended on the
conditions set out in HMRC's letter of 2 February 2011
70.
We leave it to the parties to agree the amount of penalties payable in
accordance with this decision. If they are unable to reach agreement, we give
leave for them to apply to this Tribunal (acting by a single Judge sitting
alone) to determine the penalties payable.
71.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
NICHOLAS ALEKSANDER
TRIBUNAL JUDGE
RELEASE DATE: 11 May 2012
