The statutory rules that specify the maximum penalties which can be levied by HMRC according to certain types of conduct ranging from negligent behaviour to deliberate and concealed are familiar. However, the rules in force prior to April 2008 allowed HMRC to take an approach of giving abatements and mitigations for various categories of conduct such as abatements for disclosure, cooperation and seriousness.

A recent case (Dr J Kohal) has been heard by the First-tier tribunal (FTT), finding that they were not obliged to follow the approach taken by HMRC. Instead, the judge advised that the FTT should take an overall view of the appropriate penalty for the offence in question according to the law.

In this case, Dr Kohal had declared that he had no income for 2003/04 on his tax return when in fact he had worked and received bank deposits of nearly £80,000. HMRC concluded that the taxpayer had been negligent in completing the return and imposed a penalty of 60%. Before the penalty was imposed, HMRC gave abatements of 20% for seriousness and 20% for cooperation to reduce the penalty from the 100% maximum charge to 60%. Following the instruction by the judge to ensure that the most appropriate penalty was levied, the FTT ignored the abatements given by HMRC and agreed that the 60% penalty imposed was too high for negligent conduct. The FTT ruled that the penalty should be reduced to 45%.

Whilst the case related to legislation that has now been out of date for a number of years, this case serves as a reminder of how the tribunals serve as a buffer to protect the taxpayer from the occasional heavy hand of HMRC. More importantly, this case demonstrates the fact that HMRC practice is not the law, and taxpayers should seek to challenge when they disagree with HMRC’s interpretation.

 

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