Many years ago, as a young Inspector of Taxes, my District Inspector taught me not to take a harsh line on “late” submissions on behalf of the Inland Revenue.  His policy was that it was not the job of the Government to fine or penalise citizens if they were broadly trying to comply with their tax obligations but were slightly late in doing so.  The thinking behind this idea was that people were far more likely to be co-operative and compliant – factors key in having a capable and cost effective tax system – if citizens felt they were dealing with people who were reasonable and flexible, rather than hide bound by bureaucratic rules.

Perhaps as a result of such benevolent views, Accountants rarely thought about questions of Revenue powers and procedures, trusting the administrative reasonableness of the ‘Powers that be’.  It appears to me that such flexibility and judgement has been eroded from the Revenue lexicon.  This may be because of a desire to be more consistent, but in any event Accountants should help clients by considering carefully whether penalties have been correctly and legally levied or whether they can be eliminated or mitigated via concepts such as reasonable excuse or the use of suspended penalties.

Examples of cases where the Revenue line taken to the courts could appear harsh include;-

Cotter, where the Revenue sought to deny a taxpayer the right to claim a stand over of collection of tax which was in dispute pending resolution of the appeal.  The taxpayer won in the Court of Appeal, but HMRC are now taking it to the Supreme Court, demonstrating their effective limitless resources compared to individual taxpayers.

Business Women’s Coaching, where the taxpayer was fined for filing a return due by 31 December on 11 February.  The return in question was updated as originally it had been submitted on 9 December, but was then rejected as being incomplete.  The taxpayers did not advance a ‘reasonable excuse’ so their appeal was rejected, but would taxpayers consider HMRC’s behaviour as reasonable and proportionate in imposing a fine on being just 6 weeks late in adding extra material to a return originally submitted in time?

F Weerasinghe, where an accountant had lost the client’s papers and HMRC then rejected updated figures from a new accountant on the basis that they were too late.  The taxpayer won on a technicality because the tribunal held the time limits did not apply, because HMRC had not issued a formal demand for the Return in question.  They also found that the taxpayers figures appeared more reliable than those calculated by HMRC.

Hard cases make bad law and HMRC have a very difficult job to do.  It is a question of balance but perhaps it may be worth reflecting on the original responsibility of the Inland Revenue for the “care and management” of the tax system in Section 1 of the Taxes Management act 1970.  This was changed in 2005 to “collection and management”.  Maybe a little more “care” to mitigate pure “collection” may pay dividends in keeping taxpayers happy and compliant?

The other lesson is that accountants should be helping their clients by seeking to identify circumstances winthin the scope of “reasonable excuse” or the regime for suspending penalties.

Where a taxpayer is subject to a penalty from the tax year 2008/09 onwards, HM Revenue & Customs (HMRC) have the power to suspend a penalty for a careless inaccuracy.

However what many people may not be aware of is that in addition to HMRC granting a suspension it is also possible for the taxpayer to request that they do so.

If HMRC refuse to suspend a penalty it is possible to appeal to the First-tier Tribunal, but the tribunal can only allow your appeal if it thinks that the HMRC decision is flawed.

A complete failure to exercise the discretion, i.e. not to consider a suspension in light of the taxpayer’s circumstances, is generally considered a flawed decision.

There is however nothing which prevents HMRC adopting policies or practices which indicate factors it may take into account when exercising its discretion; so long as they do not prevent consideration of individual circumstances.

HMRC’s instruction to staff is to only consider a suspension where they can set at least one condition that, if met will help the taxpayer to avoid a further penalty.

Some officers claim that HMRC cannot suspend a penalty for errors involving capital gains tax (CGT).  This is incorrect as there is no reason that HMRC cannot suspend a penalty in relation to CGT providing at least one condition can be set.

Case law however has proved inconclusive. In Fane v HMRC the tribunal accepted HMRC’s view that a one-off error was not suitable for a suspended penalty, however in Boughey v HMRC the tribunal disagreed and overturned the decision not to suspend.  Both tribunals said that the suspension conditions need not relate to the specific error.