Special Circumstances – Penalty Reduced

A recent tribunal case (F Berrier v HMRC – TC03584) involved the use of a relatively little known aspect of the legislation, namely that HMRC have the power to reduce penalties, “if they think it right because of special circumstances” (FA 2007, Sch 24, para 11).  The more cynical might suggest that HMRC might never think it right to reduce a penalty, but a recent case showed that the courts may have the power to apply such reductions as well.

Background and Facts

The taxpayer began working for a securities broker in 2009 and received a sum of £25,000 in addition to his starting salary.  He claimed to believe this was a “golden hello”, but his employers were treating it as a “forgivable loan”, as noted in his employment statement.

The loan was subsequently written off in February 2011, and it included on his P11D as a taxable benefit for the 2010/11 tax year.  He was also provided with a note telling him to include the amount in his tax return for the year.

One completing his return, however, he did not include the loan. HMRC amended the return to include the £25,000 and levied a penalty for carelessness.

The taxpayer appealed the penalty, as he had referred to the sum in his 2009/10 return.

Tribunal Decision

The First-tier Tribunal agreed that the sum was a loan, and therefore the taxpayer was liable to income tax when the loan was written off under ITEPA 2003, s.62 and on the beneficial interest rate (i.e. 0%) under s.175. The charges were applicable to the 2010/11 tax year.

The tribunal found that the taxpayer should have shown this income on his 2010/11 return and agreed that the omission was careless.  He did not have reasonable excuse, as his claim that his wife had tidied away the P11D only made matters worse.  He should have gathered together the necessary documents before preparing his return.

However, as the taxpayer had referred to the loan on his 2009/10 return and therefore drawn HMRC’s attention to it, the tribunal felt that there were special circumstances under FA 2007, Sch 24 para 11 and that HMRC’s decision not to apply a reduction under this provision was incorrect.  The tribunal therefore applied a 25% reduction to the penalties.

The facts of this case were perhaps quite unusual, however it demonstrates the importance of pursuing all aspects of the legislation that could provide taxpayers with a reduction on penalties; seeking reductions due to special circumstances could well be another option where the a “reasonable excuse” cannot be applied to entirely wipe out a penalty.