When the current system of tax penalties was devised 10-years ago this problem was tackled in an imaginative way. For people who had deliberately 'fiddled' their taxes severe penalties were charged.
Those who had simply made a mistake were not penalised. For people in the middle – who had done nothing deliberately but had failed to take reasonable care – a low level of penalties was imposed. If a taxpayer could agree with HMRC to pull his socks up (a non-technical term) the penalty would be suspended, and ultimately cancelled. In some ways this is the tax equivalent of being offered a speed awareness course as an alternative to points on your licence, which is offered for minor speeding offences, but not for traveling at 120 mph down the M1.
The concept of suspended penalties is a good one – but it has been surprisingly difficult to apply in practice and there have been several tribunal cases testing the rules. The latest case sheds some useful light on the way that they should operate. HMRC claimed that the failure of the taxpayer to return the disposal of business premises could never meet the conditions for suspension. He was unlikely to sell other business premises in the foreseeable future and so it was not possible to agree conditions to ensure that he didn’t make the same mistake again. The tribunal said that this approach was too narrow. The taxpayer had made a mistake because of a failure to keep proper records. Suspension conditions could be set which required him to keep better records in future: the fact that he would not make future property disposals was not part of the statutory test.
The tribunal also said that HMRC’s guidance had fettered the discretion which the law gave to its officers in determining when and how to set suspension conditions. HMRC should give guidance to ensure that there was consistency of approach, but the law still required individual officers to apply discretion within that general framework. That finding may well be the most important part of this decision.
What this case shows yet again is the difficulty of moving from policy to practice. The policy of allowing penalties to be suspended is a good one which has widespread support. Making it work in practice so that it is applied to the right cases is much more problematic.
If you would like further information on any of the issues raised above, please contact Andrew Hubbard or your usual RSM contact.