Over the last few years, we have had a lot to say in Weekly Tax Brief about HMRC’s increasingly strict approach to imposing penalties for what they consider to be substandard 'behaviour' where taxpayers get things wrong when submitting their annual Self-Assessment tax returns.
A First Tier Tribunal decision announced a few weeks ago throws further light on the department’s apparent desire to treat all errors as at least 'careless' and to seek to refuse penalty suspensions. The case itself involved a Mr Steady, who completed the 'interest received' section of his 2013/14 tax return based on a certificate which his bank had handed to him. Unfortunately the certificate showed the wrong tax year.
Using information supplied to them for the correct year, HMRC enquired into Mr Steady’s return and established that a tax underpayment of almost £2,500 had arisen. Apparently disregarding the fact that a similar error had occurred in the previous tax year and that tax had actually been overpaid, HMRC contended that the taxpayer had been careless and charged a penalty of £368. They refused to suspend the penalty on the grounds that this was a one-off error and hence any future change of taxpayer behaviour could not be encouraged by the setting of suspension conditions.
The Tribunal judge found for Mr Steady – he described HMRC’s decision not to suspend the penalty as 'flawed' and suggested that suitable suspension conditions could be set.
Perhaps curiously, it seems that Mr Steady did not ask the Tribunal to rule on whether his behaviour was 'careless'. The Tribunal judge noted this and commented that had HMRC’s view been challenged, he 'would have had a strong arguable case that his behaviour was not careless'.
All of this begs the question why HMRC are so intent on pursuing such modest amounts of penalty in such a vigorous way. Indeed we wonder how HMRC can ever consider it worthwhile spending valuable time and resource on such 'innocent' errors. Maybe the department should take heed of what the Tribunal judge had to say about the taxpayer’s actions – '…the mere fact that there is an error in a tax return does not mean that the taxpayer has been careless'. This is a view which HMRC themselves advanced upon the introduction of the behaviour-based penalty regime in 2008: surely it wasn’t meant to be like this?
If you would like any more information on this issue please get in touch with Mike Down or your usual RSM contact.