CGT penalty warning for one-off transactions

With speculation that there may be changes to capital gains tax (CGT) rates in the future, some may be considering accelerating a transaction or disposal in order to try and secure the current tax rates and reliefs. Such transactions can often be a one-off, like the sale of a business or a second home, and a recent tax case has highlighted the need to get the details right on disposals like this.

The First-tier Tribunal (FTT) case of Cox & Anor v Revenue and Customs considered an appeal by the taxpayers in relation to penalties charged by HMRC. The case involved an erroneous claim that Entrepreneurs’ Relief (ER) (now known as Business Asset Disposal Relief) applied to a disposal of shares and the taxpayers contended there were grounds for associated penalties to be suspended by HMRC.

It is possible, in certain circumstances, for all or part of a penalty charged by HMRC in respect of a careless inaccuracy to be suspended. Precisely what constitutes a careless inaccuracy is assessed on a case-by-case basis and is also a discretionary matter for HMRC. 

Given how valuable this regime can be, it can often be a contentious area between taxpayers and HMRC and the FTT has considered a number of such cases over the years. In order for penalties to be suspended, there are various criteria that must be met. 

One such criterion is that a penalty may only be suspended if compliance with the condition would help influence the taxpayer’s behaviour in terms of meeting their future tax obligations.

In context, this means that HMRC may suspend a penalty if it believes that imposing one or more conditions will prevent the taxpayer from being charged penalties in respect of similar inaccuracies in the future. If they do not consider that this may be the case, then a penalty may not be suspended. 

Given disposals triggering CGT are often one-off in nature, it can be particularly challenging to obtain agreement from HMRC to suspend penalties in such cases as such a sale may be unlikely to occur again. In the case of Cox & Anor, the company’s shareholders had received a preliminary indication from their advisers that a disposal of the shares they held in a private company would qualify for ER. However, after receiving this indication and without personally taking subsequent tax advice, Mr and Mrs Cox each made a gift of some of their shares which resulted in them both failing to meet the 5% shareholding required for ER. 

The taxpayers made a claim for ER in relation to the relevant disposals on their 2019/20 tax returns. However, after HMRC enquired into their tax returns, the taxpayers conceded that their claims were incorrect and expressed a wish to withdraw them. HMRC subsequently issued penalty notices to the taxpayers on the basis that the errors on their returns constituted careless behaviour and applied penalties of 15%.

The taxpayers contested the penalty notices, which ultimately led to an appeal being lodged with the FTT. One of the arguments put forward was that HMRC’s decision not to suspend the penalties was flawed. Typically, if HMRC agrees suspension then the steps agreed with the taxpayer need to be ‘SMART’, meaning they are specific, measurable, achievable, realistic and time-bound. 

The taxpayers had suggested some conditions to HMRC that might be considered to meet the SMART criteria, in particular that they would appoint a separate tax adviser and have annual meetings with them to review their tax returns prior to submission. 

However, the taxpayers had a strong track record of submitting their tax returns accurately with the assistance of their existing accountant. It was determined that if there were no ‘out of the ordinary events’ expected in the future, there would be ‘little likelihood of the proposed change of behaviour having any effect on future carelessness’. As a result, the court found in favour of HMRC and supported the view that a suspension of the penalty was not appropriate in this case.

If we do see a surge in transactions in the coming year, taxpayers should be aware that care needs to be taken when reporting these on tax returns as it can lead to expensive mistakes. They may not find HMRC particularly sympathetic in any claims for suspended penalties which makes it even more important to get things right the first time.