“(1) HMRC may suspend all or part of a penalty for a careless inaccuracy under paragraph 1 by notice in writing to P. (2) A notice must specify - (a) what part of the penalty is to be suspended, (b) a period of suspension not exceeding two years, and (c) conditions of suspension to be complied with by P. (3) HMRC may suspend all or part of a penalty only if compliance with condition of suspension would help P to avoid becoming liable to further penalties under paragraph 1 for careless inaccuracy. (4) A condition of suspension may specify - (a) action to be taken, and (b) a period within which it must be taken. (5) On the expiry of the period of suspension - (a) if P satisfies HMRC that the conditions of suspension have been complied with, the suspended penalty or part is cancelled, and (b) otherwise, the suspended penalty or part becomes payable. (6) If, during the period of suspension of all or part of a penalty under paragraph 1, P becomes liable for another penalty under that paragraph, the suspended penalty or part becomes payable.”
“On an appeal under paragraph 15(3) the tribunal may order HMRC to suspend the penalty only if it thinks that HMRC's decision not to suspend was flawed…”
“In sub-paragraph … (4)(a) ‘flawed’ means flawed when considered in the light of the principles applicable in proceedings for judicial review.”
“The court is entitled to investigate the action of the local authority with a view to seeing whether they have taken into account matters which they ought not to take into account, or, conversely, have refused to take into account or neglected to take into account matters which they ought to take into account. Once that question is answered in favour of the local authority, it may be still possible to say that, although the local authority have kept within the four corners of the matters which they ought to consider, they have nevertheless come to a conclusion so unreasonable that no reasonable authority could ever have come to it. In such a case, again, I think the court can interfere. The power of the court to interfere in each case is not as an appellate authority to override a decision of the local authority, but as a judicial authority which is concerned, and concerned only, to see whether the local authority have contravened the law by acting in excess of the powers which Parliament has confided in them.”
“The knowledge you have gained as a result of this enquiry is what will assist you in determining whether potential future claims to BADR are valid. I am unable to set any specific, measurable, achievable, realistic and time bound (SMART) conditions to help you avoid making these inaccuracies in future and so the penalty will be charged.”
“It is surely possible to set a condition which stipulates that they will commit to taking advice on any future transactions on their own behalf rather than relying on advice taken via any third party over an agreed timescale as required by the legislation.”
“It appears to me that it is unlikely that similar careless inaccuracies will arise in future. Firstly, your clients will have gained knowledge from this enquiry that will help them avoid a similar error in future. Additionally, as far as I am aware, neither of your clients currently hold any offices, nor any employments currently. While of course other eligibility criteria also apply, this does not indicate that your clients currently have any capability or intention to dispose of shares that could qualify for BADR. Currently I have no reason to believe that it is likely that your client’s will ever have further share disposals that may qualify for BADR. Therefore, as it seems unlikely that a similar careless error will occur again, I find it difficult to see how any suspension condition relating to this could be measured (as per the SMART criteria).”
“Therefore, it becomes possible to identify what could have been done differently so that an inaccuracy can be avoided in future. We put it to you that this failure could be attributed to the advice being targeted on the transaction as a whole and, in the process, the focus on the specific position of our clients was lost. It then is possible to set a condition for the future that the Coxs’ always appoint separate Advisers dedicated to their particular circumstances and, secondly, that any advice given at client meetings is always confirmed in writing.”
“I note your point in response to my previous mention of “similar” inaccuracies and would explain that this is not a reference to the legislation but to HMRC guidance on suspension of penalties as per the previously issued factsheet CC/FS10. The legislation at FA 2007 Sch.24 paragraph 14 is not specific regarding which careless errors could be avoided in the future through any suspension conditions as you point out. However, the point remains that I cannot see any future careless error(s) that could be avoided by setting a suspension condition in this case. As mentioned in my previous correspondence, the legislation states that HMRC may suspend a penalty, only if compliance with a condition of suspension would help a taxpayer to avoid becoming liable to further penalties for careless inaccuracy. Your response suggests a condition relating to your clients seeking individual advisors that will consider only your clients particular circumstances, in the event any further advice is required. This condition would unfortunately not meet the suspension criteria for several reasons. Firstly, a promise to check with an advisor in future is not a measurable condition. I would refer again to CC/FS10 which sets out that any suspension condition must be specific, measurable, achievable, realistic and timebound. The condition does not relate to a definite specific action, but rather an action that could be taken if the situation arose. Furthermore, such a situation may not arise within the suspension period and therefore again this would be a suspension condition which does not meet the criteria set out in the legislation (as above) as the condition will not have avoided any future careless errors. Also, were this to be the case, adherence to the condition could not be measured. Additionally, seeking appropriate advice where required, to meet tax obligations is a responsibility already expected of reasonable taxpayers, regardless of a suspension condition. It’s everyone’s own responsibility to get their tax right. As mentioned above, in HMRC’s view it is reasonable to expect a person who encounters a transaction or other event with which they are not familiar to take care to find out about the correct tax treatment or to seek appropriate advice. Therefore, due to the points raised above I can’t see how appropriate suspension conditions can be set to avoid a future careless inaccuracy and allow the penalties to be suspended.”
“We can understand your view that promising to do something contingently in the future may not be a suitable condition for suspension. However, our proposal is that each year, with immediate effect, our client should have a formal minuted, in-person meeting with a partner in this firm specifically to review each entry on the return before the return is submitted. Had that happened in this case, the anomaly between the client’s circumstances and the advice received would have become apparent, enabling a further review to be undertaken and the inaccuracy obviated.”
“In order to suspend a penalty for a careless inaccuracy, HMRC must be able to set at least one specific suspension condition that would help a person to avoid becoming liable to a further careless inaccuracy under Paragraph 1. In your case I am unable to identify a careless inaccuracy that will be avoided by setting conditions. There is no underlying weakness in your record keeping etc, and therefore suspension does not appear to fit in your case”
“38. Mr Sinclair drew our attention to a report - Tax penalties: final report – published by the Office of Tax Simplification in November 2014 in which it had noted the tribunal cases and had, at para 3.9 of the report, remarked that there had been a change of approach by HMRC and that updated guidance stated that it is possible to suspend penalties in instances where there have been one-off errors so long as it is possible to set appropriate suspension provisions. The guidance quoted there is from CH405050: “A penalty cannot be suspended where it is not possible to set specific conditions because the same type of inaccuracy is unlikely to happen in the future.” 39. We have to say that this emphasis on the type of the inaccuracy remains vulnerable to the criticism that it unreasonably fetters the discretion of HMRC. All that para 14(3) requires is that the conditions or conditions would help the taxpayer avoid further penalties for careless inaccuracy. There is no necessary link between the type of inaccuracy and the possibility of further penalty. We respectfully disagree with the tribunal in Testa to the extent that it was suggesting, at [32], that the use of the word “further” in para 14(3) implies a link between the type of inaccuracy for which the original penalty has been levied and the type of inaccuracy which might give rise to a future penalty. In our view, the word “further” does no more than describe another penalty for careless inaccuracy that might arise in the future.”
“56. Having considered the evidence for ourselves, we consider that it was a failure by Mr Eastman to keep a proper record for himself of the disposal of the business premises that led to him failing to spot the error which had undoubtedly first emanated from his accountants. Although he had a file for more mundane tax documents he did not have any means of double-checking the contents of that file. That is something that is capable of remedy for the future, and is properly something that can be dealt with by way of a suspensive condition. It does not matter that the disposal of the business premises was a one-off event or that Mr Eastman no longer has business assets. Nor would it necessarily be a bar to a suspensive condition if he had no other chargeable assets, so long as he had a continuing requirement to make self assessment returns and thus a risk of a penalty for careless inaccuracy.”
“64. A condition of suspension, therefore, must contain something more than just a basic requirement that tax returns should be free from careless inaccuracies. This suggests, therefore, that the condition of suspension must contain a more practical and measurable condition (e.g. improvement to systems) which would help the taxpayer to achieve the statutory objective i.e. the tax returns should be free from errors caused by a failure to exercise reasonable care.”
“28. Mr Steady’s case is not on all fours with Fane. In Fane, the suspension condition being considered was merely that Mr Fane file accurate self-assessment returns in future. In Mr Steady’s case, it is proposed that a detailed schedule of his savings accounts is kept, and that this will help him to ensure that his tax returns are accurate in future. It matters not that a prudent taxpayer might keep such a schedule (although we would question whether a typical prudent taxpayer would keep such a schedule) – indeed it could be argued that the purpose of the suspension conditions is 10 to bring the standard of compliance of the careless taxpayer up to the standard of a prudent taxpayer. We are satisfied (and find) that a requirement to maintain a schedule of the sort described by Mrs Foyle, would be a practical and measurable condition (e.g. improvement to systems) which would help Mr Steady to achieve the statutory objective that his tax returns should be free from errors caused by a failure to exercise reasonable care.”
“33. It is necessary, in order that HMRC can operate fairly amongst all taxpayers, that guidance is issued to officers tasked with the exercise of a discretion such as that which applies to the question of the suspension of a penalty. But that guidance should go no further than is required to ensure consistency of approach. It should not fetter the discretion of an HMRC officer otherwise than is consistent with the legislative scheme itself. If it does, then any decision which is constrained in that way will be likely to be flawed in the sense provided for by para 17(6).”
“31. The apparent underlying purpose of the legislation is not simply to allow a taxpayer the opportunity of “a last chance” if he mends his ways (akin to a suspended sentence in the criminal sphere) but only to allow him that last chance if he takes some specific and observable action which is specifically designed to improve his compliance. 32. Although the legislation does not specify the nature or extent of the required linkage between the earlier default and the action required by the suspensive condition, the use of the word “further” in paragraph 14(3) seems to us to imply that there must be some such linkage. 33. It therefore seems unlikely that paragraph 14(3) is intended to cover a situation where, for example, a taxpayer carelessly gives inaccurate information in a Construction Industry Scheme return and then seeks to have the penalty suspended on the basis of a promised improvement in his PAYE record keeping processes. 34. On the other hand, consider a case in which the original inaccuracy had arisen, say, because of a particular weakness in the taxpayer’s system for distinguishing between CIS payments for materials and construction services in certain unique circumstances. Let us assume the taxpayer, alarmed by the problem, had instructed an external professional firm to carry out a full review of its whole CIS reporting process and obtained a report giving recommendations for its improvement (including the elimination of the weakness that gave rise to the particular error, even though it was unlikely to recur). If the taxpayer offered to agree a condition requiring it to implement those recommendations, that would surely meet the underlying purpose of the legislation and fall within paragraph 14(3), even if the circumstances giving rise to the particular error were a “one off” and unlikely ever to be repeated. 35. HMRC’s policy (as referred to in their letters referred to at [11] and [13] above) sits uneasily with the above example. If their stance were correct that “one-off” inaccuracies (or inaccuracies arising from “one off” events) could never benefit from the suspension regime, then they would refuse to allow the suspension. This must in our view be wrong. Instead in such a case they should simply consider whether the implementation of the external report would help the taxpayer to avoid future inaccuracies in its CIS returns.”
“38. Mr Sinclair drew our attention to a report - Tax penalties: final report – published by the Office of Tax Simplification in November 2014 in which it had noted the tribunal cases and had, at para 3.9 of the report, remarked that there had been a change of approach by HMRC and that updated guidance stated that it is possible to suspend penalties in instances where there have been one-off errors so long as it is possible to set appropriate suspension provisions. The guidance quoted there is from CH405050: “A penalty cannot be suspended where it is not possible to set specific conditions because the same type of inaccuracy is unlikely to happen in the future.” 39. We have to say that this emphasis on the type of the inaccuracy remains vulnerable to the criticism that it unreasonably fetters the discretion of HMRC. All that para 14(3) requires is that the conditions or conditions would help the taxpayer avoid further penalties for careless inaccuracy. There is no necessary link between the type of inaccuracy and the possibility of further penalty. We respectfully disagree with the tribunal in Testa to the extent that it was suggesting, at [32], that the use of the word “further” in para 14(3) implies a link between the type of inaccuracy for which the original penalty has been levied and the type of inaccuracy which might give rise to a future penalty. In our view, the word “further” does no more than describe another penalty for careless inaccuracy that might arise in the future. 40. Whilst the nature of the inaccuracy in respect of which the penalty has been levied is a relevant factor for HMRC to consider in the exercise of their discretion, we do not consider that it should constrain the nature of the inaccuracies available to be considered for the purpose of determining whether conditions may be imposed which will help avoid penalties for carelessness in those respects as well as those related to the original inaccuracy. Paragraph 14(3) does not differentiate between types of careless inaccuracy any more than the provisions imposing the penalty do. 41. In the same way that the penalty for careless inaccuracy seeks to deter careless behaviour and penalise it, para 14 recognises that the imposition of conditions may alter behaviour so as to avoid that behaviour being repeated. It is therefore necessary, in exercising a discretion, for the decision-maker to have regard to the underlying behaviour that has given rise to the penalty and to determine whether a condition may be imposed to affect or obviate that same behaviour in the future. That is not something that is confined to the nature of the original inaccuracy, including whether it arose as a consequence of a one-off event that is not expected to be repeated. 42. We do not consider that the Explanatory Notes to the Finance Bill 2007 are of assistance in this respect. In our judgment they do not reflect the statutory language that has been used. To the extent that those Notes are sought to be relied upon to restrict, beyond the language of para 14(3), the cases where discretion in favour of a suspended penalty may be exercised, we consider that they represent an unwarranted fetter on the exercise of that discretion. Every case must fall to be considered by reference to its own facts and circumstances. 43. In considering whether any appropriate conditions may be imposed, the acid test, in our view, is to ask what the taxpayer could reasonably have done differently that would have avoided the original inaccuracy. That, in different words, is a similar approach to that adopted most recently by the tribunal in Paul Ronald Steady v Revenue and Customs Commissioners[2016] UKFTT 473 (TC) where it said, at [28], that it could be argued that the purpose of the suspension conditions is to bring the standard of compliance up to the level of a prudent taxpayer. Having ascertained what could have been done in that respect, the question is whether, educated by that answer, a condition may be imposed which would help avoid future careless inaccuracies. As a penalty would not differentiate between types of inaccuracy, the condition must encompass all risks of future careless inaccuracy that can reasonably be identified. … 56. Having considered the evidence for ourselves, we consider that it was a failure by Mr Eastman to keep a proper record for himself of the disposal of the business premises that led to him failing to spot the error which had undoubtedly first emanated from his accountants. Although he had a file for more mundane tax documents he did not have any means of double-checking the contents of that file. That is something that is capable of remedy for the future, and is properly something that can be dealt with by way of a suspensive condition. It does not matter that the disposal of the business premises was a one-off event or that Mr Eastman no longer has business assets. Nor would it necessarily be a bar to a suspensive condition if he had no other chargeable assets, so long as he had a continuing requirement to make self assessment returns and thus a risk of a penalty for careless inaccuracy. In fact, of course, he does continue to own chargeable assets on which capital gains may have to be accounted for.”
“287. The Eastman Tribunal stated at [39] that the emphasis on the type of inaccuracy: “…remains vulnerable to the criticism that it unreasonably fetters the discretion of HMRC. All that para 14(3) requires is that the conditions or conditions (sic) would help avoid further penalties for careless inaccuracy. There is no necessary link between the type of inaccuracy and the possibility of further penalty.” 288. The tribunal respectfully disagrees.”
“301. The history over the previous 20 years, prior to the submission of the 2019-20 tax return, was that PDC had accurately and competently completed their tax returns without requiring any of the conditions proposed for suspension of their penalties. 302. The tribunal agreed with HMRC’s submission that the proposals to meet with a partner and go through the tax return did little more than transfer what had been carried out electronically to a face-to-face meeting. 303. HMRC said in respect of the proposals, that they could identify “no underlying weakness in your record keeping etc. and therefore suspension does not appear to fit in your case.” 304. The error was in relation to a ‘one-off’ event which was out of the ordinary for the completion of PDC’s tax returns. 305. If there was no serious contemplation of further out of the ordinary events, there would be little likelihood of the proposed change of behaviour having any effect on future carelessness. 306. Accordingly, the tribunal considered that the connection referred to in [Testa] between the event and behaviour is relevant and that in the case of PDC was evident. 307. The tribunal considered; that the conditions put forward by PDC amounted to no more than a basic requirement that their tax returns should be free from careless inaccuracies; that that the conditions should be and were reviewed by HMRC who carried out their due diligence in a practical and measurable manner by using the SMART criteria to achieve the statutory objective to consider whether the penalty should be suspended; and that the inaccuracy was a ‘one off’ error which would not normally be suitable for a suspended penalty, and that is applicable in this case.”
“284. The tribunal did not consider that HMRC had adopted a rigid approach and, therefore, decided that PDC’s inaccuracy was a ‘one off’ event and automatically precluded suspension. HMRC set out their reasons with reference to the SMART criteria The promise to check with an advisor in future was not measurable and did not relate to a specific action. It could not, HMRC, say be measured.”
“290. The tribunal agrees with the Testa Tribunal at [32] that the use of the word ‘further’ in paragraph 14(3) implies a link between the type of inaccuracy for which the original penalty has been levied and the type of inaccuracy which might give rise to further penalties and with the Fane Tribunal and the Webb Tribunal decisions that a ‘one off’ error would not normally be suitable for a suspended penalty.”