Mark McLaughlin looks at the ‘special reduction’ in HMRC penalties for certain tax offences.
HM Revenue and Customs (HMRC) have an impressive and expanding range of powers. In many cases, those powers are underpinned by penalties for non-compliance with various statutory requirements by taxpayers and others.
However, some compliance regimes include provisions to reduce or eliminate penalties in certain circumstances. This article looks at one such provision, the ‘special reduction’. This potentially applies to various categories of penalty, including for errors in returns (FA 2007, Sch 24), failure to notify (FA 2008, Sch 41), and failure to make a return (FA 2009, Sch 55).
In each of those cases, the special reduction rules provide that if HMRC “think it right because of special circumstances” they may reduce certain penalties. The legislation does not define “special circumstances”, but merely states what they do not include (i.e. the ability to pay, or the fact that a potential loss of revenue from one taxpayer is balanced by a potential overpayment by another).
A special reduction includes HMRC ‘staying’ a penalty (i.e. stopping or postponing enforcement of a penalty) or ‘agreeing a compromise’ (i.e. foregoing all or part of a penalty).
The special reduction facility is obviously good news for taxpayers. The fact that the reduction relies on HMRC’s discretion is less promising! However, if HMRC does not at least consider applying a special reduction where a penalty is in point, this can result in the tribunal applying a penalty reduction instead (see below).
Are you special?
The question of whether circumstances are ‘special’ will depend on the precise facts of each case. HMRC considers that special circumstances are either “uncommon or exceptional, or where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law” (CH170100).
HMRC cites examples in the Compliance Handbook manual where special circumstances ‘may’ exist (CH170800), and where they do not (CH170900). HMRC considers it “unlikely” that a special reduction will apply to a penalty where behaviour is considered to be deliberate, as it would “not normally be enough” for the person to say that their error or failure was only caused by uncommon or exceptional circumstances.
Due to the lack of definition of ‘special circumstances’, HMRC’s Compliance Handbook manual refers to various case law (CH171000) and First-tier Tribunal decisions (CH1730000) for guidance on its meaning, although its decisions do not create binding precedents.
Has HMRC considered a reduction?
There are certain rights of appeal in respect of penalties. For example, in the context of penalties for errors, a taxpayer’s rights of appeal include the right to appeal against HMRC’s decision that a penalty is payable (FA 2007, Sch 24, para 15(1)), and also as to the amount of a penalty (para 15(2)). An appeal under the latter would include an appeal against the omission by HMRC to exercise its discretion under the special reduction provisions (Hardy v HMRC; see below).
However, the tribunal’s own discretion is restricted. If HMRC does not allow a special reduction in penalties, or if the reduction is too low, the tribunal can apply a different special reduction due to special circumstances, but only if HMRC’s decision is considered to be flawed. ‘Flawed’ has the same meaning for these purposes as when considered in judicial review proceedings (Sch 24, para 17(3)(b), (6)). HMRC guidance describes judicial review principles as including “whether HMRC acted in a way no reasonable body of commissioners would act, whether we took something irrelevant into account or whether we disregarded something we should have taken into account” (CH174500).
The failure by HMRC to even consider whether a special reduction applied has been held to be a flaw in itself (e.g. Hardy v HMRC [2011] UKFTT 592 (TC)). In addition, in White v HMRC [2012] UKFTT 364 (TC), the HMRC officer did not give a special reduction in a penalty, but failed to provide any explanation. The tribunal noted that there was no evidence to indicate that the HMRC officer had considered a special reduction before the penalty determination was made. The tribunal considered that the HMRC officer’s failure to give reasons for concluding that there were no special circumstances (and hence that no special reduction should be made) meant that his decision was flawed.
In Bluu Solutions Ltd v Revenue & Customs [2015] UKFTT 95 (TC), the tribunal expressed the view (disagreeing with certain other tribunal decisions, including White) that a decision by HMRC on whether or not there are special circumstances can be made at any time up to the conclusion of the tribunal hearing. However, it agreed with the tribunal in White that a decision of HMRC in relation to special circumstances requires reasons, as otherwise the tribunal cannot know whether the decision was flawed.
In the recent case Arnfield v Revenue & Customs [2015] UKFTT 53 (TC), the taxpayer filed a late tax return. HMRC issued a late filing penalty of £100. The taxpayer appealed. It was argued that HMRC failed to follow normal working practices and notify the taxpayer’s accountants of her unique taxpayer reference (UTR), and also that the tax return had been issued to the taxpayer without her accountants’ knowledge. Unfortunately, the First-tier Tribunal decided that the taxpayer did not have a ‘reasonable excuse’ for the late submission of her return (within FA 2009, Sch 55, para 23), as she should have informed the accountants of her UTR, and showed them her HMRC notice to file. It was the taxpayer’s responsibility to ensure that the return was filed on time.
However, the tribunal went on to consider whether there were ‘special circumstances’ (within FA 2009, Sch 55, para 16). The tribunal could only substitute its decision for that made by HMRC if it decided that HMRC’s application of the special circumstances provision was “flawed when considered in the light of the principles applicable in proceedings for judicial review” (FA 2009, Sch 55, para 22). There was no evidence of HMRC having considered whether there were special circumstances. HMRC’s failure to consider the question whether to exercise their discretion to take account of special circumstances was a flawed decision. The tribunal was therefore entitled to vary the penalty if special circumstances existed.
The tribunal considered that HMRC's failure to act on forms 64-8 and SA1 sent by the appellant’s accountants was a contributory factor in her failure to file the return on time. This failure took the case “out of the ordinary run of events”. Taking all the circumstances into account, the tribunal therefore reduced the penalty to £60.
Special reduction by the tribunal?
The First-tier Tribunal has applied a special reduction in penalties below the minimum 15% penalty for prompted careless errors in some cases:
- Hardy v HMRC (see above) - The tribunal reduced HMRC’s penalty to 2.5% of the tax underpaid;
- White v HMRC (see above) – The 15% penalty sought by HMRC was reduced by the tribunal to 6% of an overstated tax repayment claim;
- Davis v HMRC [2011] UKFTT 391 (TC); Roche v HMRC [2012] UKFTT 333 (TC) - in both cases, the tribunal reduced a penalty of 15% to 7.5% of the potential lost revenue.
The special reduction not only applies to careless errors. For example, it can apply (as the Arnfield case indicates) to automated and fixed penalties for late tax returns. Whilst the special reduction can apply to tax-geared penalties as well, as mentioned earlier it is unlikely that HMRC will apply a special reduction in cases involving deliberate error.
Practical Tip:
HMRC may decide not to allow a special reduction in the particular circumstances. However, check that HMRC at least considers whether special circumstances existed. If HMRC does not do so, or does so without explaining its decision, a special reduction by the tribunal may be possible on appeal, depending on the particular facts of the case.
