When should a penalty be suspended?

27 June 2013. Published by Dan Wyatt, Partner

The First-tier Tribunal ('FTT') has allowed the taxpayer's appeal in Testa v HMRC,[1] against HMRC's refusal to suspend a penalty imposed under paragraph 1, Schedule 24, Finance Act 2007...

…for an admittedly careless inaccuracy contained in the appellant taxpayer's self-assessment tax return for the year ended 5 April 2010.

The facts

Mr Testa, was employed as CEO of Gatehouse Bank Plc ('Gatehouse'). He left Gatehouse on 31 August 2009. Under the terms of a leaving agreement Mr Testa was to be paid a severance payment of £213,600.25 of which £100,000 was a payment in lieu of notice and the balance compensation for loss of office.

Mr Testa was duly issued with form P45 on 4 September 2009, showing salary received and tax deducted up to 2 September 2009. Shortly thereafter, Mr Testa received his severance payment and a further payslip from Gatehouse showing the severance payment.

Mr Testa then made a careless error and filled in his tax return using the figures from his P45 alone. The effect was to omit from his tax return the severance payment and the tax deducted at source from it by Gatehouse when making the payment to him.

On 27 January 2012, HMRC queried this discrepancy. Mr Testa immediately acknowledged his error and provided a full explanation of how it had arisen. As a result what Mr Testa accepted was a careless error in his return, the under declared tax amounted to £38,866.07.

HMRC accepted Mr Testa's explanation and mitigated the penalty down to the minimum level of 15% for the under declaration, amounting to £5,829.91. On 12 March 2012, Mr Testa contacted HMRC informing them that he believed there were valid grounds for HMRC imposing a suspended penalty. Mr Testa said that he would retain a tax adviser who would assist him in avoiding careless inaccuracies in the future. HMRC refused, however, to suspend the penalty. HMRC's view was that there were no specific, time bound, measurable conditions that could be set to enable Mr Testa to avoid careless inaccuracies in the future and that the termination payment error was a one-off which was unlikely to occur again in the near future.

The law

The relevant legislation is contained in Schedule 24 of the Finance Act 2007, which provides that HMRC may suspend all, or part, of a penalty only if compliance with a condition of suspension will help the taxpayer to avoid becoming liable to further penalties for careless inaccuracy (paragraph 14(3)). A condition of suspension may specify action to be taken and a period of time within which that action must be taken (paragraph 14(4)).

The FTT's decision

The FTT observed that Schedule 24 sets out a new regime for the suspension of penalties for which there is no relevant precedent. The wording of paragraph 14(3) was clear and would only authorise suspensive conditions where compliance with them would help a taxpayer to avoid becoming liable to further penalties, pursuant to paragraph 1, for careless inaccuracies. In the FTT's view, the underlying purpose of the legislation was 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 the last chance if he "takes some specific and observable action which is specifically designed to improve his compliance." (paragraph 31). Moreover, the FTT found that there must be some linkage between the earlier default and the action required by the suspensive conditions so, for example, paragraph 14(3) would be unlikely to cover a situation where "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 records keeping processes." (paragraph 33).

In the present case, Mr Testa was suggesting a suspensive condition so that self-assessment tax returns for the next two years would be submitted by an appropriate professional adviser. The FTT considered that this suggestion should be considered by reference to the legislation, and not simply ignored or discarded as a result of HMRC's policy of "no suspension of penalties for one off errors" (paragraph 37). The FTT concluded:

"HMRC… did not give any indication as to why they considered it did not meet the requirements of the legislation, beyond their blanket statement that "one offs" were not appropriate for the suspension regime … there is also no evidence … that they gave any proper consideration to the suggestion actually made by the appellant.

In this case, given … the condition actually proposed by the appellant (which was refined at the hearing to include a requirement for a suitably qualified professional to certify, when submitting the appellant's self-assessment tax returns over the next two years, that such returns are accurate to the best knowledge and belief of that qualified professional) we consider it appropriate to order HMRC to suspend the penalty." (paragraphs 38 and 41).


The imposition of penalties by HMRC is an extremely important area for taxpayers who struggle to comply with an ever more complex tax system and it is important that penalties are not seen simply as a revenue raising exercise by HMRC.  The penalty regime contained in Schedule 24 of the Finance Act 2007, must be operated fairly and in accordance with the intention of parliament.  The decision in Testa is, therefore, to be welcomed and is a reminder that HMRC's own internal policies do not always reflect the correct legal position and in such circumstances should be firmly challenged.

1 [2013] UKFTT 151 (TC).

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