Can you avoid a penalty for a one-off mistake?

Careless errors

If you make a mistake in, say, your tax return, and can’t demonstrate that it occurred despite you taking reasonable care, HMRC will not only demand the tax underpaid as a result but will add a penalty. You can ask for this to be suspended for up to two years after which it will be cancelled providing you haven’t erred again.

Suspension is only permitted for careless errors. If the error was deliberate HMRC doesn’t have the power to suspend the resulting penalty.

Change your ways

The legislation says that suspension of penalties is at HMRC’s discretion. This doesn’t mean its decision is arbitrary. Within the suspension period you must take steps to ensure that the risk of repeating the same kind of error is eliminated or at least substantially reduced.

For example, by automating a process for gathering information required to complete a document rather than relying on manual collation of the data.

Criteria

For HMRC to accept that you’ve made a change that reduces the risk of errors it must:

• directly relate to the cause of the inaccuracy
• be capable of being demonstrated that it has worked
• continue to be effective
• be realistic; and
• has been put in place before the end of the suspension period.

HMRC’s narrow view

In HMRC’s eyes it’s very difficult to make a change that will protect against a one-off random error caused by an oversight. It argues that there are no steps that can prevent a similar event. However, the tax tribunals have criticised this approach on a number of occasions for being too narrow.

If the error relates to a one-off transaction that’s never likely to reoccur, say a capital gain from the sale of inherited shares, it’s unlikely that you’ll be able to make a change that will meet all HMRC’s criteria to allow for a suspended penalty. However, it is possible to do so for a one-off error that relates to a recurring transaction.

Example. Stavros’s employer provided him with a one-time benefit in kind which he overlooked when completing his tax return. HMRC spotted the error, amended his self-assessment and charged a penalty. HMRC refused to suspend the penalty and trotted out its usual line that as it was a one-off event it was not possible for Stavros to take steps that would prevent a similar error given that the benefit wouldn’t be repeated. Stavros can argue that while it was a one-off benefit, different benefits might occur in future with his current or future employer. To prevent a similar oversight, he can create a checklist for his employment income for use each year as part of the process of preparing his tax return. A tax return checklist for all types of income etc. to be included on a tax return is a good idea and may be enough to persuade HMRC to suspend a penalty for many types of mistake.