It is inevitable that sometimes things go wrong and when it comes to tax, the issue of penalties can arise. This can occur when the taxpayer has been careless – which in this context means a failure to take reasonable care. That generally means not doing what a reasonable taxpayer would have done in those circumstances.
There are three main areas of relief.
You may have a reasonable excuse for the default which would apply when you have taken reasonable care (like having taken competent and timely professional advice), and that can be a complete defence.
You can ask HMRC to reduce the penalty (possibly to zero) because of special circumstances. There are few guidelines for this, so lots of opportunities for special pleading.
Or you can ask HMRC to exercise their discretion to suspend the penalty. That is not perfect because you still have the default and the penalty on your record (which won’t help if you do something wrong in future), but at least you don’t have to pay it. The suspension will be subject to a number of conditions, and HMRC have a number of criteria before they will consider suspension; these are called the SMART tests:
Specific: The conditions must be directly related to the business or individual being penalised to encourage better compliance future.
Measurable: It must be possible for the individual to show that conditions have been met during the suspension period.
Achievable: The person must be able to meet the conditions. There is no point in setting a condition which a person can never meet.
Realistic: The condition must be proportionate and reasonable and cannot include a condition that requires the person to incur costs.
Time: The suspension period cannot exceed two years.
If HMRC are not sympathetic and insist on the penalty you can always appeal to the tribunal, which is what Mr Cox did in Cox v HMRC [2026] UKUT 7 (TCC).
Unfortunately, the careless error of Mr Cox related to a gift of shares and an erroneous claim to Entrepreneurs’ Relief; this was a one-off event which was unlikely to be repeated. The idea of the suspension is to encourage better compliance in the future. HMRC refused to suspend the penalty on the grounds that compliance would not have been improved by a suspension. The tribunal accepted that this was a reasonable exercise by HMRC of their discretion.
The decision is perhaps a bit tough on the taxpayer because HMRC might well have said by that if Mr Cox had made a careless error once, he might make another careless error, and a suspension would have had the purpose of encouraging greater vigilance over compliance – which would be a good thing. But I suppose HMRC might have taken the view that having the penalty and not suspending it may be a greater incentive to proper compliance.
It is inevitable that sometimes things go wrong and when it comes to tax, the issue of penalties can arise. This can occur when the taxpayer has been careless – which in this context means a failure to take reasonable care. That generally means not doing what a reasonable taxpayer would have done in those circumstances.
There are three main areas of relief.
You may have a reasonable excuse for the default which would apply when you have taken reasonable care (like having taken competent and timely professional advice), and that can be a complete defence.
You can ask HMRC to reduce the penalty (possibly to zero) because of special circumstances. There are few guidelines for this, so lots of opportunities for special pleading.
Or you can ask HMRC to exercise their discretion to suspend the penalty. That is not perfect because you still have the default and the penalty on your record (which won’t help if you do something wrong in future), but at least you don’t have to pay it. The suspension will be subject to a number of conditions, and HMRC have a number of criteria before they will consider suspension; these are called the SMART tests:
Specific: The conditions must be directly related to the business or individual being penalised to encourage better compliance future.
Measurable: It must be possible for the individual to show that conditions have been met during the suspension period.
Achievable: The person must be able to meet the conditions. There is no point in setting a condition which a person can never meet.
Realistic: The condition must be proportionate and reasonable and cannot include a condition that requires the person to incur costs.
Time: The suspension period cannot exceed two years.
If HMRC are not sympathetic and insist on the penalty you can always appeal to the tribunal, which is what Mr Cox did in Cox v HMRC [2026] UKUT 7 (TCC).
Unfortunately, the careless error of Mr Cox related to a gift of shares and an erroneous claim to Entrepreneurs’ Relief; this was a one-off event which was unlikely to be repeated. The idea of the suspension is to encourage better compliance in the future. HMRC refused to suspend the penalty on the grounds that compliance would not have been improved by a suspension. The tribunal accepted that this was a reasonable exercise by HMRC of their discretion.
The decision is perhaps a bit tough on the taxpayer because HMRC might well have said by that if Mr Cox had made a careless error once, he might make another careless error, and a suspension would have had the purpose of encouraging greater vigilance over compliance – which would be a good thing. But I suppose HMRC might have taken the view that having the penalty and not suspending it may be a greater incentive to proper compliance.
