Testa v Revenue & Customs

Factual and Procedural Background

The Appellant, formerly employed as Chief Executive Officer of Company A, received a severance payment following termination of employment effective 31 August 2009. The severance payment included a payment in lieu of notice and compensation for loss of office. The Appellant filed his self-assessment tax return for the year ended 5 April 2010 using figures from his P45 alone, inadvertently omitting the severance payment and the tax deducted from it. This omission was a careless error, resulting in an underdeclaration of income tax amounting to £38,866.07.

HM Revenue & Customs (HMRC) identified the discrepancy upon cross-checking the tax return with the employer's annual return and imposed a penalty under Schedule 24 of the Finance Act 2007 for careless inaccuracy. The penalty was mitigated to the minimum of 15% of the underdeclaration due to the Appellant's cooperation. The Appellant sought suspension of the penalty on the basis of a condition that his future self-assessment returns be prepared by a suitably qualified professional adviser. HMRC refused to suspend the penalty, citing a general policy against suspending penalties for one-off errors and stating no specific, time-bound, measurable conditions could be set to avoid future careless inaccuracies.

The Appellant appealed HMRC's refusal to suspend the penalty. The First-tier Tribunal heard the appeal and considered the relevant statutory provisions, case law, and the parties’ positions.

Legal Issues Presented

1. Whether HMRC's decision not to suspend the penalty for careless inaccuracy was flawed under paragraph 17(4)(a) of Schedule 24 Finance Act 2007.
2. Whether the proposed condition for suspension—that the Appellant's tax returns for the next two years be submitted by a suitably qualified professional adviser—meets the statutory requirements for suspension under Schedule 24.

Arguments of the Parties

Appellant's Arguments

• The Appellant admitted the error was careless and sought suspension of the penalty on the condition that future self-assessment returns be prepared by a qualified professional adviser to avoid further careless inaccuracies.
• The Appellant argued that such a condition is specific, measurable, and time-bound, and would help avoid future penalties, fulfilling the statutory criteria.
• The Appellant contended that HMRC's blanket policy refusing suspension for one-off errors was overly harsh and inconsistent with the legislation.

Respondent's Arguments (HMRC)

• HMRC maintained that the penalty related to a one-off error and that no conditions could be set to prevent recurrence, thus suspension was not appropriate.
• HMRC argued that the Appellant was provided with all relevant paperwork to complete the return correctly and the error arose from his failure to file the payslip containing severance payment details.
• HMRC relied on their internal policy and previous case decisions to justify refusal to suspend penalties for one-off inaccuracies.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Fane v HMRC [2011] UKFTT 210 (TC)	Refusal to suspend penalties for one-off careless inaccuracies; conditions of suspension must be specific and practical, not merely a general obligation to avoid future errors.	The Tribunal agreed that suspension is generally inappropriate for one-off errors unless specific, measurable conditions are met; however, the court distinguished the present case on the nature of the proposed condition.
Hearn v HMRC [2013] UKFTT 782 (TC)	Deliberate omission precludes suspension; suspension requires conditions that lead to non-repetition of errors.	Referenced to illustrate the approach to suspension; the present case involved a careless rather than deliberate error.
Philip Boughey v HMRC [2012] UKFTT 398 (TC)	Suspension conditions need not be specific to the precise inaccuracy; a condition requiring professional preparation of returns is valid and assists in avoiding further penalties.	The Tribunal found HMRC's refusal to consider the proposed condition flawed; the present court adopted this reasoning to support the Appellant's proposal.

Court's Reasoning and Analysis

The court analysed the statutory framework under Schedule 24 of the Finance Act 2007, focusing on paragraph 14(3), which permits suspension only if compliance with conditions would help the taxpayer avoid further careless inaccuracies. The court noted that the legislation requires conditions that are specific, practical, and measurable, going beyond a mere general obligation not to make errors.

The court considered HMRC's policy of refusing suspension for one-off errors and found it to be an unwarranted limitation inconsistent with the broad drafting of the legislation. The court accepted that while one-off events often do not lend themselves to suspension, the legislation does not exclude them categorically if appropriate conditions can be set.

The Appellant's proposed condition—that future self-assessment tax returns be prepared and certified by a suitably qualified professional adviser—is specific, measurable, and likely to reduce the risk of further careless inaccuracies. HMRC had failed to provide any substantive reasoning or evidence to reject this proposal other than reliance on their general policy.

Accordingly, the court found HMRC's decision not to suspend the penalty to be flawed under the judicial review principles applicable to such decisions. The court exercised its discretion to order suspension of the penalty, indicating that the terms of suspension should include the proposed professional adviser condition, though it lacked jurisdiction to impose the precise terms at this stage.

Holding and Implications

The appeal is allowed and HMRC is ordered to suspend the penalty.

The direct effect of this decision is that the penalty imposed on the Appellant for careless inaccuracy in his self-assessment tax return is suspended, subject to appropriate conditions to be agreed or appealed subsequently. This ruling clarifies that HMRC's blanket policy against suspending penalties for one-off errors is not consistent with Schedule 24 and that suspension may be appropriate where specific, measurable conditions are proposed that address future compliance. No binding precedent beyond this case is established, but the decision provides guidance on the interpretation and application of the suspension regime under Schedule 24.