Philip Cox & Anor v The Commissioners for HMRC

Under paragraph 14 of Schedule 24 to the Finance Act 2007, suspension of a penalty for careless inaccuracy requires a condition that would help the particular taxpayer avoid further careless inaccuracies. The legislation does not require future inaccuracies to be of the same type, and a one-off event does not automatically prevent suspension. The taxpayer’s underlying behaviour and what could reasonably have been done differently remain relevant. HMRC may use SMART criteria to promote consistency, provided its guidance does not fetter the statutory discretion. A tribunal may order suspension only where HMRC’s refusal is flawed by judicial review standards. An error in the reasoning is immaterial where it did not form the basis of the decision and could not have affected the outcome.

Philip and Debra Cox appealed to the Upper Tribunal against the First-tier Tribunal’s dismissal of their appeals concerning HMRC’s refusal to suspend penalties for careless inaccuracies in their 2019/20 self-assessment returns.

The inaccuracies followed the Appellants’ disposal of shares after their shareholdings had fallen below the level required for business asset disposal relief. The FTT found that the Appellants had acted carelessly and that HMRC’s refusal to suspend the penalties was not flawed. The Upper Tribunal granted permission on four grounds concerning the interpretation of paragraph 14(3), one-off inaccuracies, HMRC’s SMART criteria, and conditions requiring no more than reasonable taxpayer behaviour. The central issue was whether the FTT had made a material error of law in upholding HMRC’s decision.

1. Appeals dismissed. The FTT had correctly concluded that HMRC’s refusal to suspend the penalties was not flawed applying judicial review principles.
2. Paragraph 14(3) of Schedule 24 to the Finance Act 2007 does not require a link between the type of inaccuracy giving rise to the original penalty and the type of future inaccuracy. A future error need not be similar, and a one-off event does not automatically preclude suspension.
3. The statutory focus is nevertheless on the behaviour of the particular taxpayer. The decision-maker must identify what went wrong, what the taxpayer could reasonably have done differently, and whether a condition would improve or change that taxpayer’s behaviour so as to reduce the risk of further careless inaccuracies. The nature of the original inaccuracy is a relevant, but not determinative, consideration.
4. HMRC may apply SMART criteria requiring conditions to be specific, measurable, achievable, realistic and time-bound. Such guidance is permissible to promote consistency, but must not unlawfully fetter the discretion. The FTT found that HMRC had not adopted a rigid rule excluding suspension for one-off inaccuracies.
5. The FTT made errors in stating that paragraph 14(3) implied a link between types of inaccuracy and in treating the proposed conditions as no more than a basic requirement. Those errors were immaterial. HMRC’s actual decision was based on the inability to identify any future careless error that a condition would avoid, having regard to the Appellants’ long history of accurate returns, the absence of an underlying record-keeping weakness, and the exceptional one-off nature of the event.
6. The statutory review process meant that later submissions, including the alternative proposed condition, could be considered. HMRC’s decision as upheld on review was the decision challenged before the FTT. The statutory threshold for ordering suspension was not met.

• Upper Tribunal (Tax and Chancery Chamber): appeals against the First-tier Tribunal decision dismissed. The Upper Tribunal held that the FTT’s errors of law were immaterial and upheld the refusal to suspend the penalties.
• First-tier Tribunal (Tax Chamber): appeals against the penalties and HMRC’s refusal to suspend them dismissed. Decision released 3 June 2024.