HMRC have discretion to reduce penalties if they think it is right because of special circumstances. This is referred to as special reduction. Details are given in the Compliance Handbook and HMRC have updated their guidance on this topic. Special reduction may be given if a person appeals against an automated penalty, whether it is fixed or tax-geared. HMRC guidance states that the penalty may be stayed, or a compromise may be agreed.
HMRC have amended their guidance on:
- “when special circumstances may exist” – see CH 170800; and
- “what are special circumstances” – see CH 170600.
The following (again from see CH 170800) is an HMRC example of where there might be special circumstances:
“Joe received a VAT repayment that he was entitled to. Due to a posting error he mistakenly accounted for the receipt to HMRC as taxable sales in his next VAT return. The large size of the output tax related error meant that Joe should have notified HMRC via the VAT error correction report process. However, he mistakenly corrected the error in his next VAT return.
We carried out a pre repayment credibility check. When prompted, Joe explained what he had done. We decided that the error was careless because a prudent VAT taxpayer should have been aware of the error correction return adjustment limit. This meant Joe was liable to an inaccuracy penalty of 15% minimum for a prompted disclosure.
In these precise circumsatnces where Joe had mistakenly paid his VAT refund back to HMRC and clawed it back via his next VAT return instead of notifying HMRC using the error correction process, we would consider reducing the penalty to a more appropriate level through special reduction. The reduced penalty would take into account these relevant facts but still be sufficient to encourage Joe to comply with the error correction report requirement for larger VAT errors in future.”
Taxpayer Safeguards (see below), by the late Robin Williamson, explores the topic of special reduction, including its interaction with the concept of reasonable excuse.