HMRC has the power to suspend penalties arising from careless inaccuracies in tax returns or other documents under Schedule 24 to the Finance Act 2007. Suspension allows a taxpayer to avoid paying a penalty, provided specific statutory conditions are met. The key points to understand are set out below.

1. Penalties can only be suspended for careless inaccuracies

HMRC can suspend penalties only where an inaccuracy is considered careless. Penalties relating to deliberate or deliberate and concealed behaviour cannot be suspended under any circumstances.

2. Suspension depends on future behaviour

A penalty will only be suspended if HMRC can set conditions that are intended to prevent similar inaccuracies from occurring again. If no such conditions can be identified, suspension will not be available.

3. Suspension conditions must be SMART

Any condition imposed by HMRC must be specific, measurable, achievable, realistic and timebound. In practice, this means the condition must address the cause of the original error, be capable of being evidenced, and be achievable within a defined period.

4. Filing returns on time is always a condition

In addition to any specific suspension conditions, the taxpayer must submit all tax returns on time throughout the suspension period. Late filing alone may result in the suspended penalty becoming payable.

5. Tax avoidance cases are unlikely to qualify

Where a careless inaccuracy arises from an attempt to use a tax avoidance scheme, HMRC considers it unlikely that a penalty can be suspended, even if the behaviour is not deemed deliberate.

6. Conditions must be agreed before suspension

Before a penalty is suspended, the taxpayer must agree the conditions with HMRC. These conditions should be proportionate to the inaccuracy, take the taxpayer’s circumstances into account, and make it clear when they have been satisfied. HMRC will then issue a formal notice of suspension.

7. The suspension period is limited

The length of the suspension period depends on how long it should reasonably take to meet the conditions. While the law allows a maximum suspension period of two years, HMRC will normally set a shorter period where appropriate.

8. Compliance during the suspension period is critical

During the suspension period, the taxpayer must meet all agreed conditions and ensure that no further inaccurate returns are submitted. If another inaccuracy penalty arises during this time, the previously suspended penalty will become payable in full.

9. HMRC will review compliance at the end of the period

At the end of the suspension period, HMRC will ask the taxpayer to confirm that the conditions have been met and may request evidence or review records. If HMRC is satisfied, the penalty will be cancelled. If not, the penalty will have to be paid.

10. Appeal rights are limited

A taxpayer can appeal HMRC’s decision not to suspend a penalty. However, once HMRC decides at the end of the suspension period that conditions have not been met, there is no right of appeal. Judicial review may be available, but legal advice should be sought before pursuing this option.