Upper Tribunal considers first penalty suspension conditions case

Jake Landman, a tax disputes specialist at Pinsent Masons, was commenting as the UT upheld the First-tier Tax tribunal’s (FTT) dismissal of an appeal against HM Revenue and Customs’ (HMRC) refusal to suspend penalties for errors made by two taxpayers when claiming business asset disposal relief (BADR) on the disposal of shares in their tax returns.

The dispute centred on Philip Cox and Debra Cox, who in 2019, alongside other shareholders in David Williams IFA Holdings Ltd, disposed of their shares in the company. They proceeded to claim BADR – previously known as entrepreneurs' relief – for the applicable tax year, which reduces the capital gains tax payable by individuals on gains realised on disposals of shares in companies to 10%, provided a number of specific conditions are met.

However, HMRC issued penalties to the Coxes for careless inaccuracies in their self-assessment returns for the 2019-20 tax year and said they had claimed BADR to which they were not entitled since they did not own the required minimum shareholding of 5% in the company.

The Coxes appealed both the penalty notices, which together amounted to more than £32,000, and the decision on BADR to the FTT.

HMRC can suspend penalties subject to certain conditions. Provided these conditions are met for the qualifying period, the penalty does not have to be paid, but if the taxpayer fails to meet the conditions, the penalty comes back into charge. Schedule 24 to the Finance Act 2007 provides that HMRC may only suspend a penalty if compliance with the conditions would help the taxpayer avoid becoming liable to further penalties for careless inaccuracy.

A tribunal can only overturn HMRC’s decision not to suspend a penalty if it finds that HMRC’s decision was flawed in the judicial review sense. In February 2025 the FTT ruled that the shares did not qualify for BADR, that the inaccuracy had been careless and that HMRC’s decision to refuse to suspend the penalties had not been flawed.

The FTT determined that the proposed conditions put forward by the appellant had been no more than basic requirements for a taxpayer to complete their returns accurately. It also said that HMRC had applied its published criteria correctly, had not adopted a rigid approach and had not automatically precluded suspension on the basis that the tax event was a “one-off”.

The Coxes appealed to the UT in relation to the decision not to suspend, marking the first time this specific issue has been considered by the tribunal.

The UT ultimately decided (PDF 28 pages / 403KB) that HMRC’s decision had not been flawed. Specifically, it found that existing legislation does not require there to be a link between the type of inaccuracy that gave rise to the penalty in question and the type of inaccuracy that could arise in future. In other words, it said that the future inaccuracy does not need to be similar to the current one. However, consideration of suspension does require a focus on the taxpayer’s behaviour.

It said that HMRC’s decision maker needed to establish what went wrong that led to the inaccuracy and whether a condition of suspension could be established that would help to avoid or reduce the risk of inaccuracy in the future.

While it reasoned that the FTT had made an error of law in setting out its interpretation of the principle on the link between the two inaccuracies, the decision not to suspend was not based on this error and therefore it ruled that there was no material error in the FTT’s decision.

It said that the FTT’s approach had been largely correct. Although the UT agreed that the FTT had erred in concluding that the conditions put forward must be more than “the actions of a reasonable and prudent taxpayer”, it noted that the FTT had gone on to find that even in spite of this, HMRC’s decision-making was not flawed on a different basis, and therefore the error was, again, not material and this ground was also dismissed.

Landman said the UT’s decision provided some important clarifications for taxpayers seeking tax penalty suspensions in future: “Even though the UT found the FTT had made some errors in dealing with the case law and principles, the UT nevertheless felt these errors hadn't been determinative of the FTT's decision,” he said. “The UT was careful to emphasise it was not looking to establish whether it was possible to conceive of a suitable set of suspension conditions for this case. The question on appeal is instead whether HMRCs decision was flawed applying a judicial review threshold.”

Landman said the fact that the taxpayers had a “prior record of good practice” in terms of filing tax returns arguably made their case for suspension more difficult. “This does feel odd, but the UT linked this to the statutory condition in that there must be something in the taxpayer's practices to change or correct for suspension to be appropriate,” he said. “The case underlines the importance of carefully framing the proposed penalty suspension conditions when attempting to persuade HMRC suspension is appropriate.”