TaxPersonal TaxFormer bank chief defeats taxman in ‘careless error’ tribunal

Former bank chief defeats taxman in 'careless error' tribunal

Tribunal rules against HMRC over its decision to refuse to suspend a penalty over a careless inaccuracy made by ex-bank CEO David Testa

Former bank chief defeats taxman in ‘careless error’ tribunal

THE FORMER CHIEF EXECUTIVE of Gatehouse Bank has successfully appealed in the first-tier tax tribunal against HM Revenue & Customs’ “flawed” refusal to suspend a penalty imposed for a careless inaccuracy.

HMRC rejected David Testa’s offer of using a qualified tax practitioner to ensure he ironed out future self-assessment errors after he mistakenly failed to declare his severance payment after he left his post with the bank in 2009.

HMRC may wholly or partially suspend a penalty if compliance with a condition of suspension would help to avoid a person becoming liable to further such penalties.

Testa left Gatehouse – now known as Gatehouse Capital – on 31 August 2009, for which he received a severance package of more than £213,000, of which £100,000 was payment in lieu of notice, with the balance compensation for his loss of office.

Testa was issued with a P45 showing his payment and tax deducted up to 2 September 2009, after which he received his severance payment. He also received a further payslip from Gatehouse showing the payment to him of the severance package plus a small amount of basic pay and accrued holiday pay, less tax.

As this payment was made after he had left Gatehouse and been issued with his P45, tax was deducted from the total payment. Testa filed his last payslip with his other Gatehouse papers and kept the P45 with his tax papers in order to fill in his year-end tax return. Subsequently, he filled in his tax return using the figures from his P45 alone, causing him to omit his severance payment and tax deducted from it – something he admits was a careless error.

After noticing the discrepancy – some £38,000 of undeclared income – HMRC challenged Testa and he immediately acknowledged his mistake and explained how it had occurred.

Accepting Testa’s explanation and as a result of his co-operation, the taxman levied the minimum fine of 15% of the undeclared income, equating to approximately £5,800.

In its letter to Testa, HMRC said is can only suspend a penalty “if we can set conditions to help avoid penalties in the future and if we think the conditions can be met”, adding suspensions may last up to 24 months.

It went on to say “we cannot suspend any of this [Testa’s] penalty… there are no specific, time-bound, measurable conditions” as his termination payment was a one-off. Testa, though, disputed that, and suggested the use of a tax adviser in order to prevent further errors.

The tribunal upheld Testa’s view, noting HMRC’s policy “sits uneasily” regarding inaccuracies arising from one-off events.

Judge Kevin Poole described HMRC’s logic as “flawed” and added there is “a danger of taking too narrow a view of the legislation”.

“It has been drafted deliberately broadly and HMRC should not be placing unwarranted limits on it by reference to general policies which exclude whole classes of case which, in our view, would have been intended to be covered by it,” he said.

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