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HMRC internal manual

Compliance Handbook

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Special reduction: When special circumstances may exist

We can only make a special reduction where there are special circumstances, see CH170600. You must not give a special reduction without authority from TAA to do so, see CH175000.

This page provides examples to help to illustrate when special circumstances might exist. However, the examples are not an exhaustive list and the precise facts of individual cases will be critical in deciding whether similar circumstances are special circumstances.

CH170600 explains that special circumstances are either

  • uncommon or exceptional, or
  • where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law.

Examples 1 and 2 show the type of cases where uncommon or exceptional circumstances may justify a special reduction. Example 3 shows the type of case where strict application of the penalty law may produce a result contrary to its clear intention.

Example 1 - Joe

Special circumstances - uncommon or exceptional

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 uncommon and exceptional circumstances, 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.

Example 2 - Brian

Special circumstances - uncommon or exceptional

Brian included a careless inaccuracy in his return. He made a prompted disclosure and received full reduction for that disclosure. So he was liable to a 15% minimum penalty.

Due to the precise facts relating to Brian’s circumstances, after very careful consideration and with authorisation at the appropriate level under remission procedures, see the Admin Law guidance, HMRC decided not to collect the understated tax.

In these precise uncommon circumstances, while Brian was still liable in law to an inaccuracy penalty under FA07/SCH24, we would consider reducing the penalty through special reduction, to nil if appropriate. The appropriate reduction of the penalty would depend on the precise uncommon and exceptional reasons why the understated tax resulting from the inaccuracy is not being collected.

Example 3 - Frank and Darren

Special circumstances - strict application of penalty law contrary to clear compliance intention of penalty law

Frank and Darren, a father and son, traded in partnership. Frank retired from the partnership trade. Darren continued to trade afterwards without registering as a sole trader. Darren continued to submit VAT returns to HMRC, but failed to notify the change of VAT entity. He was therefore liable to a tax-geared penalty for late notification.

In these precise circumstances, where the right tax was paid at the right time, which the partnership does not want returned, and there is a close association (here the father and son succession relationship), we may reduce the penalty to an appropriate level through special reduction. We would only consider this because there is a close association between the two tax entities.

If the change in tax entity resulted from normal commercial arrangements then such transfer of business circumstances would not be uncommon or exceptional and so would not be special circumstances.