Getting your tax right can sometimes be complex and it is often the case that when HM Revenue and Customs (HMRC) investigate a taxpayer, they find that there are irregularities. When these result in an underpayment of tax, HMRC will normally levy interest and/or a penalty on the taxpayer.

HMRC have discretion as to the amount of the penalty they can levy and where a taxpayer is fully cooperative and the underpayment is not regarded as an attempt to evade tax, a penalty may be waived altogether.

In a recent case, a man who controlled a partnership which had under-declared profits some years earlier faced an additional tax charge (plus statutory interest) of £122,000. He intended to appeal against HMRC’s decision, but wrote to the tax inspector prior to the court hearing making the following proposal: he would pay the additional tax, interest on the underpaid tax at the statutory rate and HMRC’s legal costs and, in consideration for his so doing, HMRC would withdraw its amendments to the relevant tax returns. This would remove the tax-geared penalty. The offer was made in the form of a formal offer to pay under Part 36 of the Civil Procedure Rules.

The man’s tax inspector wrote back, indicating that his offer would be accepted ‘without prejudice to any penalty determination which may follow hereafter’ and the taxpayer considered that once he had paid the agreed sum, that would be the end of the matter. However, a 70 per cent penalty notice (£54,000) followed, which was towards the upper end of the scale of penalties which are normally levied.

The taxpayer went to court to contest HMRC’s right to levy the penalty – and lost. The offer had not been sufficiently clear as regards the settlement of penalties and had not specifically dealt with them. Accordingly, HMRC were not bound to accept his offer as one which would remove their right to levy a tax-geared penalty.