Case: Penalties for omitting bank mis-selling payment quashed
 UKFTT 0042 (TC)
Judge Christopher Staker
Decision released 22 January 2019
Income tax – Payment of redress for mis-sold interest rate hedging products – Penalty for failure to declare payment in tax return - Special circumstances – Appeal allowed - FA 2007 Sch. 24.
Lovell & Anor  TC 06938
Mr and Mrs Lovell (the appellants) ran a nursing home business. They took out an interest rate hedging product (IRHP) with Barclays Bank in respect of a loan used to purchase a nursing home. The IRHP premiums were deducted in the appellants’ tax returns as revenue expenses of their business. During 2013-14 the appellants received a redress payment from Barclays Bank for the mis-selling of the IRHP which they failed to include in their tax returns.
HMRC issued discovery assessments under TMA 1970, s. 29 and penalties under FA 2007, Sch. 24 for submitting inaccurate returns.
The FTT found the case to be unlike a typical careless failure to include taxable income in a tax return. For example, the appellants:
•only received the payment because they were the victims of mis-selling;
•were in a situation not of their own making;
•did not understand the IRHP that they had purchased;
•were not themselves capable of appreciating the appropriate tax treatment of the redress payment;
•had been through extremely difficult financial and personal circumstances following the mis-selling;
•were fighting to keep their heads above water;
•had overwhelming volumes of information and were dealing with complex issues that they did not understand;
•would have incurred significant fees obtaining specialist advice regarding the taxability of the redress payment which is unlikely to have been clear or conclusive;
•were aware that HMRC’s guidance was that redress payments were taxable, but were in their own minds uncertain whether this was correct;
•may at some stage have thought that the redress payment was a payment on account and that they would return the full amount of redress once finalised; and
•had not sought to dispute their liability to tax.
The FTT found that there was no indication that any matters raised by the appellants were specifically considered from the point of view of whether or not they amounted to special circumstances under FA 2007, Sch. 24, para. 11. And a bare statement in HMRC’s review letter that there were no special circumstances was insufficient to show that such consideration had been given. The FTT was therefore satisfied that HMRC’s decision on whether there were special circumstances was flawed in a judicial review sense and that it could therefore determine the issue of its own discretion.
The FTT considered that the appellants were not blameless, as for example they could have disclosed the payment and explained the circumstances in the white space in their tax returns. However, having regard to the circumstances as a whole, including the appellants accepting early on that the redress payment was taxable even though the matter was still subject to litigation in other cases, the FTT decided to reduce the penalty to zero.
The FTT decided that it was able to consider the issue of special circumstances because, by HMRC telling the taxpayers that ‘having considered the facts before me I have not found any evidence of circumstances that might allow a special reduction’, HMRC had not demonstrated that they had specifically considered whether matters raised by the taxpayers had been considered in terms of providing special circumstances.
The underlying issue of the tax treatment of mis-sold interest rate hedging products was determined by the FTT in Gadhavi  TC 06762. The issue appears set to be litigated again in a the next few months in Wilkinson TC/2017/04466, which has been designated as an informal lead case.
For commentary on penalties for incorrect documents, see In-Depth at ¶184-850.