Special reduction is HMRC’s discretion to cut, stay or settle a penalty “if they think it right because of special circumstances”. It can take a penalty below the statutory minimum, but it cannot be based on inability to pay, on tax lost from one person being balanced by an overpayment by another, or on facts already used for reasonable excuse, reasonable care or the disclosure reduction. A tribunal can only substitute its own view of special reduction if HMRC’s decision was flawed on judicial review principles.

Where does the power come from?

Each of the main modern penalty codes contains the same wording:

  • Schedule 24 to the Finance Act 2007, paragraph 11 (inaccuracies);
  • Schedule 41 to the Finance Act 2008, paragraph 14 (failure to notify and certain VAT and excise wrongdoing);
  • Schedule 55 to the Finance Act 2009, paragraph 16 (late returns); and
  • Schedule 56 to the Finance Act 2009, paragraph 9 (late payment).

Each says HMRC may reduce a penalty if they think it right because of special circumstances, that special circumstances do not include ability to pay or the fact that a potential loss of revenue from one taxpayer is balanced by a potential overpayment by another, and that reducing includes staying a penalty and agreeing a compromise in proceedings for a penalty. HMRC’s Compliance Handbook (CH170200) also lists asset based offshore penalties, deliberately withholding information, failure to pay tax under the Finance Act 2021 and electronic sales suppression penalties as within scope.

Staying means stopping or postponing enforcement. A compromise lets HMRC give up all or part of a penalty (CH170500).

What counts as special circumstances?

CH170600 says special circumstances are factors not otherwise provided for in the legislation, and fall into two kinds:

  • circumstances relevant to the penalty that are sufficiently special that HMRC considers it right to reduce it; or
  • cases where strict application of the penalty law produces a result contrary to its clear compliance intention.

A circumstance need not be unique to the taxpayer, but it must be relevant to the penalty. HMRC’s examples in CH170800 include:

  • Joe, who wrongly accounted for a VAT repayment as sales and then corrected it on his next return instead of using the error correction process. His careless penalty had a 15% minimum, but HMRC would consider reducing it because the error was in effect paying his own refund back.
  • Brian, whose understated tax HMRC formally decided not to collect. His 15% careless penalty could be specially reduced, to nil if appropriate.
  • Frank and Darren, father and son. Darren carried on the partnership business as a sole trader without notifying the change of VAT entity, but the right tax was paid at the right time. Because of the close family succession HMRC may reduce the late notification penalty. A normal commercial transfer of business would not qualify.

What does not count?

Beyond the two statutory exclusions, CH170900 says HMRC will not treat the following as special circumstances:

  • anything already covered by another part of the penalty law, such as a reasonable excuse, reasonable care, or the factors used to set the reduction for disclosure;
  • facts that led HMRC to reclassify a prompted disclosure as unprompted (see prompted or unprompted disclosure);
  • an underpayment in one period balanced by an overpayment in another, on its own;
  • the size of the penalty on its own, or an argument that it is disproportionate, because the tax geared regimes are designed to be punitive and comply with the European Convention on Human Rights; and
  • in most cases, deliberate behaviour, whether or not concealed.

HMRC also says (CH170600) it will not use special reduction where that would be contrary to the clear compliance intention of the regime, and in particular not because the underlying tax has been paid. Its example Ian filed five months late, owed £200 of tax and was charged £100 plus £600 in daily penalties. The mismatch was not special. Nor was Alan’s plea that his careless omission of a termination payment, already at the 15% minimum, was “a simple oversight”.

How does HMRC decide?

CH170100 says officers must consider special reduction when assessing a fixed or tax geared penalty and when someone appeals an automated penalty, after first checking reasonable excuse, reasonable care and the disclosure reduction. An officer may refuse, but cannot grant a special reduction without authority from HMRC’s Specialist Technical Team, and must refer the case there if the taxpayer disputes a refusal (CH175000). The amount is not negotiated with the taxpayer; the technical team sets it (CH170500).

CH174500 suggests looking for special facts about what caused the inaccuracy, what caused the person not to take reasonable care, and what caused the disclosure to be prompted rather than unprompted. The decision letter should state what was taken into account and why.

How does the tribunal review a refusal?

There is no separate appeal against a refusal of special reduction. You appeal against the amount of the penalty (CH175100). On that appeal the tribunal may affirm HMRC’s decision or substitute another decision HMRC had power to make. Paragraph 17(3) of Schedule 24, mirrored in paragraph 19(3) of Schedule 41 and paragraph 22(3) of Schedule 55, then limits what it can do with special reduction:

  • it may apply special reduction to the same extent as HMRC, which may mean the same percentage reduction applied to a different starting point; or
  • it may apply it to a different extent, but only if it thinks HMRC’s decision was flawed.

“Flawed” means flawed in the light of the principles that apply in judicial review. CH174500 summarises them as acting in a way no reasonable body of commissioners would, taking something irrelevant into account, or disregarding something relevant. CH170100 warns officers that failing to consider special reduction at all risks the tribunal finding the decision flawed. On the meaning of the words, HMRC accepts the Upper Tribunal’s view in Barry Edwards that special circumstances should not be read restrictively, and notes the Upper Tribunal’s comment in Matthew Harrison that the circumstances must be “special”, no more and no less (CH173000).

Worked example: the same reduction on a new starting point

Illustration only. HMRC charges a 15% careless penalty on potential lost revenue of £10,000, which is £1,500, and specially reduces it by half to £750. On appeal the tribunal finds the extra tax was only £6,000. The penalty before special reduction becomes £900. Unless HMRC’s special reduction decision was flawed, the tribunal applies the same half reduction, giving £450. If it was flawed, the tribunal may decide its own level of reduction.

How do you ask for a special reduction?

  • Appeal the penalty in time. HMRC says you usually have 30 days from the date the penalty was issued; see late appeals if that has passed.
  • Argue reasonable excuse, reasonable care and the disclosure score first, because special reduction only covers what those do not.
  • Set out the specific facts that make the case special and how they relate to the penalty, not general hardship or the size of the bill.
  • If the officer refuses, ask for a statutory review or go to the tribunal; see reviews and the tax tribunal. On appeal, look at whether HMRC considered special reduction at all and whether its letter shows relevant facts were weighed.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.