In April 2011 a new penalty regime was introduced for the late filing of individual, partnership and Trust tax returns. The new rules, which apply to tax returns for 2010/11 onwards, greatly increase the penalties payable. A tax return that is 6 months late now attracts an automatic penalty of £1,300, compared to a comparable fine of £200 or less under the previous system. Penalties for missing tax payment deadlines have also been increased, and a further tightening of the penalty regime is likely in the future.
Why has HMRC introduced the new penalties?
The new penalty regime is part of long-term reforms by HMRC to tackle those who fail to keep up-to-date with their tax filings and payments. Other changes have already been introduced for providing inaccurate information or failing to notify HMRC of important changes, such as becoming self-employed. Further changes will be made in the future to bring other areas (such as company tax returns and Corporation Tax) into the new, unified regime.
What are the new penalties for late personal tax returns?
Under the new regime a taxpayer will be fined an initial £100 for missing the filing deadline, with the penalty increasing quickly once the tax return becomes more than 3 months late. The new penalty is calculated as follows:
- initial penalty: failure to submit a tax return by the initial deadline (i.e. 31 January if filing electronically) will lead to an automatic penalty of £100. This is payable even if no tax is due;
- more than 3 months late: if the tax return is still outstanding after 3 months the fine increases by £10 for each day it remains overdue, up to a maximum of £900;
- more than 6 months late: the fine increases by a further £300, or by 5% of the tax due if higher;
- more than 12 months late: the fine increases by another £300, or by 5% of tax due if higher. However if the taxpayer deliberately withholds information the penalty can be up to 70% of tax due, and this rises to 100% of tax due if the taxpayer takes deliberate action to conceal the incorrect information (for example, by faking paperwork).
Example: Sue moves abroad and believes she no longer has to complete a UK tax return. However when she comes back to the UK for a visit she finds a letter from HMRC saying a 2010/11 tax return was due 9 months ago. She completes the tax return (showing that no tax is due) and files it electronically on 11 October 2012.
Penalty: Sue is fined a total penalty to £1,300. This is £100 for missing the filing deadline, plus a further £10 for every day it was more than 3 months late (to the maximum of £900). There is a further penalty of £300 for being more than 6 months late. This £1,300 penalty is charged even though no tax is due.
What are the new penalties for the late payment of personal tax?
As well as raising the fines for being late with tax returns, penalties are also being increased for the late payment of tax. Under the previous regime a surcharge of 5% of tax due was charged if a tax payment was more than 30 days late, plus a further 5% if more than 6 months late. These two surcharges are being kept, but a third surcharge of 5% is being introduced if the tax payment is more than 12 months late. Interest also applies to all late tax payments.
Example 2: Steve is a busy executive and doesn’t have time to complete his tax returns. After being repeatedly reminded by HMRC and his accountant, he finally completes his 2010/11 Tax Return, showing a tax liability of £10,000, 13 months late.
Steve is fined a total penalty of £3,500 plus interest. This is made up as follows:
Penalty for late tax return: Steve is fined £100 for being late with his tax return plus the maximum of £900 for being more than 3 months late. He also receives a penalty of £500 (i.e. 5% of the tax due) for being more than 6 months late, plus a second charge of £500 for being more than 12 months late. This brings the total penalty for being late with his tax return to £2,000.
Penalty for late payment of tax: In addition to the fines above, Steve is also fined £1,500 for being late with his tax payment. This is made up of 3 surcharges of £500 each (i.e. 5% of tax due) for missing the 30 day, 6 month and 12 month payment deadlines. Steve will also be charged interest on all late payments at the rate set by HMRC at the time (currently 3%), as well as interest on the various penalties from the time they were payable.
What if the taxpayer has been given extra time to pay by HMRC?
Penalties for late payment of tax will not be charged while a taxpayer has been given extra time to pay by HMRC. However the penalties will be re-imposed if the taxpayer does not stick to the agreement and misses the agreed payment schedule.
How are partnerships tax returns affected?
If a partnership tax return is late each partner will receive a penalty. So if a partnership tax return is one day late each partner will receive an automatic penalty of £100, and these penalties will increase by £10 per day (up to a maximum of £900) if the return is more than 3 months late. Thereafter each partner will be fined an additional £300 if the return is 6 months late, and a further £300 if 12 months late.
Do these penalties also apply to Companies?
Not yet. However the legislation is in place to extend the penalty regime to companies, and this is likely to be activated in the future.
Can these penalties be appealed or reduced?
Although the penalties are levied automatically they can be waived in some circumstances. They can be overturned if the taxpayer is found to have a “reasonable excuse” for being late. HMRC can also, at its discretion, reduce penalties in special circumstances where the outcome is considered inappropriate or disproportionate.
What counts as a “reasonable excuse”?
There is no legal definition of the phrase “reasonable excuse”, so it will be down to the taxpayer to convince HMRC that their excuse falls within this category. However the law specifically excludes certain excuses, namely:
- having insufficient funds available;
- relying on someone else to file a tax return (unless the taxpayer took reasonable steps to ensure it was filed on time);
- missing a tax payment because another taxpayer (such as his or her Limited Company or spouse) had an offsetting overpayment.
What are some examples of a “reasonable excuse”?
HMRC has issued some guidance on what constitutes a reasonable excuse. In addition, a number of disputed cases have been taken to independent tribunals and the decisions released. Some of these decisions show circumstances where the excuses prohibited by law, namely insufficiency of funds or relying on an agent, can in fact be accepted.
Generally HMRC will need to be convinced of three things: that the taxpayer made a serious effort to submit a return and/or pay tax on time, that the problem was out of the taxpayers control and could not be foreseen, and that the taxpayer made an effort to correct the problem as soon as possible. A few examples of reasonable excuses are shown below:
- serious illness where supporting evidence is provided;
- forms lost in the post where proof is provided;
- a severe, unpredictable drop in income provided the taxpayer has done his or her best to make tax payments;
- problems with HMRC’s online filing system;
- problems with an accountant where the taxpayer had a genuine belief his or her return had been filed on time;
- HMRC failing to provide information on whether a return is due (providing the taxpayer makes an effort to get the required information).
The following excuses have not been considered reasonable by the tribunals:
- missing deadlines because a taxpayer doesn’t know the rules;
- financial difficulties where the taxpayer hasn’t done his or her best to make tax payments;
- not filing due to personal problems;
- waiting for HMRC to provide information where the taxpayer hasn’t followed up properly.
How will these new penalties affect the average taxpayer?
Most taxpayers file their tax returns and make their tax payments on time, and are unlikely to be affected by these new penalties. However there are some taxpayers who, while being honest, may get caught out by the new rules. People who have moved abroad (such as Sue in the example above) are at risk, as many of them may not realise they need to file UK tax returns and do not receive post from HMRC. However ignorance of the rules, or not receiving post (which stems from a failure to inform HMRC of their new address), will not count as reasonable excuses. And people who put a low priority on completing their tax returns, such as Steve in the second example, are key targets of the new regime and will receive no mercy from HMRC.