H M Revenue & Customs (HMRC) is introducing new penalties for late submission of tax returns and late payment of tax. In some cases the penalties may be up to 100% of the tax shown on the Return so there is an incentive to ensure that you pay tax on time and submit your tax returns on time. Late Tax Return penalties for partnerships may also be expensive as each partner will be charged a penalty rather than there being one penalty for the partnership itself.
These changes are part of the numerous changes that have been made in recent years to the UK’s tax administration legislation including alterations to HMRC powers for obtaining information and inspecting business records, increased penalties for errors and the introduction of rules to enable HMRC to publish the names and details of those who are charged a penalty for deliberately evading tax. However the new penalties for late submission of tax returns and late payment of tax have the potential to affect the greatest number of taxpayers.
The late return penalties apply to personal, partnership and trust returns for 2010/11 onwards. If the return is submitted after the filing deadline (31 October 2011 for paper returns and 31 January 2012 for electronic returns) then a £100 penalty will automatically be charged. If the Return is more than three months late then HMRC may also impose a £10 daily penalty. If the Return is still outstanding 6 months after the submission deadline then HMRC will charge an additional penalty of £300 or 5% of the tax liability shown on the return, whichever is greater. A further penalty can be imposed if the Return is submitted over 12 months late and this can be up to 100% of the tax shown on the return.
It is important to remember that the penalties for failing to submit a tax return on time apply regardless of whether the tax has been paid. Furthermore, if a partnership return is submitted late then each partner is charged a penalty so if a partnership of 20 partners files its return two months late then the total penalty will be £2,000.
The late payment penalties apply to income and capital gains tax liabilities whether included in tax returns for 2010/11 and subsequent years or separately assessed, for example by an amendment to the return, an enquiry closure notice or a discovery assessment for the same tax years. They are imposed in addition to interest being charged on late paid tax.
The late payment penalties are calculated as shown below:
Late payment penalties can be avoided by contacting HMRC before the payment is due to let them know that the taxpayer is experiencing cash flow difficulties and reaching an agreement for deferred payment, commonly known as a “time to pay agreement”, with them. However, if the revised payment deadlines are not met then late payment penalties will be charged.
It is possible to appeal against the imposition of and the amount of any penalty. It is also possible to ask for a penalty to be reduced to nil if you have a “reasonable excuse”. This is a highly topical issue as the First Tier Tax Tribunal has disagreed with HMRC’s interpretation of this phrase in a number of recent cases. However, the legislation clearly states that having insufficient funds cannot be a reasonable excuse unless it is caused by events out of the taxpayer’s control. It should also be remembered that reliance on another person may not be a reasonable excuse and that once the excuse ends then the penalty will be charged unless the failure to pay tax or submit a return is corrected without unreasonable delay.
If a taxpayer submits their Return late and pays their tax after the due date then both late payment and late return penalties will be charged unless they have a reasonable excuse. Failing to comply with tax obligations will rapidly become expensive.
In my experience, it is better to organise your tax affairs so that you get your information to your tax adviser in good time to enable your tax return to be submitted before the deadline. Regardless of whether you or they are preparing it, leaving it to the last minute inevitably means that things are done in a rush and, even with the best will in the world, mistakes can be made which give HMRC further opportunities to charge tax geared penalties for errors. You also risk suffering late payment interest and penalties if HMRC do not receive your payment in time, especially as HMRC cannot receive payments via the Faster Payments Service so bank transfers usually take at least three working days to reach them.
If you are unable to submit your Return and pay your tax on time do talk to a tax adviser, such as BDO’s Private Client Services team, to obtain advice as to the best course of action. It may be that submitting a return with carefully estimated figures and appropriate disclosures and paying tax based on that might be the best way forward to minimise penalties if you are unable to obtain the information you need in time, for example, but your adviser will be able to suggest a solution that fits your personal circumstances.