Self Assessment penalties

Obverse

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In the past as long as you paid your tax liabilities on time and cleared any self-assessment tax due by 31 January, no late filing penalties were due. Even if you failed to pay your tax on time, late filing penalties were capped at £100 or nil if you were due a tax refund. The goal posts have moved! The 2010-11 tax returns have to be filed by 31 October 2011 if you are filing a paper return, or 31 January 2012 if you are filing electronically. If you fail to meet these deadlines you face the following penalty regime, even if your tax payments are up-to-date.

* One day late an initial penalty of £100.

* Three months late a daily penalty of £10 per day up to a maximum of £900.

* Six months late an additional £300 or 5% of any tax outstanding, whichever is the higher amount.

* One year late a further £300 or 5% of any tax outstanding, whichever is the higher amount.

As you can see the minimum penalty for filing 6 months late is £1,300 even if all your tax due is paid on time or you are due a tax repayment. If you have had a relaxed attitude to meeting the filing deadline in the past; you may like to reconsider your priorities for the filing of the 2011 return!

Tribunal criticises HMRC for delay in issuing penalties

In a recent case, HMRC have been criticised for deliberately issuing penalties for late forms P35 (Payroll end of year forms) several months late, generating higher penalties than were necessary. A summary of the case is reported below.

This case has potentially wide ranging implications for other employers. Please do get in touch if you would like further guidance in this area.

The case (TC01286: Hok Ltd) concerned an appeal against a penalty of £400 for late filing of the 2009/10 P35. The penalty was calculated at £100 per month for four months. In October 2010 a further penalty of £100 was issued, given that the filing had taken place on the 15 October 2010 once the company had been alerted to its default.

The company argued that it thought it did not need to file the appropriate returns because its only employee had ceased employment part way through the year. It acknowledged that it was wrong and that HMRC was entitled to levy a penalty. However, the company argued that, if HMRC had notified it of its default, it would have been remedied it a far earlier time, thus avoiding ongoing penalties.

During the Tribunal HMRC stated that it runs a:

‘…structured programme to enable penalties to be issued regularly throughout the year, rather than waiting for the late return to be submitted and then issue a final penalty. These penalties, although aimed at encouraging compliance and having the effect of reminding are not designed to be reminders for the outstanding return.’

The Tribunal was amazed by this and stated that:

‘….HMRC deliberately waits until four months have gone by and does not issue the first interim penalty notice until, as in this case, September of the year of default.’

‘There can be no logical reason whatsoever for HMRC to delay sending out a penalty notice for four months so that, in effect, a minimum penalty of £500 will be levied unless the taxpayer has unilaterally realised that it has failed to undertake the necessary filing.’

‘In our judgement it would be a very simple matter for HMRC to set its computer settings so that a default or penalty notice was sent out immediately after the 19 May in any year, instead of some four months later. That might generate less penalty cash for the State, but it would be fair and conscionable as between the taxpayer and the State (acting by HMRC).’

‘As, in our judgement, HMRC has neither acted fairly nor in good conscience, in the manner described above, we do not consider that any penalty is recoverable over and above the £100 penalty for the first month unless HMRC proves (the onus being upon it) that even if such a penalty notice, which would have acted as a reminder, had been issued, the default would nonetheless have continued. It has proved no such thing.’

Revenue Powers and Penalties

Powers

From the 1 April 2009 HMRC will be aligning its powers across all taxes and duties. In a nutshell they will be able to exercise the following powers:

. a power to inspect records required under the record-keeping legislation – this restricts the existing VAT and PAYE inspections to statutory records and introduces a new power of inspection for direct tax;

. a power to require supplementary information which is relevant to establishing the correct tax position;

. a power to require third parties to provide information which is relevant to establishing a taxpayer’s correct tax position;

. a power to visit business premises and to inspect records, assets and premises;

. removal of VAT and PAYE powers to undertake inspections at private homes without taxpayer consent;

. appeal rights against any penalty, and against information notices which have not been pre-authorised by an appeal tribunal;

. penalties for failure to allow an inspection and failing to comply with an information notice, including a tax-geared penalty which can be imposed by the new upper tier tribunals; and

. an updated criminal offence of destroying or concealing records requested under a notice authorised by a tribunal.

An additional power that has recently been granted to HMRC is the right to intercept phone calls – “bugging” powers! The Customs branch have always had this right, and it is now rolled out to investigations that involve all taxes. The powers were granted in the Serious Crimes Act 2007; the relevant implementation date was 15 February 2008.

Penalties

The Budget March 2008 included provisions that will enable the Revenue to introduce a single penalty regime across all the taxes, levies and duties they administer.

The changes are likely to commence for all incorrect return periods commencing on or after 1 April 2009, where the return is due to be filed on or after 1 April 2010.

New penalties for failure to notify the commencement of a new taxable activity are expected to have effect for those that arise on or after 1 April 2009.

The penalty will be determined by the amount of:

. the tax understated,
. the nature of the behaviour giving rise to the understatement, and
. the extent of disclosure by the taxpayer.

The use of suspended penalties will be extended.

There will be no penalty where a taxpayer makes a mistake, but there will be a penalty of up to:

. 30 per cent of the tax understated for failure to take reasonable care;
. 70 per cent of the tax understated for a deliberate understatement; and
. 100 per cent of the tax understated for a deliberate understatement with concealment.

The measure will provide for each penalty to be substantially reduced where the taxpayer makes a disclosure (takes active steps to put right the problem), more so if this is unprompted.

. For an unprompted disclosure of a failure to take reasonable care the penalty could be reduced to nil.
. Where a taxpayer discloses fully when prompted by a challenge from HMRC each penalty could be reduced by up to a half.