Following on from earlier publications this article covers the common penalties HM Revenue & Customs charge on individual’s failing to pay tax or file personal and partnership tax returns on time.

Please note that it is common for HM Revenue & Customs to issue payslips late and that interest is charged on late payments. Therefore if you find yourself without a payslip then do not delay making payment as their delay is no excuse against incurring penalties – it is a case of one rule for us and another rule for them!

The cost of late payment interest should not be ignored which is as at today’s date is 3%. The average rate between 2003 and late 2008 was 7%.

Late filing penalties – personal & partnership tax returns

A personal tax return should be filed by 31 January following the end of the tax year to which it relates with class 4 national insurance, income tax and any capital gains tax paid by the due date.

If the filing deadline is missed then an individual will be issued with an automatic £100 penalty. If the tax return is over six months late and not filed by 31 July then another £100 penalty is issued.

In addition, HM Revenue & Customs can also impose a further penalty of up to £60 per day where they consider £100 penalties are insufficient to encourage the filing of outstanding tax returns.

For individuals, the above penalties are reduced to nil if there was no outstanding amount owed to HM Revenue & Customs at the due date of 31 January.

However late filing partnership penalties apply without reduction and so a husband and wife filing their partnership return late will each be liable for automatic £100 partnership tax return penalties.

Late payment surcharges

Regardless of whether tax returns are filed on time, whenever a balancing payment of class 4 national insurance and tax remains unpaid at the due date, an individual is liable for an automatic late payment surcharge equal to 5% of the outstanding debt, as assessed on 28 February and 31 July.

Therefore if a sole trader delays filing a tax return and paying £1,500 of tax and class 4 national insurance on the first year’s trading activity, then over 6 months after the due date it will have cost the individual £350 in penalties, as follows:

Date Penalty Amount
Due on 31 January   £1,500
After 31 January Fixed penalty £100
After 28 February Late payment surcharge £75
After 31 July Fixed penalty £100
After 31 July Late payment surcharge £75
Due after 31 July   £1,850

Note that a 5% surcharge is not imposed if in advance of the due date an individual has reached an agreement with HM Revenue & Customs to pay tax by instalments.

Incorrect tax returns – new penalty regime (2008/09 onwards)

Having avoided the above penalties, an individual is not beyond the scope of the next penalty which applies where incorrect tax returns or similar documents are submitted to HM Revenue & Customs or where individuals fail to advise HM Revenue & Customs of an under assessment of tax.

The penalties have been designed so that individuals who take reasonable care when completing their tax returns will not be penalised, as the level of penalty will depend on the underlying behaviour of the individual giving rise to the incorrect return.

Penalties can be reduced by making unprompted disclosure of any inaccuracy but there is no scope to reduce penalties by cooperating with HM Revenue & Customs following their discovery of an error.

The penalty is based on the amount of tax and national insurance under declared and paid at the due dates. The new penalty regime applies for 2008/09 tax returns and onwards and is as follows:

Maximum penalty
Behaviour Minimum penalty – unprompted disclosure Minimum penalty – prompted disclosure
Careless 0% 15% 30%
Deliberate but not concealed 20% 35% 70%
Deliberate and concealed 30% 40% 100%

Where an error results in a tax and national insurance underpayment of £10,000, the penalty in a situation of deliberate but not concealed prompted disclosure is between £3,500 and £7,000. Plus interest.

So how does one make ensure that they end up at the lowest percentage basis in each subdivision? The breakdown is as follows:

Behaviour Minimium reduction Maximium reduction
Telling 0% 30%
Helping 0% 40%
Access to records 0% 30%

The greater the help and assistance you provide HMRC determining the tax loss the larger the reduction in the penalties. Based on three categories of telling, helping and providing access to your records.

Please be aware that this is not a comprehensive list of penalties.

Links to other penalties articles

I would not wish penalties on anyone but if you should be caught then the following articles may set you mind straight concerning the eventual penalty costs unless this can be mitigated via fact of a ‘reasonable excuse’.

Companies House penalties – click
End of year payroll and P11D penalties – click
CIS300 penalties and surcharges – click

If you have any queries then please contact me.

copyright ©2009

This article is for discussion purposes only and does not represent advice on which you should act without consulting a professional as tax legislation is complex and changes frequently.

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