PENALTIES for late tax returns are heading for almost £1bn – but they can be challenged, says Jeff Salway.
Taxpayers are being penalised unfairly by HM Revenue & Customs as its crackdown on late tax returns rakes in hundreds of millions of pounds for government coffers. By the end of this month, the government’s tax office will have raised up to £950 million in fines from self- assessment taxpayers who missed the January deadline for their 2010-11 tax returns.
Law firm Pinsent Masons said that while fewer people are being fined this year – HMRC has issued 1.16 million late filing penalties, down from 1.5 million last year – the size of the penalties has increased dramatically.
It said the value of the fines dished out to tardy taxpayers could reach £950m by the end of this month, up from £250m this time last year despite the drop in the number issued.
The change reflects HMRC’s recent crackdown on late payers. Under a new penalty system introduced in April 2011, individuals face extra penalties for every tax return deadline they miss, even if they don’t owe any tax.
Many people who failed to file their 2010-11 returns by the end of January this year are being hit with fines of up to £1,600. Around one in ten self-assessment tax returns for 2010-11 were not filed on time, according to HMRC.
Neil Whyte, tax partner at PKF, said: “The new penalty charging regime is designed to really incentivise people to send in their return on time. There are now combined penalties of at least £1,600 once your personal return is a year late and, regardless of whether or not you have tax to pay, if HMRC asks for a return, it expects to get one.”
Its increasingly hardline approach means some penalties are being issued wrongly. One reason is that the system is automatic, with penalty notices knocked out on the back of computer records. If your records are not entirely up-to-date – whether through HMRC’s fault or your own – errors can easily arise.
“Late filing should be discouraged, but unfortunately HMRC has a track record of wrongly issuing penalty notices,” said Phil Berwick, director at Pinsent Masons. “Once those fines are levied, it’s hard to get HMRC to change their mind.”
With fines issued automatically, the onus is on victims of wrongly issued penalties to fight back, rather than hope HMRC will rectify the error.
But Gillian Arthur, a tax manager at Shepherd & Wedderburn in Edinburgh, pointed out that while people with advisers and accountants should have been warned about the new penalty regime, many others will be in the dark.
“I suspect that the ordinary man in the street will have had no idea until the tax return landed on the doormat. The tax return comes in an envelope which makes it look like junk mail, so one can only wonder how many accidentally end up in the bin.”
The difficulty in appealing against fines is that HMRC only accepts what it considers a “reasonable excuse” for late filing – and its definition of a reasonable excuse is very different to the way most taxpayers would look at it.
“This is where problems arise,” said Arthur. “It is very much open to interpretation, and I fear we may see a big increase in cases ending up at the tribunal or individuals having to engage professional advisers to assist.”
According to HMRC, a reasonable excuse is when an “unforeseeable or unusual event beyond your control has prevented you from filing your return on time”.
This may be a failure in HMRC’s IT systems, your own computer breaking down as you prepare or file your return, or a serious illness, disability or health condition that leaves you unable to file your return.
It claims to offer some leeway where someone has registered to file online but not received an HMRC activation code on time.
“If your excuse is reasonable, HMRC will not charge a penalty until the problem ceases, but it will still expect you to file your tax return within 14 days of the date the problem ceases: if you don’t, the penalty clock will start again,” said Whyte at PKF.
But HMRC won’t let you off the hook if you found the filing process too complicated, forgot about the deadline, failed to register for online filing in time or were let down by your accountant.
Yet while HMRC is accused of being overzealous in handing out fines, some people have enjoyed success with tribunal appeals. In one case the tax office was accused of being “conspicuously unfair”, while it has also attracted criticism from tribunals for using its penalty regime more to raise revenues than to incentivise punctual tax returns.
So how can you maximise your chances of a successful appeal if you feel you’ve been unjustifiably penalised?
The penalty notice you received from HMRC should have included an appeal form. Use that or download appeal form SA370 from.hmrc.gov.uk. Alternatively, write to HMRC within 30 days of the date on the penalty notice, outlining your reasons for appealing. Make sure you send your name and unique taxpayer reference (which will be on your tax return), the date you sent your return and, if you missed the deadline, the reason why.
Your chances of overturning a fine are slim. But with tribunals taking a more sympathetic line on penalty appeals of late, it’s worth challenging HMRC’s decision if you believe you have a case. If you have a reasonable excuse, appeal on that basis. Berwick said: “If a taxpayer accepts a penalty is due, they need to make sure that HMRC has calculated the penalty correctly. If the penalty has been issued later than it should have been, taxpayers need to challenge the penalty to make sure they pay what would have been due if the penalty was issued promptly.”
How fines mount up
YOU CAN be fined for sending in your self-assessment return late even if HMRC owes you money. This is how fines can mount up:
There is an automatic £100 fixed penalty if you fail to submit a return by the deadline.
That £100 rises by £10 a day for the next three months if you still don’t file your return, to a maximum of £900.
If the delay reaches six months, another penalty is added: whichever is higher of £300 or 5 per cent of the tax due. If you are 12 months late you are hit with a fine of £300 or 5 per cent of the tax due, whichever is higher. Again, this is in addition to previous penalties.
So you could incur penalties of more than £1,600 if you don’t owe any tax, or indeed even if HMRC owes you. In serious cases HMRC may demand a penalty of up to 100 per cent of the tax due.
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