Submit tax return on time or pay the penalty

THE last thing on most people's minds during the summer holidays will be filling in their tax returns, and understandably so. Sorting out tax returns tends to be an autumn or winter task and, for many, it is too often left until the last minute.

But changes that have come into force this year mean taxpayers leaving it too late could be in for a nasty shock.

That's because HM Revenue & Customs can now apply far more punitive penalties for those failing to file their tax return on time and for those not paying their bill quickly enough.

The basic facts remain the same. If you are required to file a tax return (for example, if you are self-employed) then you must file an online tax return for the year to 5 April, 2011, by 31 January, 2012. For those filing paper returns, the deadline remains 31 October, 2011.

You must also pay, by 31 January, 2012, any outstanding sums due for the year ended 5 April, 2011, as well as 50 per cent of any sums due (ie advance payments) for the current tax year. You should pay your second instalment on account for the year to 5 April, 2011, by 31 July, 2011.

The difference this year is that the penalties for not filing and for not paying on time have risen dramatically.

In previous years, many people avoided the 100 penalty for failing to file a tax return because it only applied when they had not submitted a return in time and there was tax outstanding.

If you paid everything that you owed (or even overpaid on what you owed) in time, then the automatic penalty notice would be rescinded eventually.

Under the new rules, introduced from 5 April 2011, there is an automatic 100 fixed penalty if you fail to submit a return even if HMRC owes you money.

There is also an automatic 100 penalty for any previous years up to 2009/2010 for which you have failed to file returns.

The penalties continue to mount if there are more delays in filing your return, with the initial 100 for the first day late rising by 10 per day thereafter for the next three months up to a maximum of 900.

If the delay reaches six months then another penalty is added to your bill: this is 300 or 5 per cent of the tax due, whichever is the higher. If you are 12 months late you are hit with a fine of an additional 300 or 5 per cent of the tax, whichever is higher.

This means that even if you don't owe a penny in tax, you could end up with penalties of more than 1,600 if your tax return is more than a year late. In serious cases you may be asked to pay a penalty of up to 100 per cent of the tax due.

This is just one of the reasons why many individuals should start working on their tax returns sooner rather than later.If you haven't filed a return for several years then you will need to ensure you have all returns completed by the 31 January, 2012, deadline or face steep penalties.

But it doesn't stop there. There are further penalties if you fail to pay any outstanding tax in time.

The penalty for failure to pay within 30 days of the tax being due is 5 per cent of the total unpaid sum.

If you don't pay within six months, a further 5 per cent is added to the unpaid debt, and yet another 5 per cent can be added if you don't pay within 12 months.

In addition, interest is charged on any unpaid tax and penalties: the rate charged currently stands at 3 per cent for a late payment - despite the fact that HMRC only pays interest at 0.5 per cent when it owes you a repayment.

But surely HMRC staff are reasonable people and will accept my excuses if I fail to deliver my return and pay my tax on time, I hear you say. Clearly, HMRC will not accept the excuse that my dog ate my tax return but it will listen to some reasons for failing to submit a return. These include:

• documents lost through theft, fire or flood that can't be replaced in time

• life-threatening illness: for example, a heart attack that prevents you dealing with your tax affairs

• death of a spouse or partner or business partner shortly before the deadline

• industrial action by Royal Mail over a lengthy period of time

• issues with the online service, with no workaround (you will need to provide the error message received)

If you think you have a reasonable excuse then you can ask for a penalty to be reconsidered. HMRC will look carefully at the information you provide and any other available evidence. But don't wait until you receive the penalty; write to HMRC as soon as possible (it cannot accept this information over the phone). For an excuse to be accepted, you must send in the following information:

• your name and unique taxpayer reference (from your tax return or statement)

• the date that you sent your return

• the reason it was late

There is definitely a new urgency within HMRC to speed up the collection of taxes from all sources and it is not taking any prisoners over self-assessment: it wants your tax return and the tax you owe as soon as it is due, if not before.

Automatic penalties are a money-spinner for HMRC, and such sanctions against taxpayers who don't cooperate are only likely to get worse, so make sure you get up to date and stay that way.

• Neil Whyte is tax partner with accountants and business advisers PKF