Late Filing Penalties for Tax Returns are Increasing

Late filing penalties for personal tax returns issued by HM Revenue and Customs (HMRC) used to be quite simple.  They consisted of 2 x £100, which were limited to the amount of tax actually due.

For example:

For tax year 2010 (year to 5 April 2010), the tax return was due by 31 January 2011.

If the return was not filed by this date, there was a penalty of £100.  If the return was still not filed by 31 July 2011, then a further penalty of £100 would apply.

When the return was eventually filed, the penalty would be capped at the higher of (a) the penalty issued and (b) the tax due.

So if the actual tax due was £5,000, the penalty was £200.  If the actual tax was £175.20, the penalty would be £175.20.  Notably, if the tax due was NIL, the penalty would be NIL.  Furthermore, you could actually avoid the penalty by paying an estimate of tax, to ensure that no tax would actually be due.

So far, so good!

This has now all changed.

NEW RULES

For the 2011 tax year, the late filing penalty regime is as follows:

• If you file 1 day late, you will be charged £100, even if you have no tax to pay or have already paid all the tax you owe.
• If you file 3 months late, you will be charged an automatic daily penalty of £10 per day, up to a maximum of £900.
• If you file 6 months late, you will be charged further penalties, which are the greater of 5% of tax due or £300.

Therefore, if you file your tax return 6 months late, you will be looking at a minimum penalty of £100 + £900 + £300 = £1,300.  It could be more depending upon how much tax you owe.

Comment

We believe that HMRC were right to tighten up on the regime, but think they may have gone too far the other way.  We regularly take on new clients who have perhaps fallen behind with their tax affairs, or not even been aware that that a personal tax return had been issued to them.  There is even a common myth that if you’ve been issued with a tax return, but you’ve not got anything to file, or even all your income is dealt with under PAYE, that you don’t need to file the return.  This is not true.  It still needs to be dealt with.  The old regime was more forgiving, but whether that will still be the case in the future is uncertain.

The bottom line is – keep on top of your tax responsibilities to avoid any late filing penalties.

Notes:

• The penalties described above are only for late FILING, there are further penalties for late payment of tax.
• Also, the dates given apply for the online filing option.  If you file your return by paper, the deadline is 31 October, not 31 January.