TAX RETURNS – PENALTIES: THE NEW REGIME

Now that the 31 January has passed, the majority of UK taxpayers will have breathed a collective sigh of relief at yet another Tax Return being out of the way. In some cases the tax due may have been paid to avoid the £100 late filing penalty, where others may still be frantically trying to get things done before the first surcharge date of 28 February.

However, going forward, things are about to change in a big way and not surprisingly it is to HMRC´s benefit...

HOW THINGS WERE

The old penalty regime that HMRC had in force, for the years up to and including the year ended 5 April 2010, was relatively tame:

     •      A £100 fine for not filing your Return by 31 January.
     •      A further £100 fine if the Return was still outstanding 6 months later.

So, the maximum you could be fined for the late filing of your Return was £200. Not a huge amount of money by today´s standards and in most cases not really that much of a deterrent. There was also the option of paying your tax liability in full by 31 January, which would mean HMRC would have to reduce the late filing penalty to nil as the penalty was tax-geared, so no liability at 31 January meant no penalty.

As for the non-payment of your tax liability, there were 3 ´penalties´ to be aware of:

     •      Interest accrued daily on the unpaid balance.
     •      A 5% surcharge arose 4 weeks later on 28 February on any unpaid balance.
     •      A second 5% surcharge was incurred should any amount still remain outstanding 6 months later.

With the current late payment interest rate being 3% per annum, you would be looking at interest of roughly 41p per day on an outstanding balance of £5,000, again hardly much of a deterrent. The two 5% surcharges however would add up to £500 as a penalty, so in reality this was the only real area where taxpayers could potentially get hit hard in their pockets.

HOW THINGS WILL BE

HMRC have now announced a new penalty regime, commencing with Tax Returns and payments relating to the 2010/11 tax year, which is far more aggressive.

If the Return is filed late now, the following apply:

     •      If the Return is not filed by 31 January a £100 penalty is incurred.
     •      3 months late and a daily penalty may be incurred.
     •      6 months late a penalty of £300 or 5% of the tax due (whichever is HIGHER)
     •      12 months late or more and another £300 or 5% of the tax due will be charged.

The late payment penalties remain very similar. The first 5% surcharge is incurred on 31 January rather than 28 February. The second surcharge of 5% is incurred on 31 July, as before, but a third surcharge of 5% has been introduced should any tax remain outstanding 12 months later.

So, by way of comparison, if a taxpayer was over 12 months late submitting their Return and paying their tax, the old and new scenarios are set out below (ignoring interest) based on a tax liability of £5,000:

As you will see, the new regime has more than doubled the previous penalties, which is why it is imperative that your tax affairs are now dealt with as soon as possible after the 5 April each year.

By completing your Return early you not only avoid the late filing penalties, but also you will be given notice of any increase in your tax liabilities far earlier. This should give you sufficient time to make the necessary arrangements to pay your liabilities by the due date, thus avoiding the interest charges and late payment surcharges too.

HMRC rarely introduce a new scheme unless it is designed to make them money. Try not to let them do so at your expense, especially when it can be avoided with some relatively simple, but careful, tax planning.

For further advice please see our specialist Income Tax Accountants.

Mark Dawes – Tax Manager
© Stern & Company 2011