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Do you know the rules?

A Guide to: HM Revenue & Customs Penalties regime

In Summary

Heather Tulloch, Senior Manager/Consultant

heather.tulloch@ashcroftllp.com

28 July 2021

Tax penalties apply for: Late payment; Failure to notify Penalties; Errors in a return and documents

HMRC will consider whether any special circumstances exist and if so it may override the statutory penalties and reduce them as it sees fit.

The onus is on the taxpayer to satisfy HMRC that you had a ‘reasonable excuse’ or that there were special circumstances, at the time the failure occurred.

HM Revenue & Customs Penalty Regime

HMRC can impose penalties upon businesses and individuals for a variety of reasons, from basic and easily avoidable errors in self-assessment tax returns to blatant failures to declare income or pay what is owed. In today’s tax environment, penalties are ever-present and are growing increasingly difficult to avoid. Even those who are not required to file a tax return can sometimes find themselves facing a penalty if they are deemed responsible for making a mistake in someone else’s return. In this environment it is important to understand how HMRC operates, the circumstances in which penalties are typically issued, and where you stand if you find yourself or your business.

Tax penalties apply for the late filing of Self Assessment tax returns and late payment of tax due under Self Assessment. There may also be penalties for failure to notify chargeability and for error if there is a mistake in a tax return.

Penalties for:

  • Late payment
  • Failure to notify
  • Penalties: Errors in a return and documents

are all tax geared: if no tax is due or outstanding, no penalty applies.

Interest is charged on both unpaid tax and unpaid penalties.

Late filing penalties summary

Late FilingLate PaymentPenalty
Miss filing deadline £100
 30 days late5% of tax due
3 months late Daily penalty £10 per day for up to 90 days (max £900)
6 months late 5% of tax due or £300, if greater
 6 months late5% of tax outstanding at that date
12 months late 5% or £300 if greater, unless the taxpayer is held to be deliberately withholding information that would enable HMRC to assess the tax due.
12 months late5% of tax outstanding at that date
12 months & taxpayer deliberately withholds information Based on behaviour: deliberate and concealed withholding up to 100% of tax due, or £300 if greater. deliberate but not concealed up to 70% of tax due, or £300 if greater. Reductions apply for prompted and unprompted disclosures and telling, giving and helping.

Late filing example:

Richard goes to the middle east and accidentally forgets to file his 2019 Tax Return by the 31 January 2020 deadline, he has a tax liability of £500.  He comes home and files his return on 1 February 2021. HMRC sends him notification of penalties as follows:

Trigger DatePenalty
Missed filing deadline: 31 Jan 2020£100
Unfiled after 3 months: deadline 30 April 2020£10 per day for 90 days
Unfiled after 6 months: deadline 31 July 2020£300
Unfiled after 12 months: deadline 31 Jan 2021£300

Late payment example:

Harriet is due to make a balancing payment of £10,000 in income tax under Self Assessment for her 2019 Tax Return with payment due on 31 January 2020.
If the tax was not paid penalties accrue as follows:

Trigger DatePenalty
Unpaid by midnight 1 March 2020£500 (5%)
Unpaid by midnight 1 August 2020£500 (5%)
Unpaid
by midnight 1 February 2021
£500 (5%)

Late payment: Time to pay agreements

If the taxpayer makes a time to pay agreement with HMRC the penalty is suspended.  The taxpayer will become liable to the penalty if the suspension agreement is broken.

Special reduction

HMRC has a statutory requirement to consider whether any special circumstances exist and if so it may override the statutory penalties and reduce them as it sees fit. 

Appeal

  • The taxpayer has 30 days to lodge an appeal with HMRC against a tax penalty.
  • A late appeal may be accepted at the discretion of HMRC or the tribunal judge.

Tax return errors

Generally speaking, if a taxpayer has made an error in their tax return, HMRC will consider whether or not to issue that taxpayer with a penalty. HMRC tends to initially impose penalties wherever a liability to penalties arises which means that taxpayers will be hit with a penalty on grounds of making an error in their return – and this may come as a complete surprise.

Under HMRC’s existing penalty regime for errors, the level of penalty will depend on the degree of culpability of the taxpayer. In the tax authority’s eyes, the mistake will fall into one of the following categories:

  • ‘Careless’ – which can incur a maximum penalty of 30 percent of the additional tax.
  • ‘Deliberate but not concealed’ – which can incur a maximum penalty of 70 percent.
  • ‘Deliberate and concealed’ – which can incur a penalty of 100 percent, or potentially more if the error involves a serious matter e.g. offshore tax matters.

In the first instance, HMRC has the power to suspend all or part of a penalty. It is unusual for HMRC to offer this and it is usually the taxpayer who has to request this.  Agreement will need to be reached about what part of a penalty will be suspended, and the period of suspension, which must not exceed two years. Penalties cannot be suspended for ‘deliberate’ errors.

In instances of a ‘deliberate’ error which is later disclosed by the taxpayer, HMRC will assess whether the taxpayer’s disclosure was ‘prompted’ or ‘unprompted’ – and the latter may be looked upon more favourably.  HMRC will not usually impose penalties for errors which the taxpayer can show they have taken ‘reasonable care’ to avoid. If it does, however, and the taxpayer believes that a ‘reasonable excuse’ for the failure exists, this will have to be proved. The concepts of ‘reasonable care’ and ‘reasonable excuse’ are almost entirely subjective – as neither is clearly defined by HMRC.

Reasonable excuse

In some cases, there can be an exception from certain penalties if the taxpayer can demonstrate a ‘reasonable excuse’ for the failure giving rise to the penalty. This can apply to various compliance penalties, such as:

  • Late payment of tax.
  • Late filing of tax returns.
  • Failure to notify liability to tax.
  • Failure to comply with an HMRC information notice.

In terms of tax returns, the penalty provisions for late or incorrect returns do not explicitly define what counts as a ‘reasonable excuse’ – hence why disputes over such matters can often be confusing and difficult to resolve and may even go to the Courts should a taxpayer wish to appeal an HMRC decision. Fortunately, some very basic guidance is provided by HMRC.

What might be considered a reasonable excuse?

HMRC offers the following basic guidance as to what might constitute a reasonable excuse:

  • Bereavement – this may apply if one of the taxpayer’s close relatives or their partner passed away around the time they should have filed their return or paid tax.
  • Serious illness – if the taxpayer themselves or a close relative fell seriously ill around the time the tax should have been paid.
  • Unforeseen events – which can include delays due to industrial action or returns/ payments being lost in the post.

What might not be considered a reasonable excuse?

HMRC states a handful of circumstances in which a reasonable excuse can never – or will very rarely – exist. These are:

  • Deliberate failure to submit a tax return on time – this will always be considered a failure on the taxpayers’ part.
  • Insufficient funds – this will not be deemed a reasonable excuse unless a) the shortage of funds could not have been reasonably foreseen by the taxpayer or b) the lack of funds can be attributed to another event outside of their control.
  • Reliance on another person – this will not be deemed a reasonable excuse unless it can be proven that the taxpayer took ‘reasonable care’ to avoid the compliance failure.

Special reductions and special circumstances

In certain special circumstances it is possible that HMRC will be able to provide a ‘special reduction’ to a penalty, which may go as far as allowing the penalty to be eliminated altogether. Compliance errors, such as mistakes in tax returns, a failure to notify HMRC or a failure to submit a return, can all be liable to ‘special reductions’, under the right circumstances. ‘Special reductions’ will be considered on a case-by-case basis, and HMRC’s Compliance Handbook offers no solid definition of what constitutes ‘special circumstances’.

The taxpayer may be able to challenge the decision at a Tribunal – which is independent of Government and will weigh up both sides of an argument prior to making a decision. At a Tribunal, the taxpayers will have a chance to prove ‘reasonable care’, a ‘reasonable excuse’ or ‘special circumstances’. However, as HMRC’s Compliance Handbook offers vague definitions of what constitutes each of the above, this may not always be easy to do. When it comes to such contentious matters, taxpayers will often be advised to consider alternative dispute resolution (ADR) before applying to the Tribunal. However, the ADR procedure is not suitable for disputes about reasonable excuse. HMRC’s view in brief HMRC says that, under all circumstances, it expects each taxpayer to be “a prudent person, exercising reasonable foresight and due diligence, having proper regard for their responsibilities under the Tax Acts”.

What does this mean for you?

Simply put, should you find yourself facing a penalty, e.g. for submitting a late tax return, the onus is on the taxpayer to satisfy HMRC that you had a ‘reasonable excuse’ at the point the failure occurred, or that there were special circumstances, assuming you wish to obtain an exemption, or ‘special reduction’ from that penalty. If you are unable to advance a ‘reasonable excuse’ in relation to your circumstances, HMRC will weigh up the unique circumstances of your case in order to determine whether the penalty you have been issued with is justified. However, at a later date, you are entitled to challenge a ‘flawed’ decision at a Tribunal or via alternative dispute resolution if you so wish. It is worth keeping in mind that what is considered a reasonable excuse in one person’s case, will not always constitute a reasonable excuse elsewhere if there are even slight differences in circumstances.

How can Ashcroft Partnership help you?

Ashcroft Partnership LLP have extensive experience in dealing with these scenarios and tailoring an individual/Companies approach to HM Revenue & Customs in order to mitigate risk and provide the most favourable outcome.  Please do not hesitate to get in touch should you need help with such matters.

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