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Income Tax Penalties & HMRC – The Facts

Author

Ryan Conlon

Ryan qualified as a Chartered Tax Adviser with a Big Four firm before continuing his tax career at national firms and HMRC’s Fraud Investigation Service.

Income Tax Penalties, Appeals & Interest… An Introduction

HMRC imposes income tax penalties where;

  • Income tax returns are filed late;
  • Income tax is paid late;
  • Where the taxpayer has failed to notify HMRC of their chargeability to income tax;
  • Where the there are errors in returns and documents provided to HMRC.

Where a return is filed late, the late filing penalty is automatic not reduced if the tax has been paid on time.

In the other instances, the penalties are tax geared meaning that if no tax is due, then no penalty arises.

Income tax penalties for late filing

The normal filing date for a self-assessment tax return is 31 January following the end of the relevant tax year.

If the tax return deadline is missed, then there is an automatic £100 late filing penalty.

Should the return still be outstanding 3 months later, HMRC will then impose daily late filing penalties of £10 per day for up to 90 days, i.e. to a maximum of £900.

If the return is still outstanding after 6 months, then HMRC will impose a further penalty of 5% of the tax due or, if greater, £300. A further 5% of the tax due or £300, if greater, is due if the return is outstanding after 12 months.

Penalties for being 6 months late and 12 months late are subject to a combined limit of 100% of the tax due (unless the failure involves certain offshore matters).

Income tax penalties for late payment

The normal deadline for the payment of income tax liabilities is 31 January following the end of the relevant tax year.

If paid 30 days late, a late payment penalty of 5% of the tax due arises, with a further 5% penalty if 6 months late and a further 5% if 12 months late.

In addition to the late payment penalties, late payment interest will accrue from the due date.

Income tax penalties for failure to notify

HMRC may impose penalties where there has been a failure to notify chargeability to income tax, e.g. a former employee becoming self-employed and failing to notify that she is subject to self-assessment.

The amount of the penalty is calculated with reference to a percentage of the potential lost revenue.

The percentage applying depends on the reason for the failure to notify and whether or not HMRC were informed voluntarily and the cooperation offered.

The penalties range from nil in cases where there is reasonable excuse through to 100% where the deliberate and concealed.

Type of behaviour Disclosure Penalty range
Non-deliberate Unprompted within 12 months 0-30%
Unprompted after 12 months or more 10-30%
Prompted within 12 months 10-30%
Prompted after 12 months or more 20%-30%
Deliberate Unprompted 20-70%
Deliberate Prompted 35-70%
Deliberate and concealed Unprompted 30-100%
Deliberate and concealed Prompted 50 – 100%

 

If there is a reasonable excuse for non-deliberate failure to notify, HMRC will not charge a penalty.

Penalties for income tax errors

HMRC charges tax-geared penalties for errors in tax returns and other documents which understate an income tax liability.

The amount of the penalty depends on behaviour that resulted in the error, whether HMRC have been notified of the error without prompting, and a percentage of the potential lost revenue. The percentages are summarised in the table below.

Behaviour Unprompted disclosure Prompted disclosure
Reasonable care No penalty No penalty
Careless 0-30% 15-30%
Deliberate 20-70% 35-70%
Deliberate and concealed 30 – 100% 50-100%

 

The potential lost revenue is the amount arising from the correction of an inaccuracy, income repayment or incorrect claim.

The above table gives a range of potential penalties, e.g. where there is an unprompted disclosure of a careless error, the penalty range is 0% to 30%. HMRC consider the quality of the disclosure in determining where in that range the penalty will fall. If it has taken a significant period, normally considered three years or more, then HMRC will restrict the amount of any reduction by 10 percentage points above the minimum, i.e. in the case of an unprompted disclosure of a careless error after three years, the range would be 10% to 30%. The final percentage would depend on the assistance given to HMRC, which they refer to as “telling, helping and giving”.

Penalties for offshore income tax matters

HMRC imposes higher penalties concerning offshore matters and offshore transfers involving individuals and unincorporated business.

These higher penalties apply where there are inaccuracies, failure to notify and deliberate withholding of information involving income tax, capital gains tax or inheritance tax.

Mitigating penalties

Penalties can be mitigated by ensuring that the affairs are correct in the first instance. Where there are errors, the quality of the disclosure made to HMRC can also greatly reduce the penalties imposed.

It may also be possible, in cases of careless inaccuracies (but not deliberate), to have the penalty suspended, subject to complying with agreed condition for a period of time, normally up to 2 years.

For more information on tax charges and penalties simply contact a member of our helpful tax advice team. You can also read more about HMRC below…

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