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Changes to HMRC Penalties

12 January 2011

Nicola CubbonAs the deadline for filing on-line tax returns is approaching (31/01/11) Nicola Cubbon looks at little known change that means the late filing penalty will no longer be capped, so even if there is no tax due the penalty for late filing will be £100.

The Finance Act 2010 has brought changes to the late filing penalty. The changes have not been picked on by the press, and so appear to be little known but could have repercussions for a lot of people.

The deadline for handing in a completed paper tax return to HM Revenue and Customs (HMRC) is 31 October after the tax year end (5 April). The deadline for filing on-line tax returns is 31 January after the end of the tax year. Currently if tax returns are not filed by the 31 January or 30 days after requested by HMRC, there is a £100 penalty (this is on top of surcharges and interest). The late filing penalty is capped at the maximum of the tax due by 31 January after the end of the tax year.  If no tax is due, the penalty is reduced to zero.

From October 2011 this late filing penalty will not be capped, so even if there is no tax due the penalty for late filing will be £100.

I have seen on two separate occasions letters from HMRC demanding the late filing penalty because a tax return was not sent in when requested. Both the people concerned were higher rate tax payers, but had never completed tax returns because they received only a salary that was taxed at source. On neither occasion were they aware of receiving a request to complete a tax return. In fact, I can categorically say that one definitely did not, as he was my husband and I scrutinise any post from HMRC that comes through our letterbox! On both occasions there was no tax to pay and so the late filing penalty was reduced to zero. If this had happened after October 2011, both would have had to pay a £100 late filing penalty without even knowing they had to complete a tax return.

Many people do not realise that once HMRC issue a request to complete a tax return, one must be completed even if their circumstance had changed and they no longer have tax due, for example losing a job or retiring. These people will be penalised with a £100 late filing penalty potentially at a time when they are least likely to have a spare £100, and had no tax to pay anyway.

£100 may not be a huge amount of money on its own, but given that quantity of people who could be affected this could be quite a money spinner. HM Revenue and Customs are not advertising this change and there is also no guarantee that the £100 penalty will not be increased in the future.

My advice? Once you have sent a tax return in, do not stop sending them in future years until HMRC have written you to tell you it is safe to do so.

For further information on HMRC’s penalty regime please see http://www.hmrc.gov.uk/about /penalties.htm