It really is in everyone’s interest to avoid penalties. They can be very costly are easily avoided.
It is worth remembering that each tax or duty has specific rules on penalties for late payment or filing. A penalty may also be due if you don’t tell HMRC about a liability to tax at the right time.
You may be charged a penalty if your return or other tax document was inaccurate and tax has been unpaid, understated, over-claimed or under-assessed as a result. You may also face a penalty if you don’t tell HMRC that an assessment is too low.
Who is responsibility for penalties?
Don’t forget that even with an Accountant acting for you in dealing with your accounts or Tax Returns, it remains your responsibility for the returns, calculations and payments.
Our authorisation as an agent only allows HMRC to deal with us on your behalf, but any liability for penalties for late returns, late payments or any errors on paperwork legally remains firmly with you.
Penalties for late filing or late payment
Penalties for late filing of returns and paperwork or late payment differ according to which tax you are dealing with.
For instance, if you do not file your personal Tax Return by the 31st January deadline HMRC impose the following:
- an initial £100 fixed penalty, which applies even if there is no tax to pay, or if the tax due is paid on time;
- after 3 months, additional daily penalties of £10 per day, up to a maximum of £900;
- after 6 months, a further penalty of 5% of the tax due or £300, whichever is greater; and
- after 12 months, another 5% or £300 charge, whichever is greater.
There are also additional penalties for paying late of 5% of the tax unpaid at 30 days, 6 months and 12 months.
Penalties for errors on returns, payments and paperwork
Penalties can be charged if there are errors on returns or other documents which:
- understate the tax
- misrepresent the tax liability
Penalties may also apply if you don’t tell HMRC if an assessment is too low. This type of penalty is known as an ‘inaccuracy penalty’ and applies to the following taxes and duties:
- Betting and Gaming duties
- Capital Gains Tax
- the Construction Industry Scheme
- Corporation Tax
- Environmental taxes
- Excise Duties
- Income Tax
- Inheritance Tax
- Insurance Premium Tax
- National Insurance contributions
- Petroleum Revenue Tax
- Stamp Duties
If you send in a document that contains a mistake, HMRC will charge a penalty if the error is:
- because of a lack of ‘reasonable care’
- deliberate – such as intentionally sending incorrect information
- deliberate and concealed – for example, intentionally sending incorrect information and taking steps to hide the error
The level of the penalty is linked to the reason why the error occurred. The more serious the reason, the higher the maximum penalty can be. HMRC can reduce the penalty if you, maybe with your Accountants assistance, help them to put things right.
What ‘reasonable care’ means
Every individual or business is expected to keep records that allow them to provide a complete and accurate return. HMRC also expects you to check with your agent, or HMRC, to confirm the correct position, if you are not sure.
However, ‘reasonable care’ is different according to your own circumstances and abilities. For example, if you have relatively straightforward tax affairs may only need a simple system of record keeping that is regularly updated. A large business with complex tax affairs is expected to have a more sophisticated system that is well-managed.
How the inaccuracy penalty is calculated
If a penalty arises because of a lack of reasonable care, the level of the penalty will depend on the reasons for the error and the potential lost revenue (PLR). The PLR is an additional amount of tax which is due or payable as a result of correcting the inaccuracy.
- if a penalty arises because of a lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due
- if the error is deliberate, the penalty will be between 20 and 70% of the extra tax due
- if the error is deliberate and concealed, the penalty will be between 30 and 100% of the extra tax due
The penalty can be reduced if you tell HMRC about the error. HMRC may make further reductions depending on the quality of the disclosure. Penalties can be reduced by:
- telling HMRC about the errors
- helping HMRC work out what extra tax is due
- giving HMRC access to check the figures
Failure to notify penalty
If you don’t tell HMRC when changes happen that affect your liability to tax, VAT, or other duties, you may face a penalty. This is known as a ‘failure to notify’ penalty.
A penalty may occur, for example if you don’t tell HMRC, at the right time, that:
- you are liable to tax because your new business has made a profit
- your company is liable for Corporation Tax
- your business turnover has reached the VAT registration threshold
- you have sold an asset and make a capital gain on which tax should be paid
- you start a type of business that must register with HMRC – for example a business that will charge Excise Duty
- your circumstances change in a way that affects your tax position
This penalty is calculated on PLR which is based on the amount of tax or duty that is unpaid as a result of the failure to notify. HMRC can reduce the penalty if you tells them about the failure. Further reductions may be made depending on the quality of disclosure in a similar way to the inaccuracy penalty.
It’s a complex area, but you can see that you can reduce penalties just by being co-operative.
If you are faced with an HMRC enquiry and have a penalty issue, Contact us today to arrange a FREE consultation, we have Chartered Accountants and Tax Advisers in Canary Wharf, Essex and Manchester waiting for your call.