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Tax geared penalties proportionate?

We have a client who is persistantly late in submitting returns, and where the tax involved is substantial, ie anywhere between 50k and 100k per annum. He has regularly incurred £100 penalties but we usually try to estimate the liabilities outstanding and he makes substantial payments on account before the end of Feb each year to avoid surcharges. HMRC have now levied penalties for failure to file by 31 Jan each year going back several years and are relating the amounts to the tax outstanding on return at 31 Jan. If in their wisdom the govt decided surcharges should be applied for late tax at 28 Feb, it seems somewhat harsh and dissproprtionate to levy a 30% "seriousness" penalty on the tax outstanding at 31 Jan, when this has been paid within 3 to 4 weeks and has not fallen foul of surcharge rules. We are talking about penalties approaching £30k! We are being invited to make an offer but I can see how the penalty regime is appropriate for discovery or following enquiry but £30k for tax being paid late by 3/4 weeks and where interest and flat penalties applied? I believe it is possible to argue Human Rights legislation as the penalty is seemingly dissproportionate to the "offence". We have succesfully used this argument on CIS penalties before but has anyway come across this situation
Andy Shady

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FAO ANDY SHADY
Hi Andy

Could you possibly enlighten me as to how you successfully used the Human Rights Act argument in relation to a CIS penalty appeal. I currently have a case where the penalties are more than three times the tax charge

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Just to add....
This will all change soon, as the penalties for late filing will be revised by FB 2009.

There are a couple of nasty things to look out for (subject of course to Parliamentary approval or otherwise) :

1. The capping of penalties for late filing at the tax outstanding on 31 January will go (!!)
2. Daily penalties are likely to be levied MUCH quicker. (Generally speaking it produces very prompt results)
3. There are other potential penalties in the pipeline - like one for paying your PAYE late in year. However that will need extra reporting to get it to work, which is likely to be (a bit) unpopular! This might put a spanner in the works on this one.

As soon as we know what the new rules are going to be and when they will come in, we'll cover it on the site. Keep watching!

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I agree!
This is heady stuff but, yes, the tax due under Section 59B is due on 31st Jan following the year end and is the difference between
(a) the amount of income tax and CGT due per his self assessment and
(b) the aggregate of any payments on account made by him (whether under section 59A or otherwise) and any income tax that has been deducted at source.

So further payments on account - or overpayments left over from earlier years - will count as payments on account, provided they are made before 31st Jan (the effective due date for 59B) and the penalty under Section 93(5) is limited accordingly.

It's like trying to knit spaghetti - Simple as long as you know where each strand starts and ends and can keep a firm grip on it!

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Correct

Although s93(1) say that the penalty is based on the amount shown as payable in the return, 93(9) effectively restricts this to the amount that is unpaid on 31 January. It's a rather roundabout way of putting it. I prefer s98A (for late P35s) which specifically refers to tax unpaid at the due date.

This doesn't help the OP who told his client to pay in February. The OP needs to realise that there is a world of difference between interest and surcharges for when tax is paid late, and the punitive penalty for failing to submit a return. Were it not for punitive penalties, who would bother to submit a return?

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Antony - do you agree?

Antony

Consider a taxpayer, let's call him Jim.

In year 1 Jim files his tax return on time and pays his tax on time. His tax (and Class 4 NIC) liability amounts to £80K.

In year 2 Jim does not at first complete his tax return. He pays £40K x 2 on account. Knowing his income has increased he pays a further £25K before 31 January.

In year 3 Jim again does not at first complete his tax return, but he pays £40K x 2 on account. In February he pays a further £20K to (he hopes) avoid a surcharge on 28 February.

He eventually files tax returns for year 2 showing income tax (and class 4 NIC) of £100K and for year 3 income tax (and class 4 NIC) of £110K (in each case the returns are filed more than 12 months late).

After filing the return for year 3 he pays the balance due (in respect of tax and interest, and the surcharges on £5K underpaid for year 3).

My thinking is that the tax-geared penalties for (very) late filing of the returns for years 2 and 3 should be based on:

YEAR 2
£NIL (because tax etc of £100K is covered by £105K paid by 31 January)

YEAR 3
£25K (being tax etc of £110K less £5K brought forward as overpaid for year 2 and payments on account of £80 paid before 31 January).

The year 3 penalty would have been based on only £5K if the payment made in February had instead been paid before 31 January.

Do you agree?

David

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sfgth
sfdgs

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hmrc is a loan shark? - discuss 20pts.
The VAT penalties regime is equally draconian. The effective APR on SA and VAT penalties makes a loan shark seem cheap.

Considering excessive APRs are illegal for them, how come the government awards itself such rates without any trouble, or worrying its conscience.?

I have a company facing £'000s in VAT surcharges for being a few weeks late with its VAT payment, surely this is grossly disproportionate to the interest cost to HM Government? a vaguely acceptable figure is 10-15%pa.

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Onus on HMRc
Maybe i am missing the point but if a return is estimated and 12 months pass the filing deadline then doesnt the Revenue dictate that this estimated return becomes an actual one. And if so, then on the basis that they have changedthe status of theestimated to actual how can they impose such penalties.

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Penalty chargeable on tax due under Section 59B
I'm not sure whether this will help you but Section 93(9) limits the penalty under Section 93(5) to a percentage of the tax payable under Section 59B. Effectively, Section 59A sets out the amounts payable by instalments due on 31st Jan and 31st July (i.e. half of the previous year's liability, excluding CGT). Then section 59B charges the balance for the year due on the next 31st Jan.

So if year 1's total liability is £80k, and year 2's liability is £100k, the instalments due in year 2 under section 59A are two lots of £40k, and the balance due on 31st Jan following the end of year 2 under section 59B is £20k. If the instalments have been paid, the penalty under Section 93(5) is based on the £20k only, and not on the £100k.

Obviously it depends on whether any payments on account have been made (or any PAYE tax deducted) but it may assist if you can show/argue that some of the amount paid on 31st Jan represents a payment on account of the next year's liability.

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Andy, fair point!

Andy

You make a fair point. What concerned me (and still does to some extent) is that in your earlier postings you seemed to suggest that (i) you were unaware of the possibility of tax-geared penalties in cases of serious delay in filing returns, (ii) you seemed to be saying you had advised that payment should be made by 28 February rather than by 31 January, and (iii) you were focussing on the small delay in making payments rather than the long delay in filing returns.

As you appreciate, if the 'February' payments had been made in January that would have removed the risk of a tax geared penalty in relation to the amount of those payments.

You have not said whether you warned the client specifically of the risk of a tax-geared penalty as a consequence of a return being filed very late (as distinct from the surcharge for late payment of tax). If you did not, then I still feel you are at risk of bearing the penalty yourself (and your insurers) if the client makes a negligence claim.

Turning to the penalty level, I am sure you intend to point out that, although the returns were filed very late, correct returns WERE filed. In the circumstances, you will say (I hope), that a 30% level of penalty is too high. Compare this with, say, the penalties levied in relation of disclosure of an offshore account.

Obviously size, and the repeated delays, work against you - but clearly there is no dishonesty (as evidenced by the payment of about the right amount of tax at about the right time and the eventual submission of correct returns). However I do not agree with you that tax-geared penalties are only appropriate in cases of incorrect returns or non-disclosure of income.

Where the client has already suffered a penalty for the same failure (including a daily penalty) then do point this out in the course of your negotiation (in effect arguing that the tax-geared penalty should be reduced by the amount of the daily penalty already suffered for the same failure).

Good luck!

David

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Thanks for support!
The client has received letters from us every year warning that we need his records, need answers to queries, need our bills paying etc etc. We cannot make him answer or give us the information so fail to see how it is our problem. The delays have not been down to us. Perhaps you would like to explain how we should have submitted the return? Perhaps in the circumstances we shouldn't have continued to act. Our estimates have been based on previous years. In my heart I believe he deserves penalties, which he has had including daily ones on occasion, but my head says that how can penalties of £30k be appropriate when the actual loss to HMRC is receiving forms late and tax only usually about 3 or 4 weeks later than it would have been received had the returns been submitted. Surely surcharges are the mechanism for punishing taxpayers, and these form of penalties are designed for non-disclosure or investigation settlements. How is £30k proportionate to the offence, which I believe under the Humans rights legislation has to be the case with penalty legislation. The penalty has clearly been mitigated by 60% due to co-operation and disclosure as the figures are from the returns without any enquiry or amendment, but how is a tax payment delay of 3 to 4 weeks and delay of forms no matter how long a serious enough offence to warrant a 30% penalty, compared to the seriousness following an enquiry where profits are shown to be delibaretly understated etc. Could anyone also explain how the penalty is suddenly imposed 3 years after the offence

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I agree with David
The tax at stake is high and the continued failure to file on time makes it a worthwhile exercise for HMRC. I cannot believe that you somehow estimated a tax payment by 28 Feb but then take more than 11 months to actually file the return. And, you let this continue for several years.

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How late were the returns?

I assume your reference to s81 should read s8.

Would I be correct in thinking that each of the three year's returns in question was eventually submitted more than 12 months after the normal filing date (e.g. the return for the year ended 5 April 2006, due on 31 January 2007, was filed sometime after 31 January 2008)?

Surely the penalty here is in respect of late filing of returns, not in respect of late payment of tax (although I agree that if the 'February' payments had been made before 31 January the proposed 30% penalty would only have been applied to the balance - if any - remaining unpaid on 31 January).

The maximum penalty under the legislation would be 100% so, arguably, a proposal of 30% already incorporates 70% mitigation. In the light of that you might struggle to say, under Human Rights legislation, that the penalty is disproportionate to the 'offence'.

With the benefit of hindsight should you not have advised the client to make his estimated payments before 31 January each year, rather than in February and / or advised him of the potentially serious consequences of being more than 12 months late filing his returns?

Sorry, but I cannot help thinking that if there was a lot of tax to pay and the client was VERY late in filing his return you should have foreseen the possibility of tax geared penalties - and warned the client of this on the first occasion on which a return became more than 12 months overdue. If you had done so (and the client had heeded your warning) the penalty could only have been applied to the first year's overdue tax (because the client would have got the info to you to enable his subsequent tax returns to be filed more promptly). So, in my view, any penalty payable in respect of the second and third years is down to you! Methinks it is time to check your PI cover is in place (hopefully without too high an excess!).

Obviously if you did warn him of this at the time and he still failed either to pay the full tax liability by 31 January or get the info to you within a reasonable time, with the consequence that the second and third year's returns were still filed more than 12 months late, then you would not be responsible for the penalties for those years.

(Some would say I am being generous to you here in suggesting the client should cop for the tax geared penalty for the first year, especially as it seems you had sufficient information to estimate the tax due on 31 January but advised the client to pay by 28 February - when your advice should have been that he pay it by 31 January.)

Of course by all means try to negotiate down the actual penalty to be paid. You may have some success with that.

If the client ultimately coughs up whatever penalty is agreed and doesn't make a claim against you, think yourself lucky! I don't think you are under any obligation to volunteer to pay anything towards the penalty.

David

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Penalty Authorities
TMA70/S81 (1) (a) and S93 (5).
I am assuming currently (I will check though) that they can legitimately charge under these sections in this situation but have never come across this before. Seems draconian and I cannot believe this is how these penalty provisions were expected to be used, ie late returns not failure to notify etc. Main query relates to proportionality of penalty though ,ie £30k for tax liability paid 3 to 4 weeks late in each of 3 years when interest has been charged already and when client tried to pay the estimated amount of tax.

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Not come across this myself
It all seems a bit odd but before I look any further please confirm the relevant section that HMRC are quoting in respect of the penalties. No doubt you have checked this first?

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