I haven't filed a tax return in 5 years - Some advice would be appreciated

Irrelevant

If you notified them that you were no longer self employed it does not matter that you did not put a cessation date on the return. They have failed to act on information received, as they have also failed to update the address from the P14/60s sent in by your employers.

 If they are reissuing returns you have 3 months I believe to complete them. Do you have your P60's for each year? If you enter your PAYE income/tax paid details on each year you may be a little underpaid. If you haven't kept them ask HMRC to give you details of your earnings and tax paid for each year, or ring the employers t ask for duplicate p60's.

As long as you had no untaxed income there should be minimal liability so no consequences from the returns.  

when

you get hit with the £1,500 penalty for 2010/11 return appeal on the basis that you should not have been in the self assessment system

A few points

All this talk of penalties might be worrying you. However it's unlikel;y you have anything to be concerned about.

What the previous commentators allude to, but don't make clear, is that until you have received the tax returns you aren't obliged to submit them. There can be no penalty for not submitting the tax returns.

When the  newly issued tax returns do arrive you have three months in which to complete and send them back. Or you can register to do this online. It's vital that the returns, when they arrive, show the recent date of issue and not when HMRC originally sent them to your old address. If they show the old date then get back on the phone to HMRC and tell them again you didn't receive the originals and they must re date the forms. Do not take no for an answer, if they won't agree, ask to speak to someone more senior. All this is to protect you from HMRC issuing a penalty charge for late submission.

The previous posts were correct in saying that there was no need for HMRC keep you in self-assessment, but to be fair to them they wouldn't have had a reason to remove you from the system as you didn't tell them you had ceased acting. And I wouldn't recommend sending the letter suggested by Fawltybasil because I don't believe that what he's suggesting you say is correct. HMRC do have a right to issue a self-assessment to whoever they want.

An important and recent development is that HMRC can now remove people from self-assessment retrospectively. Until recently once a tax return had been issued (and received!) you had to complete it. That's no longer the case. If you want to read more about this there's more information about it on the Chartered Institute of Taxation's web site

http://www.tax.org.uk/tax-policy/newsdesk/2012/Missed_SA_deadline.htm

One further aspect of your situation which is interesting is that HMRC are issuing tax returns for five earlier years - the earliest of these is now out of date and they do not have the right to pursue this even if they want to. There are other mechanisms open to them whereby they could assess you to tax for the out of date year, but that's a completely separate matter which is probably not relevant, so I won't go into detail.  

A word of caution - if it turns out you had further tax to pay for earlier years, although from the facts you give this seems unlikely, the self-assessment penalties, which as I have already explained, can't be due, may be irrelevant. There is a different penalty system for charging those who should have notified HMRC that they owed tax and didn't 

And  finally, I would just add that it seems to me you don't have a problem, but get it sorted now or you'll likely end up with HMRC sending out erroneous penalty notices and you'll waste oceans of time, not to mentioned a deal of stress, getting these cancelled

Good luck

TC  

Undeclared Income

If someone has been paid under PAYE but not completed a return for the past 7+ years, and has received income e.g. from share dividends, savings interest, and property throughout which obviously has not been declared, can she legitimately claim she did not need to complete a return because HMRC has never asked her to?

If HMRC was to find out about this undeclared income, are they entitled, and are they likely to go after it for all the years in which it was earned? Could be in excess of £70,000!

(not me, I hasten to add, should anyone from HMRC be reading this - just submitted my SA ...and will be paying what's due!!) 

Just to enhance.....

Just to enhance the point David makes you need to understand that there are two separate, but closely linked, rules involved.

1. There is no obligation to complete a tax return unless you're asked to do so by HMRC.

2. Where you are not asked to complete a return, but you are chargeable to income or capital gains tax for a year, you have six months from the end of that year in which to notify HMRC about this - they are then likely to issue a return.

If you have complied with points 1 or 2 and HMRC have done nothing then you have escaped scot-free. However, you must be completely sure HMRC are aware of all the facts regarding your income etc. They have powers to assess you to tax, plus penalties and interest where, within 6 years, they "discover" information that because of carelessness or negligence on the part of the taxpayer they have missed out on tax that would have otherwise been due. 

@tonycourt

Six years or 20 years? See s36(1A) TMA 1970.

"An assessment on a person in a case involving a loss of income tax or capital gains tax ... attributable to a failure by the person to comply with an obligation under section 7...may be made at any time not more than 20 years after the end of the year of assessment to which it relates."

RM