Penalty changes for late tax returns

Subject to consultation, new late filing and late payment penalties will take effect from 6 April 2011 for personal, trust and partnership tax returns.

The existing rule that a personal/trust late filing penalty would be the lower of £100 and the balance of tax due will be replaced.

Instead, HMRC’s proposed late filing penalty regime will include the following sanctions:

• £100 penalty immediately after the due date for filing (whether or not the tax has been paid)
• daily penalties of £10 per day for returns that are more than three months late, running for a maximum of 90 days;
• penalties of 5% of tax due for the return period (or £300 if greater) for prolonged failures (over 6 months and again at 12 months);
• higher penalty of 70% of the tax due where a person fails to submit a return for over 12 months and has deliberately withheld information necessary for HMRC to assess the tax due (100% penalty if deliberate with concealment).

The penalties/surcharges for late payment of any tax due will be:

• penalty of 5% of the amount of tax unpaid, generally 1 month after the payment due date (or at the filing date of the relevant return); and
• further penalties of 5% of any amounts still unpaid at 6 months and 12 months;
• suspension of late payment penalties where the taxpayer agrees a time to pay arrangement (where a tax debt is paid over time) with HMRC.

The existing rule effectively caps a late filing penalty at the amount of tax unpaid at 31 January. Many practitioners who have ensured their clients paid the bulk of any outstanding amount by this date will find this route blocked in future as the full £100 penalty will now apply to any late tax return, noted Smith & Williamson tax partner Richard Mannion.

The change will apply to the 2010-11 tax return, which are due on 31 October 2011 if sent on paper and 31 January 2012 if filed online. Full details are available from an HMRC guide (PDF).

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