The new regime for late filing penalties is throwing up a number of challenges for practitioners during the January Self Assessment rush. Rebecca Benneyworth untangles some of the problems that have cropped up in Any Answers.
The new late filing and late penalties were enacted in schedules 55 and 56 of Finance Act 2009 and came into force in the autumn, applying for the first time to paper Self Assessment returns due by 31 October 2011 and online returns due by 31 January 2012. This means that if you are dealing with tax matters going back to previous years, you may need to calculate (and negotiate) penalties under the two different regimes.
As a reminder, under the new regime an initial penalty of £100 will apply if a return is not submitted by the due date (more details here). After that, the regime ramps up in the following stages:
- Three months late: Daily penalties of £10 per day, running for a maximum of 90 days
- Six months late, and again at 12 months: Penalties of 5% of tax due for the return period (or £300 if greater).
The get out offered under the previous regime, where the penalty was capped by the tax liability, has been eliminated. So even if the outstanding amount is settled by 31 January 2012, a late filing penalty will still apply.
Additional sanctions will be levied if the lateness is deemed to be deliberate (70% of tax due) and “concealed” (100%), or £300 if that is greater than the calculated penalty.
To complicate the picture at this late stage in the Self Assessment processing year, there are new rules covering late payments. From 1 April 2010, cheque payments are treated as being cleared on the date they clear, not when the cheque is received.
For cases going back a few years, advisers will also need to keep in mind that the current penalty regime for inaccuracies began in 2009. If while working on the 2011 return you spot an error on the 2010 previous return, you can still make an amended return before 31 January 2012. But if the inaccuracy resulted in an underpayment of tax, there may be penalties at stake.
There is no penalty for a mistake made despite reasonable care, but if the mistake was careless, then correcting the inaccuracy is not sufficient – you also need to make a disclosure to reduce the penalty. An unprompted disclosure of a careless inaccuracy can qualify for a full discount, reducing the penalty from 30% of the potential lost revenue to 0%.
This disclosure can easily be achieved by making a white space entry on the amended return.
Any Answers case studies
We got the Sage Taxation Q&A rolling this week with queries drawn from the growing pool of penalty questions on Any Answers.
Our first penalty situation involved two clients who did not declare rental income for roughly five years, and the adviser wanted to know whether HMRC charge just a late registration penalty, or would other current penalties apply?
Assuming these clients are not already registered for Self Assessment, don’t waste of your effort trying to file a return before the end of the month as the late return penalties don't apply. We have to talk yet another penalty regime, the one covering failure to notify penalty. There are no late returns if none have been issued - the penalties will be on the failure to notify, but will apply for each year on the tax due for that year. In this instance most of the penalties would be levied under the old regime which charged a maximum 100% penalty for failure to notify by 6 October following the end of the tax year, reduced to zero if the tax is paid by 31 January after the tax year (the due filing date for the return).
As they are coming out of the woodwork now, they clearly have not paid the tax due, so the adviser’s goal would be to mitigate the penalty using the old rules for size, gravity, disclosure and co-operation. On the last two points, the adviser still has some control and should concentrate on those years where they can have maximum impact on the penalty.
Under the new regime, which applies from 2009/10 onwards, the penalties are 30% for simple failure, but 70% if deliberate - and you may have to accept that your client is in this position. Voluntary disclosure which is unprompted attracts a reduction to a minimum penalty in each case. Non deliberate failure would attract at least a 10% penalty and deliberate (unconcealed) down to a minimum of 20%.
Prompted disclosure is less generous - that is where HMRC has already contacted them. HMRC is presently using data from letting agents to work on undeclared rents, so this option may not be available to these clients. they may already be outside this. Pity they didn't respond to one of the many disclosure facilities over the last few years which offered better penalty outcomes for all years. So for older years your penalty leverage is by disclosure and co-operation.
Make disclosures for all years and prepare as much information as you can. Obviously interest will apply and surcharges for late payment aswell so if you can get the tax cleared before 28 Feb on current year and 31 Jan on all old years you will prevent another penalty. See HMRC's Manual CH70000 for more in depth about the new penalty.
Serial late filers
Clients who have got behind with tax returns and present themselves with several returns that need to be filed are different, because returns have been issued and not sent back. They have probably already had a few penalty notices, but perhaps if they are in a repayment position for each of the years, they or their advisers will have assumed the penalties will eventually be nil.
So what to do in this scenario? First, if the 2010-11 return is filed late, the penalty will be £100 followed fairly swiftly by daily penalties, so get that one done first. The only other returns I would put in front of 2011 are any that are already running daily penalties, unless you are sure that they will be zero. Any year for which there is a tax liability is now likely to be on tax-geared penalties so once again, getting years where there is an unpaid liability in is important.
In summary - do 2011, then start work on the rest unless there is unpaid tax for earlier years still outstanding. In which case, get the ones with the largest potential liability in first. Once again you will have interest and surcharges on any unpaid tax - which triggers again on 31 January so get payments in where possible to limit these. Or get a Time To Pay arrangement in place to stop the surcharges running - Good luck with that one!
If you’re a Sage customer, follow the link to register for the Sage Taxation Q&A to put your questions to Rebecca. AccountingWEB members who are not registered to participate can still view the questions and answers on this page.
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Rebecca trained in London with Kidsons and, on qualifying, spent some time as Chief Accountant of a manufacturing company. She now has her own small practice in Gloucestershire that comprises of owner managed businesses and small companies.
She also lectures extensively for a range of professional bodies, accountancy firms,...