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.
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.
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.
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.
About Rebecca Benneyworth
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, commercial organisations and the Inland Revenue. Demand has grown for Rebecca on the lecture circuit where she is well known for her refreshing, enthusiastic and entertaining presentation style as well as having a practical and down-to-earth approach to tax.