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Non-taxpayers hit with late filing SA penalties

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Almost 400,000 self-employed people have had late filing penalties disproportionately levied on them despite having little or no tax to pay.

30th Jan 2023
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After exposing Nadhim Zahawi’s tax issues, Tax Policy Associates’ Dan Neidle has turned his attention to campaigning against self assessment penalties for people who pay little to no tax.  

Calls to cancel fixed rate penalties

Neidle is calling for fixed-rate late self assessment penalties to be automatically cancelled if HMRC determines that a taxpayer has no taxable income. 

The campaign was prompted by a freedom of information request to HMRC, which found that between 2018 and 2020 nearly 400,000 people earning less than £13,000 received a penalty for a late tax return filing. 

During this period, few of these taxpayers hit with penalties would have paid tax because the personal allowance was £11,850 in 2018/19 and £12,500 in 2019/20. 

Automatic penalties

Those who miss the 31 January self assessment deadline are automatically hit with an initial fixed penalty of £100 the day of the deadline, even if there was no tax to pay. The fine starts increasing after three months, with additional daily penalties of £10 per day. Then after six months, the taxpayer faces a £300 charge, and then another £300 after 12 months. 

This is a change from how the penalty scheme worked up until 2011 -- prior to this a late filing penalty was cancelled if a return had no tax to pay. 

In a comment under Neidle’s research Caroline Miskin, a senior technical manager at ICAEW's Tax Faculty, pointed out that: “One impact of the previous regime was if taxpayers got years behind with returns, because the penalties were max £200 per year HMRC debt management didn’t chase very actively. They do now with the amount being £1,600.”

Why are they in SA at all?

The research highlights one question the government should be asking itself: why are people paying little to no tax even in self assessment? Miskin suggested a review of the “arbitrary” self assessment filing criteria. 

“Many of those required to file a return only need to do so because of limitations of HMRC’s systems (PAYE/NPS) and simple assessment powers could be used, removing the risk of late filing penalties,” wrote Miskin. 

New MTD start date postpones points system 

Neidle had hoped that the penalty rules would soften with the arrival of the new points-based penalties system, which had been expected from April 2025. 

But as AccountingWEB’s consulting tax editor Rebecca Cave noted, the penalties for filing self assessment tax returns are unlikely to change in 2025 because the new points-based system is tied to Making Tax Digital for income tax self assessment (MTD ITSA) -- now delayed until April 2026.  

But since MTD ITSA will now only apply to taxpayers with total property and business turnover of £50,000, Cave added that “It is VERY unlikely that the new penalty system will be introduced for self- assessment taxpayers before it has been rolled out to those reporting under MTD.” 

Change the process

In his conclusion, Neidle acknowledged that HMRC was acting in good faith and was not aware of the disproportionate impact of the penalties on low earners, but encouraged the tax authority to start monitoring late submission penalties to understand the impact and the level of penalties.  

He added that attention should be given to the self assessment process, determining how many taxpayers should not be required to submit a return and if there are any systems HMRC can put in place to avoid taxpayers with little or no tax to pay from submitting a return. 

His last recommendation was to automatically cancel (and if paid refund) fixed-rate late penalties if the taxpayer has no taxable income. This would likely be after a subsequent submission of a self assessment form, but Neidle maintained that no further application or appeal should be required,

He also called for the reduction of penalties by around 50% if a taxpayer has a low taxable income of less than £15,000, as an example. But Neidle recognised that the introduction of an abatement rule or cancellation of penalties may require a rule change. 

A longstanding issue

The problem of penalties is not a new concern in the tax community. Paul Aplin flagged the issue of SA penalties for low earners as far back as 2015, following a report from the Office of Tax Simplification (OTS). Writing in the Tax Journal, Aplin was struck by how 16% of the returns showed nil liability and 8% showed a liability of less than £50, which meant that 1.5m returns were processed to collect no tax. 

The now-abolished OTS had been working on the problem, including recommending the removal of some individuals from self assessment, providing more warnings and pointing out that other countries like New Zealand and Canada base their late filing penalties on tax owed not a fixed amount.

Reflecting on the problem seven years later, Aplin wrote on Twitter: “I always felt that capping at the amount of tax due (so no penalty if no tax or a refund due) was better. The new points/penalty system for MTD ITSA will be fairer in principle, but at 16 pages of legislation it will also be complex to navigate.

Neidle’s latest campaign comes as HMRC chief executive Jim Harra said “There are no penalties for innocent errors in your tax affairs” after former Chancellor Nadhim Zahawi reached a £5m tax settlement with HMRC which included a penalty.

Replies (17)

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By Springfield
30th Jan 2023 11:00

If you are running an "organisation" where people are mandated by law to deal with you and every year you have to levy penalties on hundreds of thousands of those people, then you have to start asking yourself, what's the problem here?

Is it that there is a vast army of the general public who are too lazy, ignorant or devious to do what we say they must, or is it the way we operate which, for many, makes engagement with us difficult, confusing or even unnecessary?

Until HMRC asks themselves this question, their response to everything will always be - more penalties.

Picture the scene in 2050. HMRC annual report to to PM. "The bad news is that we haven't collected any tax this year. The good news is that we are now owed £200bn in unpaid penalties."

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Replying to Springfield:
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By Philysis
02nd Feb 2023 08:03

Decent revenue stream for the govt , I call it unjust enrichment and control tactic , govt will say penalties change behaviour ,

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By Hugo Fair
30th Jan 2023 12:42

I like the final paragraph ... which shines the light in a different way on the conclusive but flawed syllogism by Jim 'Horror Show' Harra “There are no penalties for innocent errors in your tax affairs”.

It's obviously ludicrous to issue a penalty for failing to file a return that shows there is no tax due.

But it's equally crazy that policy decisions over the last decade or so have resulted in the need for tax returns to be filed by people with miniscule amounts of tax due ... because, for instance, the SP is operated outside of PAYE (so no tax code or P60) and BR tax is no longer deducted at source from interest or dividends.

Like any beast of burden the current tax system will soon collapse under the weight of 'corrective' adjustments intended to fix anomalies & failings ... at what point will it be recognised that if you can't resuscitate the beast then you need a replacement?

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Replying to Hugo Fair:
Tornado
By Tornado
30th Jan 2023 13:11

"Like any beast of burden the current tax system will soon collapse under the weight of 'corrective' adjustments intended to fix anomalies & failings ... at what point will it be recognised that if you can't resuscitate the beast then you need a replacement?"

A perfect description of MTD

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By ireallyshouldknowthisbut
30th Jan 2023 15:44

If they ever realised "the dream" of getting prepopulated returns issued out from HMRC to the tax payer that scooped in all the main data HMRC already knows about (PAYE, P11D, Pension, UK dividends from listed sources, Child Benefit, Savings) HMRC could just issue a demand in the spring/early summer and ask for amendments, and if no amendments the assessment stands.

But that would require HMRC IT to work.

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Replying to ireallyshouldknowthisbut:
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By Hugo Fair
30th Jan 2023 18:42

"But that would require HMRC IT to work."

Even worse (from HMRC's perspective) is it would remove their ability to always place the responsibility on someone else (in this case the taxpayer).

I'd love "the dream" to come to fruition ... but we all know what would happen:
* People would only query the 'assessment' when they think it can be reduced (anything 'missed' by HMRC would be regarded as a free bonus)!

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Replying to ireallyshouldknowthisbut:
Cherry
By cherrytelevision
01st Feb 2023 09:04

This would also require HMRC's to actually have the information they are supposed to know about; we have so many clients for whom HMRC have not pulled in employment and pension data despite those being operated via PAYE...

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boxfile
By spilly
30th Jan 2023 20:51

For the last 3 years we’ve had to file tax returns for two pensioners. Most income is from a SIPP on which they pay tax and calculated tax for each varies from £4-odd to pay, to £4-odd overpaid.
Every year either they or us phone HMRC and ask to be taken out of the SA system, get positive noises/ promises, then still get a Notice to File.
Totally pointless for all concerned apart from the small fees we charge them. I suspect quite a large portion of the unnecessary tax returns filed could be in similar circumstances.

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By AndyC555
31st Jan 2023 08:56

"Dan Neidle has turned his attention to campaigning against self assessment penalties for people who pay little to no tax...Neidle is calling for fixed-rate late self assessment penalties to be automatically cancelled if HMRC determines that a taxpayer has no taxable income."

Well done Dan. Only taken you 27 years to notice this.

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Replying to AndyC555:
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By Justin Bryant
31st Jan 2023 09:24

Not sure why you're being snide about DN here. His comments are infinitely better than this other bloke re late filing penalties: https://www.accountingweb.co.uk/community/blogs/philip-fisher/the-answer...

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Replying to Justin Bryant:
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By richard thomas
31st Jan 2023 13:18

Quite agree. I’ve posted my comments on Dan’s website some of which may be of interest to Aweb readers.

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By Ian McTernan CTA
31st Jan 2023 14:07

I've found the automatic penalties are a real disincentive to people who want to catch up on their tax affairs and where little or no tax is payable.

Recent case I took on: settled by disclosure, couple thousand pounds total tax, interest and penalty.

Outstanding fines for late submissions from several years ago: £8,000 including interest. Zero incentive for this client to come forward and get his affairs in order, in fact a major factor in him not coming forward years ago.

Due to the current system he still owes those penalties for late submission despite owing nothing for the years concerned....

I agree with Dan on this one - we need to go back to the old system where penalties were only due up to the amount of tax due.

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Stepurhan
By stepurhan
31st Jan 2023 14:34

Here's a radical idea. Limit late filing penalties to the higher of the fixed penalties and the tax due. Like it used to be when self-assessment was first brought in. Allows the small business that honestly overlooked their obligations to correct their error without getting hammered.

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Replying to stepurhan:
Stepurhan
By stepurhan
31st Jan 2023 15:23

I meant lower, but missed the edit deadline.

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Replying to stepurhan:
By Ruddles
01st Feb 2023 14:20

I disagree. A filing obligation is a filing obligation. Doesn't matter whether you owe £1 or £100k in tax, that should not affect your ability to file your tax return on time (arguably, if your tax liability is only £1 then your affairs are probably more straightforward than the person that owes £100k so you have even less of an excuse).

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By Sue Murby
06th Feb 2023 15:17

In the "old days" there was no penalty for late submission if there were an over payment of tax. As a result those clients would be left until last and often their returns would be filed in February without penalty. I agree with others who think the reason penalties are levied is because there is no tax to pay and HMRC would like some money. Alternatively the penalties will reduce the tax refunds.

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By Moo
28th Feb 2023 20:01

Of course it is always worth checking whether these low income clients still fall within the criteria for filing tax returns, there are often some who have changed circumstances but do not realise that self assessment may no longer be appropriate. If HMRC agree to cancel the return and take them out of self assessment that cancels the late filing penalty too.
On the other hand a crazy consequence of freezing the personal allowance but increasing state pensions by the triple lock will be that more low income pensioners need to pay tax, hopefully HMRC will deal with that through simple assessment but I don't envy them trying to explain to elderly people why they suddenly have a tax bill on their state pension.

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