If you fail to get rid of your tax liability within a given deadline or do not comply with rules and regulations, HM Revenue & Customs (HMRC) has the right and authority to charge you a penalty. Our tax advisors in Walsall have prepared a detailed guide to help you understand different kinds of penalties and how to avoid them.

HMRC can charge you penalties for various reasons if you do not comply with the tax rules. These reasons include (but are not limited to):

• Failure to pay tax on due dates;
• Failure to submit tax returns on paperwork before deadlines;
• Any mistake on tax returns, paperwork, or payments that reduce your tax liability or misrepresent it;
• Your failure to inform HMRC about changes that directly or indirectly affect your overall tax liability.  

Let’s dive a bit deeper to look into the different types of penalties imposed by HM Revenue & Customs. But first, you should know what an HMRC Penalty Explanation Letter is.

HMRC Penalty Explanation Letter

Usually, when HMRC charges a penalty (for any reason whatsoever), they dispatch a letter explaining the reasons behind imposing the penalty and its type. In accountancy slang, this letter is called a Penalty Explanation Letter.

Did you know that if you approach HMRC and tell them about the mistake in tax affairs beforehand, they can reduce the penalty? But it should be done before HMRC has issued you a Penalty Explanation Letter or before they have launched a probe into your records. Doing so will establish that the mistake was unintentional. However, if HMRC receives any such letter after they have initiated a probe, doing so will slash the amount of penalty significantly.

Tax Liability & Late Payment Penalties

If you pay the tax after the deadline has expired, HMRC will charge you with late payment penalties while citing the same reasons.

In such cases, usually, HMRC charges a certain amount of interest to make up for late payments. Sadly, in such cases, you can only claim tax relief if HMRC has used incorrect dates to charge tax. When charginglate payment penalties, HMRC charges you interest from the date the payment becomes due to the date it has been made.

However, if you discover that HMRC has charged incorrect dates, you can lodge a complaint with HMRC and claim relief.

Penalties For Late Payments

Interests are not the only additional financial burden you face for submitting late payments; HMRC also charges financial penalties over the same. The more you delay the payments, the more will be the amount you will pay to HMRC in terms of penalties.

The rate of penalties is as follows:

• For late payments up to 30 days, HMRC chargesa penalty equivalent to 5% of the tax outstanding.
• For payments that are late by up to 6 months, HMRC chargesanother 5% of outstanding dues.
• For payments that are late by up to 12 months, HMRC chargesa further 5% of outstanding dues.

However, the government is planning to reform sanctions for late payments of taxes and for late submissions of returns. The move aims to make the existing tax regime fairer. For VAT customers, the changes will come into effect from January 1, 2023. For income tax self-assessment customers, the changes will come into effect from April 6, 2024. You can learn about these changes by clicking here.

Penalties For Late Submission ofTax Returns

HMRC do not only charge penalties for late payment of the tax due; they also charge penalties over late submission of the self-assessment tax returns. Even if there’s no tax liability against the concerning tax year, these penalties will arise if you fail to submit your self-assessment returns on time.

These penalties are as follows:

• A penalty of £100 will be imposed if your tax return is a day late;
• A penalty of £10 a day will be imposed if your return is late by up to 3 months or 90 days. It accumulates into an overall sum of £900.
• If your tax returns are late by up to 6 months or 180 days, then you will either pay a further penalty of 5% of the tax due or £300 (whichever is higher).
• If your tax returns are late by up to 12 months or a year, you will have to pay a further £300 or 5% of the amount due (whichever is higher). In some cases, HMRC may charge you 100% of the amount due if your return is late by up to 12 months.

Penalties For Late Notifications andFailure To Notify

In case you fail to notify HMRC about changes that directly affect your tax liability (including capital gains tax, Class 2 National Health Insurance, income tax, and Class 4 National Insurance contributions), then the revenue-collecting body will charge a failure to notify penalty on you. It is pertinent here to mention that failure to notify penalty can be in addition to other penalties such as late payment of tax dues or late submission of returns.

HMRC calculates the amount of failure to notify penalty on the basis of the percentage of potential lost revenue. However, if you inform HMRC by yourself about the failure to notify, HMRC can slash the amount of penalty.

Penalties For Errors/Mistakes

Errors come at the cost of HMRC’s penalties. Such errors usually appear on self-assessment returns or other paperwork.

To avoid errors on self-assessment returns or other paperwork, it is always better to seek help from qualified professionals such as IBISS&CO.

Likewise, if HMRC finds out that you have understated your tax liability, they will notify youthrough an assessment. In such cases, a penalty will be imposed on you, known as the ‘inaccuracy penalty. The amount of inaccuracy penalty will be equal to the amount of tax that you have understated.

However, HMRC can waive the inaccuracy penalty if you have a reasonable excuse to justify the error.

The amount of inaccuracy penalty depends on the following:

• The type of behaviour (error or intentional understatement) HMRC view is involved;
• Percentage of potential lost revenue;
• And the fact that whether or not you have notified HMRC about the error without prompting.

The potential lost revenue is the amount of tax underpaid as a result of the error by the filer. In some cases, the potential loss of revenue might be more than the actual tax liability.

As stated above, you can get relief through ‘unprompted disclosure’. Those disclosures fall under the category of ‘unprompted disclosures’ through which you notify HMRC about the error before receiving an understatement assessment from the same. Unpromoted disclosures establish that there was no ill motive behind the error, and therefore, you may get relief for the same.

How Does HMRC Define Different Types of Behaviours?

HMRC classifies error as something that results when you fail to take reasonable care and it results in the submission of incorrect information to HMRC (but not intentionally).

Then comes deliberate error. As stated above, penalties for such errors are extremely high. However, the onus is on the revenue-collecting body to establish that the filer deliberately chose not to comply despite having adequate knowledge about the obligation.

Third comes false entries in your returns. False entries automatically fall into a blanket of deliberate errors. In such cases, HMRC issues inquiry notices to inquire about false entries. And if, even after receiving the error, you do not confess to deception and opt to conceal the deliberate action, it will result in the imposition of heavy penalties.

Reasonable excuses are those valid circumstances [such as pandemic] that prevented you from complying with your tax obligations. If HMRC accepts your reasonable excuse, it is very likely that you will avoid penalties. However, to establish, you need to submit all the evidence and details to HMRC. A reasonable excuse can be a single reason or a combination of different reasons. Some examples of reasonable excuses include problems with online filling, pandemic, stress, physical or mental disabilities, and your failure to understand the system.

Another case where you might get relief is ignorance of the law. It is a circumstance where you don’t comply with the system because you were simply not aware of the law. However, HMRC strongly resist claims made under the ‘ignorance of the law’ bracket. Therefore, if HMRC does not agree with the ignorance of the law claim, you can lodge an appeal with the Tribunal or ask for a review; also, you can do both.

What is Reasonable Care?

As stated in the introductory paras, the error is something that results when reasonable care is not done. An error implies that you tend to submit correct information but fail to do so because of an unintentional mistake.

HMRC views such excuses in different scenarios from person to person because of differences in each person’s circumstances and abilities. To establish that an error has occurred, HMRC wants you to come up with complete records and submit accurate information whenever asked. Likewise, HMRC wants you to approach tax advisers if you are not sure about something that concerns your tax liability. Therefore, if you have spoken to any such adviser, keep a record of the dates and amount of time spent on consultation; doing so will help you when the penalty arises.

Estimated & Provisional Figures

Due to extraordinary circumstances, it is possible that you are not able to provide the right or complete information in your self-assessment returns. Let us explain it to you with an example: If you have lost some documents that were essential to complete tax returns and now can never be extracted, you will make the best guess at figures to mention them in your records.

But if it happens, you have to inform HMRC about the same. You will not only tell HMRC about the guess but will also let them know how you have worked out the figures you used in the self-assessment.

Provisional figures might be mentioned due to delays in the arrival of documents or extracting information. In such cases, all you need to do is to mention the figure and tick the provisional information box. Also, you will provide a reason in the additional information box to inform HMRC about the possible date of arrival of documents or information. When you submit a tax return with provisional figures and provide the information in the additional information box, you save yourself from a late filing penalty.

However, once the information or documents arrive, you need to amend self-assessment returns. Online returns can be amended simply by logging into your Personal Tax Account, whereas manual returns can be amended through resubmission.

Suspended Penalties

HMRC has the prerogative to suspend penalties arising because of careless errors. These penalties can get suspended for a period of up to 2 years. It means that HMRC will not collect the penalty amount as of now. However, if, during the suspension period, HMRC finds out there are violations of the terms of suspensions, then, the suspension is revoked on an immediate basis, and you have to pay the suspension amount on an immediate basis.

Likewise, if you meet all the conditions set by the HMRC until the end of the suspension period, your penalty will becancelled. However, to get a penalty suspended and cancelled, it has to be established that a mistake results froma careless error.

However, if HMRC doesn’t suspend the penalty, you can do the following:

Appeal against HMRC’s penalty notice and request for the inaccuracy penalty to be suspended;

Likewise, you can appeal against HMRC’s decision of refusing to suspend a penalty;

Special Reductions

As stated above, HMRC has the authority to reduce the amount of penalty or completely cancel it. They will do so if they believe that you have a reasonable excuseor careless error, or they endorse that outstanding circumstances have prevented you from complying with your tax liability. Any reduction in a penalty from HMRC that occurs because of special circumstances is called special circumstances.

It is pertinent here to mention that special reductions can apply to various types of penalties, including but not limited to, failure to make timely returns, error in returns, or failure to notify HMRC about errors. In a nutshell, HMRC’s special reduction applies to careless behaviour (unintentional errors), but it does not apply to deliberate or intentional behaviour. Even HMRC has not crafted a specific definition for the said term. However, the following 2 things do not apply to special circumstances:

• simply being unable to pay, and
• the fact that the tax you owe is balanced by someone else having paid too much tax.

The vague definition for special circumstances exists and it classifies the same as ‘exceptional or uncommon.’ It further adds, “’where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law’.

In case HMRC does not offer a special reduction, you can request them to do so. Likewise, if they do not acknowledge your appeal of special circumstances, you can appeal to the Tribunal.

Can I lodge an Appeal Against HMRC’s Penalty?

Yes! You can. You can appeal against such penalties within 30 days of the date of release of the assessment.

In most cases, you can lodge an appeal within 30 days of the imposition of the penalty. When HMRC imposes a penalty, it dispatches a leaflet with the assessment explaining the reasons behind the penalty and ways to lodge an appeal against it. For lodging an appeal, you need to fill out form SA370. For penalties that are up to £100, there’s no need to fill out the form as you can lodge an appeal online.

The amount of penalty also depends on your behaviour. If it is the first occasion that an error or concealment is found by HMRC, then the amount of penalty might be lower. However, if you are a habitual offender, HMRC may charge a heavy fine in the shape of a penalty.

Offshore penalties

If you own offshore assets and fail to notify HMRC about the gains or incomes, or there’s an inaccuracy, you may be charged with an increased penalty. For this purpose, HMRC has placed countries in different categories as per information exchange arrangements. The categories are as follows:

• Category 1: Up to 100% of the unpaid tax (same penalties as the UK)
• Category 2: Up to 150% of the unpaid tax
• Category 3: Up to 200% of the unpaid tax

The countries that are included in Category 1 are the United States of America and EU member states (however, you should check the list by yourself at www.gov.uk as they keep on updating the list).

Requirement to Correct

Let’s suppose that you own offshore assets and were unable to remain compliant with respect to income and gains as of April 5, 2017. Now ‘Requirement to Correct’ regime states that you have to bring offshore tax affairs by no more than September 30, 2018. Penalties because of failure to notify offshore gains can range anywhere between 100% to 200%. It is pertinent here to mention that penalties for a prompted disclosure will not be less than 150% (for more on prompted vs unprompted disclosures, visit the above paragraphs). Again, conditions of reasonable excuses and extraordinary circumstances apply here.

On the other hand, if you are going to make a disclosure under the Worldwide Disclosure Facilityin the absence of a reasonable excuse explaining your inaccuracy or failure, HMRC will direct you to calculate applicable penalties against each tax year based on a self-assessment of your behaviour and culpability and as per guidelines available. Learn more about Requirement to Correct here.

How to Avoid Penalties?

The most appropriate way of avoiding penalties is to seek help from qualified professionals. Here at IBISS & CO, we have helped thousands of clients by legally saving them hundreds of thousands of pounds in tax. We can do the same for you.

Besides ensuring you don’t face HMRC investigations or penalties, our experienced and certified tax consultants will offer practical business advice and personal tax consultation. Call us now for a 15-Minute Free Consultation.