It’s every taxpayer’s concern to avoid fines and to understand how the HMRC penalties work to realize how they can avoid them. Each country has rules on penalties for late payment or filing. A penalty can be due if an entity does not report with the HMRC about its tax liability at the correct time or delays the payment of that liability.
Some Major Types of Tax Penalties imposed in the UK
There exist multiple types of penalties in the UK that the government can impose on defaulting taxpayers. Let us first understand the different forms of tax penalties and what recent penalty enhancements the HMRC has brought forward for the tax compliances.
- Penalties for Errors in Tax Return
A system for penalties for tax return errors and other documents was introduced on April 1, 2009. Its scope was widened from April 1, 2010. Firms can face charges if their return or other tax document was inaccurate and tax has been unpaid, understated, over-claimed or under-assessed.
They can also face a fine if they do not notify the HMRC that an assessment is too low.
- Penalties for late filing or payment
Fines for late filing of returns and paperwork or late payment differ according to which tax
Self-Assessment tax return deadlines and penalties
There’s usually a second payment deadline of July 31 if one makes advance payments towards their bill (known as ‘payments on account’). Due to the coronavirus (COVID-19), one can delay making the second payment, and they’ll not be charged interest or fines as long as they pay before January 31, 2021. What counts as a reasonable excuse?
One can appeal against some decisions about:
- the tax bill (for example, VAT, self-assessment, corporation tax)
- a request for tax relief
- a request for details or to check one’s business records
- a penalty (for instance, if one pays their tax late or files their tax return late)
PAYE/National Insurance late payment penalties
As an employer operating PAYE being part of one’s payroll, one need to complete specific tasks during each tax month. Tax months go from the 6th of a month to the 5th of the next one. Taxpayers must inform the HMRC if they’ve not paid any employees in a tax month.
PAYE penalties for late and inaccurate returns
Taxpayers are penalized for the following:
- the Full Payment Submission (FPS) was late
- they did not send:
- the expected number of FPSs
- an Employer Payment Summary (EPS) when they did not pay any employees in a tax month
The HMRC will not charge a fine if:
- The FPS is delayed, but all reported payments on the FPS are within three days of the employees’ payday. Even those filing their returns after the payment date within three days may be contacted and considered for a penalty
- The new employer and client sent the first FPS within 30 days of paying an employee
- it’s the first failure in the tax annum to send a report within the specified time (this does not apply to those who register with the HMRC as an annual scheme)
- Offshore Penalties
The HMRC can charge an increased fine where an inaccuracy penalty, or a failure to notify the fine, arises and the income or asset that gives rise to the fine is held outside the UK. The fine for failing to submit a return for 12 months can also be increased where offshore assets or income remain involved. The fine intensity depends on how readily the foreign jurisdiction shares information with the UK, which is only applicable to Income Tax and Capital Gains Tax.
- VAT and Excise Wrongdoing Penalty
Wrongdoing penalty is another penalty that HMRC imposes, which came into effect in 2010.
As per the provisions of the UK tax laws, this penalty is levied on a taxpayer if he:
- Issues an invoice that includes a VAT which they are not authorized to charge
- Handles goods on which Excise Duty has not been deferred
- Uses a product in a way that requires greater Excise Duty to be paid
- Supplies a product at a lower price of Excise Duty, knowing that it will be utilized in a system that requires a higher rate of Excise Duty
- This penalty applies to anyone registered for a VAT or Excise, anyone who should be applicable to pay VAT or Excise tax, and other general society members.
- This fine is calculated similarly to the inaccuracy penalty. HMRC can also reduce it if a client tells them about the error.
Present Scenario in the realm of Tax Penalties levied in the UK
The value of penalties the HMRC is levying on taxpayers per month is steadily increasing, according to a study by a reputed CA firm, UHY Hacker Young.
As per the study, the tax authorities collected £34m from penalties in September, indicating a marked increase of 62% compared to the £21m recorded in May. The group said that HMRC suspended tax investigations at the start of the pandemic and shifted its focus into aiding taxpayers with emergency coronavirus assistance.
It included the introduction of the furlough scheme and deferrals of tax. It further resulted in a fall in penalties for underpayment or late tax payments.
Due to the drop off in HMRC’s routine investigation work, the UHY stated the total amount taken as penalties fell 36% from £730m to £468m till September 30, 2021.
Giving ‘penalties for late filing’ as an illustration, the HMRC has the power to issue a fixed £100 penalty for late filing of a self-assessment tax return. However, this fine may be waived in cases where there is a reasonable justification.
The further fine can also apply the longer a tax return remains unfiled. The company concludes that further increases in penalties are likely as the HMRC shifts more of its staff back to compliance work and steps up investigations into the misuse of the government’s support schemes, like the furlough scheme, during the pandemic.
Many accountancy firms have already reported an increase in HMRC enquiries. If payers have a tax that they have evaded, then now is the time to come forward. Professionals predict that furlough fraud is one area of investigation for HMRC in the next year. It is imperative to the point that the first deadline on amnesty for businesses that over claimed furlough payments ended on October 20, and the HMRC has so far identified 27,000 high-risk cases.
The last date for filing for the 2018-19 self-assessment returns was January 31, 2021. Despite this, at the outset of January 2020, HMRC declared that out of the calculated 11 million tax returns receivable, around 5.4 million taxpayers were yet to file their returns.
Expected Increase in the instances of Penalties imposed by HMRC
Although most of these filers likely met the last-minute hustle to get their returns to the HMRC within the specified time, some taxpayers missed the deadline and will receive a filing penalty from HMRC. Even if taxpayers file their returns on time, they may still receive a fine from the HMRC if they fail to pay their self-assessment tax on time. But the amount in fines that the HMRC can issue relating to self-assessment tax returns seems to pale compared to that recuperated from other areas. While fines collected from self-assessment have reduced, those collected from investigations undertaken by the HMRC’s Offshore, Corporate and Wealthy Unit have increased.
Another determinant behind the Increase in penalties issued by the HMRC was an improvement in its software capabilities. Particularly, attention was drawn to a system known as ‘Connect.’ Connect has benefited from having access to more data, including financial details from the British Overseas Territories, 60 OECD countries, and several other government bodies and financial institutions. This additional information has allowed the HMRC to work smarter and more effectively.
It is also advisable to reinforce the business entities if they have any queries for tax and record keeping. It is recommended that they should check with experts for advice.
Tax Outsourcing services from eminent firms can help you avoid tax penalties!
Many accounting firms and CAs in the UK, may find it troublesome to properly manage the tax return preparation and filing needs of different clients. Especially as the tax payment deadlines are nearing, the pressure among the firms is quite intense. You can delegate some of your tax compliance demands to the hands of tax outsourcing companies like Initor Global.
Dependable and Dynamic Tax Preparation Outsourcing Services at Initor Global
Wish to get the support of a resilient and responsible tax outsourcing company? Initor Global can be an excellent choice for CAs and accounting firms in the UK. Initor’s expedite and pocket-friendly tax outsourcing services will help you in attaining the desired client satisfaction. Contact our team of tax experts to address your concerns now!