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Mark McLaughlin looks at the new penalties for individuals who pay their tax bills late... ...and how to escape penalty charges.

Introduction

New penalties were introduced from 6 April 2011 for individuals who pay their Self Assessment tax liabilities late. Penalties under this new regime are potentially higher than the late payment surcharges they replace. However, the good news is that these penalties can be avoided in some cases.

Out With the Old…

The normal due date for paying Income Tax and Capital Gains Tax liabilities is 31 January following the end of the relevant tax year. For example, an individual’s tax liability for 2010/11 (i.e., the tax year ended 5 April 2011) must normally be paid by 31 January 2012.

Under the ‘old’ rules, if an individual paid their Self-Assessment tax bill more than 28 days late (i.e., normally after 28 February following the end of the relevant tax year), HM Revenue & Customs (HMRC) imposed a surcharge. This amounted to 5% of the unpaid liability. If the tax remained unpaid more than 6 months after the due date, HMRC imposed another 5% surcharge (TMA 1970 s 59C).

This system of surcharges applies to tax returns up to and including 2009/10.  

…In With the New

Under the new regime, taxpayers face the following penalties for unpaid tax:

• More than 30 days late – 5% of the tax unpaid at that date;
• More than 6 months late – another 5% of the tax unpaid at that date;
• More than 12 months – another 5% of the tax unpaid at that date.

The tax will normally be late if it is initially unpaid by 31 January following the end of the tax year to which it relates.

Example

John’s tax return for 2010/11 is filed with HMRC in December 2011, indicating tax payable on 31 January 2012 of £10,000. However, John pays the full amount in September 2012. HMRC charges penalties of 10%, amounting to £1,000. This is in addition to the tax of £10,000, and also interest charges on the tax paid late.

If the tax remained unpaid until February 2013, the penalties would be 15% instead.

A Happy Ending?

HMRC charges penalties automatically. However, that is not necessarily the end of the story. Penalties for late payment can be avoided in certain cases, as outlined below.

(a) Asking HMRC for Tax Payment Arrangements

Taxpayers who know that they will be unable to pay their tax bill on time could contact HMRC to ask for further Time To Pay. The law requires that HMRC must suspend late payment penalties if certain conditions are satisfied (FA 2009 Sch 56 para 10). These conditions are broadly as follows:

• The taxpayer must approach HMRC before becoming liable for the penalty;
• HMRC must agree to the ‘Time To Pay’ arrangement; and
• The taxpayer must adhere to the agreement and comply with any conditions of the arrangement.

If the taxpayer breaks the agreement (by defaulting on payment of the tax, or by failing to comply with any conditions of the Time To Pay arrangement) HMRC may impose the suspended penalty.

The concept of ‘suspended penalties’ may make some taxpayers feel like criminals! However, this is a straightforward way to avoid late payment penalties for taxpayers who are serious about making a sensible Time To Pay agreement with HMRC and sticking to it. Of course, there is no guarantee that HMRC will agree to a ‘Time To Pay’ request. In addition, interest will still be payable on any tax paid late. 

(b) Reasonable Excuse

Taxpayers who fail to pay their tax on time are not liable to a penalty if there is a reasonable excuse for the failure (FA 2009 Sch 56 para 16).

Perhaps unsurprisingly, a lack of funds is not considered to be a ‘reasonable excuse’, unless the shortage is due to events beyond the taxpayer’s control. In addition, if the taxpayer relies on another person (e.g., to make the payment on the taxpayer’s behalf), there is no reasonable excuse unless the taxpayer took reasonable care to avoid the failure. If the taxpayer had a reasonable excuse for the late payment but the excuse has ended, there should be no penalty if the failure is put right without ‘unreasonable delay’ after the excuse ended.     

Unfortunately, there is no statutory definition of ‘reasonable excuse’ for these purposes. This means that the taxpayer must satisfy HMRC that a reasonable excuse exists. This may require some powers of persuasion! However, even if HMRC considers that there is no reasonable excuse, this is not necessarily the end of the story. The taxpayer can appeal to an independent body, the Tax Tribunal, and ask them to consider whether a reasonable excuse exists.

Appeals Against Penalties

Taxpayers have a statutory right of appeal against HMRC’s imposition of a penalty, and also against the amount of a penalty (FA 2009 Sch 56 para 13).

Appeals are heard by the Tax Tribunal, as mentioned above. There is no requirement to pay a penalty before the appeal is decided.

Special Circumstances

HMRC may reduce a penalty if they “think it right because of special circumstances” (FA 2009 Sch 56 para 9).

“Special circumstances” for these purposes does not include (for example) the ability to pay. In addition to reducing a penalty, HMRC may reach a compromise agreement with the taxpayer over a penalty, or can waive the penalty altogether.    

Don’t Go There!

Of course, the easiest way for taxpayers to avoid a late payment penalty is to pay the tax on time!

However, this is not always possible or realistic in the ‘real world’. It is therefore potentially reassuring to know that penalties can be avoided by those individuals who have paid tax liabilities late due to circumstances beyond their control.

Mark McLaughlin CTA (Fellow) ATT TEP is a consultant to Tax Debts Ltd, a debt management service for UK taxpayers (www.taxdebts.co.uk).