Don't get caught out by the taxman!
A round-up of new HMRC penalties and powers
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HM Revenue & Customs (HMRC) recently unveiled a plethora of changes to its penalties and regulations, as well as proposed increases in its powers and capabilities. This factsheet provides a round-up of some of the most significant changes affecting businesses and individuals, including the new penalties for late filing.
Increased penalties for late filing
A new penalty regime for late filing and late payment of personal tax through Self Assessment has now come into effect.
Under the new framework, which first applies to 2010/11 tax returns, the penalties for submitting tax returns late have risen significantly. It means that a return filed six months after the deadline could attract a fine of at least £1,300.
Previously, filing the returns after the annual 31 January deadline would lead to a £100 fine. However, HMRC claims that this failed to act as a deterrent. It hopes the new harsher penalty system will therefore encourage people to 'submit returns as soon as possible'.
Another big change to the penalty regime is that the fines will no longer be cancelled if the taxpayer owes no money to HMRC, because there was no extra tax to pay or because it had been paid. The new penalties for fi ling tax returns late are as follows:
- Day one - Individuals will be charged an initial penalty of £100, even if they have no tax to pay or have already paid all the tax owed
- Over three months late - Individuals will be charged an automatic daily penalty of £10 per day, up to a maximum of £900
- Over six months late - Individuals will be charged further penalties, which are the greater of 5% of the tax due or £300
- Over 12 months late - Individuals will be charged yet more penalties, which are the greater of 5% of the tax due or £300. In serious cases people face a higher penalty of up to 100% of the tax due.
In a surprise move, HMRC has said it will cancel any outstanding returns and associated penalties where taxpayers call them and explain why they do not need to be in the self assessment system.
Meanwhile, the penalties for paying tax late are:
- 30 days late - Individuals will be charged an initial late payment penalty of 5% of the tax unpaid at that date
- Six months late - Individuals will be charged a further late payment penalty of 5% of the tax that is still unpaid
- 12 months late - Individuals will be charged a further late payment penalty of 5% of the tax that is still unpaid. The above penalties are levied on top of the interest that HMRC will charge on all outstanding amounts, including unpaid penalties, until payment is received.
Business Records Checks
Since they were first proposed in December 2010, Business Records Checks (BRCs) have been dogged by controversy. In early 2012, HMRC carried out a review and published a report on BRCs. The recommendations provide a way forward that should defuse most of the problems provided that HMRC continues to work with the profession and arrive at a BRC approach that is reasonable and does not impose too many burdens on business.
The main recommendations are that BRCs should be amended to be a more tightly targeted compliance intervention, but set within a framework of additional education and leverage activity. HMRC has announced that it will postpone any new BRCs until its revised approach is launched 'early in the 2012/13 financial year' It is good to note HMRC's commitment to working with the professional bodies to refine and improve BRCs. However, there remains much detail to be resolved, not least whether it can be agreed what are adequate records for a business given that each business will have different circumstances and requirements.
Managing Deliberate Defaulters
After conducting a series of campaigns to encourage the disclosure of undeclared income or gains abroad, HMRC has introduced new measures to clamp down on tax evasion. Changes include increased levels of scrutiny and harsher penalties for those who deliberately evade tax.
Under the Managing Deliberate Defaulters (MDD) programme, individuals who deliberately evade tax will now be subject to detailed inspection for up to five years. The level and term of monitoring will depend on the seriousness of the offence, but HMRC does not envisage that anyone will be released from the scheme within two years.
There are a variety of ways that HMRC can now monitor a deliberate defaulter's tax affairs. These may include:
- making announced or unannounced inspection visits to carry out pre-return checks of their books and records
- asking for certain records and additional information to be sent in with the individual's tax return
- conducting in-depth compliance checks into all or any part of the person's tax affairs
- observing and recording the person's business activities and cross-checking details in their accounts
- requiring more frequent VAT returns or withdrawing certain favourable VAT schemes such as cash accounting, annual accounting, the flat-rate scheme and retail schemes.
If HMRC finds that a person has continued to deliberately evade tax, it may instigate criminal proceedings against that person. From April 2010 where someone has deliberately evaded tax of more than £25,000 HMRC can also publish the person's name and other details.
Harsher penalties for offshore tax evasion
On 6 April 2011 new penalties came into force for offshore non-compliance relating to income tax and capital gains tax (CGT). Under the new rules, penalties are linked to the tax transparency of the territory in which the income or gain arises. Where it is harder for HMRC to get information from another country, the penalties for failing to declare income or gains arising in that country will be higher.
All offshore jurisdictions are divided into three categories and the classification determines the level of the penalty that is applied, as shown in the table below. Details of which territories are in 'category 1' and 'category 3' can be found at www.hmrc.gov.uk/news/territories-category.htm. All other territories (except the UK) are in 'category 2'.
| Category | Transparency of territory | Penalty (from 6 April 2011) |
| 1 | UK and territories with automatic exchange of information on savings with the UK | The penalty remains the same - up to 100% |
| 2 | Territories which exchange information on request with the UK. Least developed countries without information-sharing agreements with the UK | The penalty is now 1.5 times that due under the previous rules - up to 150% |
| 3 | Territories which do not exchange information with the UK | The penalty is double that due under the previous rules - up to 200% |
If a person can demonstrate that they have taken reasonable care to get their tax right, they may escape a penalty. Similarly, HMRC may not apply a penalty where an individual has a reasonable excuse for a failure to notify taxable income. Where penalties are due, HMRC can reduce them depending on how helpful the individual is in assisting it to establish the correct amount of tax due.
The first Self Assessment returns affected will be for the 2011/12 tax year, with paper returns due to be filed by 31 October 2012, and electronic returns by 31 January 2013.
Security for PAYE and NICs
HMRC estimates that the Exchequer lost between £600 million and £800 million per year between 2005/06 and 2008/09 in PAYE and NICs debts that had been built up by employers who then became insolvent.
To help prevent this, legislation has introduced a power to allow HMRC to make regulations enabling them to require a security from employers for PAYE that is seriously at risk. The measure also introduced a criminal offence for non-payment of a security.
HMRC can use existing powers to make equivalent provision in respect of NICs.
If you would like more information on any of the matters raised here, please contact us. We have a wealth of experience in dealing with the tax authorities and can advise clients on strategies for mitigating tax whilst ensuring that they comply with HMRC regulations.
Please note this content is archived and has not recently been updated. Please contact us for the latest information.