Pinsent Masons - 1 Million Fines Issued Under HMRC’s Tougher New Late-Filing Penalty System

Pinsent Masons says that the new penalty system means the value of penalties sent to late filers at the end of July could be around £950m, far higher than the £250m worth of fines sent at this point last year*. This is despite the number of penalties for the 2010-11 tax year falling from the record high set by the 2009-10 tax year (1.5 million penalties).

The new system (introduced in April 2011 and in effect for the first time this year) sees extra penalties levied for successive deadlines being missed*. HMRC says that 10% of self-assessment tax returns for the 2010-11 tax year were not filed on time.

Phil Berwick, Director at Pinsent Masons, says: “The new penalties have probably shocked a significant number of taxpayers into meeting a deadline they would otherwise have missed, but it’s likely that the fall in volume of penalties disguises a hike in the value of the penalties that taxpayers will be hit with.”

“The number of penalties issued has gone down, but HMRC can still expect their potential income from fines to rocket. The value of the fines they will issue at the end of the month could potentially quadruple from last year’s figure. That’s an astonishing increase.”

“Under the old system, the penalties would only be a couple of hundred pounds, at most. Now, penalties can easily top £1,500, and in some cases they could go far beyond that.”

Phil Berwick adds: “Late filing should be discouraged, but unfortunately, HMRC has a track record of wrongly issuing penalty notices. Once those fines are levied, it’s hard to get HMRC to change their mind.”

“With automatic penalty generation there’s no quality control on HMRC’s part; it’s left to taxpayers to fight the wrongly issued penalties. With penalties now so high, HMRC has a responsibility to take more care with the penalties it issues.”

Pinsent Masons points out that numerous problems have been exposed with HMRC’s approach to issuing penalties for late filing.

For example, 2011 saw a spate of successful tribunal appeals against late-filing penalties, with HMRC’s overly strict interpretation of ‘reasonable excuse’ for late-filing being exposed as flawed.

HMRC has also been strongly criticised by tribunals for delaying its issuing of penalty notices to late-filers, which resulted in an increase in the value of penalties owed by taxpayers.

Tribunals have said that HMRC’s approach was “conspicuously unfair” in one case, and in another, that “it is hard to escape the conclusion that the penalty regime is being used as a revenue earning device rather than for its proper purpose as a mechanism to encourage prompt compliance by taxpayers.”

Phil Berwick comments: “HMRC’s errors over self-assessment penalties take up the time, effort, and financial resources of the affected taxpayers as they try to get the mistake corrected.”

“HMRC needs to learn from its previous mistakes. I’d rather it was the case that improvements had been made before HMRC was given the power to levy much heavier penalties. HMRC’s approach has been gratuitously draconian in the past, and there is little evidence of it improving in the future.”

Phil Berwick adds: “Taxpayers that receive late-filing penalties shouldn’t take HMRC’s decision as read. Taxpayers often don’t bother to appeal as they assume that HMRC probably knows best, but time and time again, this has been shown not to be the case.”

“However, steeper penalties might lead to a big rise in the number of cases being brought against HMRC by taxpayers. The tribunals system is hugely over-stretched already, which means taxpayers will have a long wait before they can get their case settled and return to getting on with their business.”

“Taxpayers receiving penalty notices need to look very carefully at what HMRC is saying, and should think about challenging HMRC’s decision.”

“If they have a reasonable excuse, they should appeal on that basis. If a taxpayer accepts a penalty is due they need to make sure that HMRC has calculated the penalty correctly. If the penalty has been issued later than it should have been, taxpayers need to challenge the penalty to make sure they pay what would have been due if the penalty was issued promptly.”

*The New Penalty System

HMRC issued 2.5m first and second automatic penalties for the 2009-10 tax year (the last year of the old system). Roughly 1.56m of these were first automatic penalties and roughly 0.94m were second penalties issued after 6 months; a decline from 1 day to 6 month penalties of 40%.

Using the same 1 day-6 month filing rate for the new system:

1 day late: £100 – 1.16m penalties issued = £116m

6 months late: £900 for being 3+ months late and £300 (6 month penalty, assuming this is larger than 5% of tax due) – 0.7m penalties issued (40% decline from 1.16m) = £840m

Those paying 6 months late could pay £1,300

So, roughly £956m worth of penalties should be issued six months after the 31 January self-assessment filing deadline

Under the old system:

1 day late: £100 – 1.56m penalties issued = £156m fines in total

6 months late: £100 – 0.94m penalties issued = £94m fines in total

Those paying 6 months late pay £200

This totals £250m