Tough new HMRC penalties for late tax returns could total £950m this month

The figures obtained by Pinsent Masons, the law firm behind Out-Law.com, show the "astonishing increase" in revenue as a result of the introduction of a new penalty system by HM Revenue and Customs (HMRC), according to Pinsent Masons tax law expert Phil Berwick.

The total, which is far higher than the £250m in fines levied by this point last year, comes despite a reduction in the number of penalties issued, from a record high of 1.5 million in the 2009-10 tax year to just 1.16 million this year.

"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," Berwick said. "The number of penalties issued has gone down, but HMRC can still expect their potential income from fines to rocket."

Self-assessment is a process through which taxpayers with more complex tax affairs - for example company directors, those receiving foreign income and the self-employed – can notify HMRC of their income and capital gains and claim tax allowances. Taxpayers must complete a tax return each financial year. The deadline for tax returns for the 2010/11 tax year fell on 31 October 2011 for paper returns and 31 January 2012 for taxpayers filing their returns online.

The new system, in effect for the first time this year following its introduction in April 2011, sees extra penalties levied the later a taxpayer files an overdue tax return. Under the old system an automatic £100 fine applied if a taxpayer missed the deadline, followed by a second automatic £100 fine if the return remained unfiled after six months had passed.

The new system could, Berwick said, see penalties "easily top £1,500". An initial £100 penalty still applies if the deadline is missed, followed by an additional daily penalty of £10 per day up to a maximum of £900 if the return is three months late. An additional £300 or 5% of any tax liability which would have been shown on the return applies after six months, whichever is higher, with the same due again once the return is 12 months late.

Taxpayers may be exempt from penalties where they have a "reasonable excuse". According to HMRC's website, reasonable excuses can include serious illness or disability or computer problems, however each case will be considered on its own merits.

Berwick said that HMRC's interpretation of 'reasonable excuse' was often "overly strict", leading to a "spate" of successful tribunal appeals against late-filing penalties in 2011. The tax tribunal said that department's approach was "conspicuously unfair" in one case, and suggested in another that the penalty regime was "being used as a revenue earning device rather than for its proper purpose as a mechanism to encourage prompt compliance by taxpayers".

"With automatic penalty generation there's no quality control on HMRC's part – it's left to taxpayers to fight the wrongly-issued penalties," Berwick said. "With penalties now so high, HMRC has a responsibility to take more care with the penalties it issues. 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."

Steeper penalties could, Berwick said, lead to a "big rise" in the number of cases being brought referred to the tribunal system by taxpayers who would be less likely to assume that "HMRC probably knows best" in light of the increase. This would, he warned, have knock-on effects for the "hugely over-stretched" tribunals system, meaning taxpayers would likely have a long wait before they could get their cases settled.

"If taxpayers have a reasonable excuse, they should appeal on that basis," he said. "If a taxpayer accepts a penalty is due they need to make sure that HMRC has calculated the penalty correctly."

Figures obtained by Pinsent Masons last month showed that the number of cases heard by the First-tier tax tribunals reached a record high of 3,400 in the last three months of 2011. Overall, the number of new cases heard in 2011 was 20% higher than in 2010, at 11,000. In addition, the number of unheard cases rose from 16,700 at the end of 2010 to 22,100 at the end of 2011.