New hefty self assessment penalties loom

tax returnAP

From today, penalty notices from HMRC will be landing on people's doorsteps - that is those who had to do a self assessment tax return and failed to do it on time (or didn't bother at all).

HM Revenue & Customs (HMRC) is clamping down on late and non-filing with a new penalty regime - threatening fines of up to £1,600. This is because up to £2 billion in tax could be at stake on these late tax returns, according to the Institute of Chartered Accountants in England and Wales.

The new penalty regime has four elements, which mount up if the tax return isn't filed:

• £100 fine from 3 February (after the 31 January deadline was extended due to HMRC strikes)

• £10 a day fine from 1 May for 90 days – a maximum of £900

• £300 fine on 1 August (or 5% of the tax due if that is more)

• £300 fine on 1 February the following year (or 5% of the tax due if that is more)

These penalties are also no longer capped at the tax owed, so taxpayers could face fines of up to £1,600 – even if they owe nothing or if HMRC owes them a refund. You simply have to file your tax return if you are in the self assessment system (in which case you should have received a tax form in the post).

Unfortunately, the extension of the deadline from 31 January to 2 February won't have made much of a difference. HMRC presented this as a generous gesture, but Mike Fleming, partner at Straughans Chartered Accountants and Tax Advisers, pointed out at the time:

"An extension neatly prevents the inevitable onslaught of letters the Revenue would have received as a result of asking taxpayers to claim in writing if they believed the strike on the 31st had prevented them from meeting the deadline. This deluge of correspondence could have crippled HMRC's already ailing administrative system and could have caused a new spate of errors to match some of the Revenue's high-profile blunders of last year.

He said the deadline extension actually meant very little as it can take up to 7 days for the Revenue to supply a taxpayer with their unique reference number, which they need to complete their return. So for anyone who had not yet approached HMRC for this number, an extension of two days would not have enabled them to submit on time – which "crucially means that HMRC do not lose out on thousands of pounds of expected income from fines".

Who has to complete a self assessment tax return?
If you're self-employed (including being a member of a partnership) you always have to complete a return so HMRC can work out how much tax you owe. This also applies if you are employed and self-employed at the same time (i.e. you are in full employment but are doing some freelance work or even running your own business on the side). If you're not sure, HMRC spells out how to determine your employment status here.

Company directors (except for directors of non-profit organisations), ministers of religion of any faith and names or members of the Lloyd's insurance market also have to file a tax return. Sometimes HMRC asks other people to complete a tax return (even if they are in full employment) - to make sure, it says, that they're paying the right tax and getting the right allowances. Here is some more information on whether you need to file a return.

What to do if you receive a penalty notice
First of all, if you think you don't need to be in the self assessment system, phone HMRC straight away, on the helpline number given in the penalty notice.

Secondly, HMRC is said to be sympathetic where people are prevented by circumstances outside their control to file their returns on time. At HMRC's discretion if the late-filer has a reasonable excuse, the penalty will be cancelled so long as they file their return as quickly as possible.

The Revenue has also pledged to support self-employed individuals and small businesses if they are having trouble paying any tax they owe. HMRC can offer time to pay through its Business Payment Support Service.

Ian Strange, ICAEW's London Regional Director, says: "HMRC are doing everything they can to raise awareness to prevent late-filers incurring fines. Initially, HMRC will send out flyers with the penalty notice inviting taxpayers to phone the helpline if they think they do not need to be in the Self-Assessment (SA) system. If they shouldn't, HMRC will take them out and cancel any penalty notice they have issued."

While it is tempting to bury your head in the sand, late filers are advised to not ignore the penalty notice - you won't get HMRC off your back that way. And do you really want to pay £1,600 in fines?

Strange adds: "HMRC will make contact repeatedly by letter and by phone for the rest of February and March to urge late filers to avoid incurring the daily penalties."
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