HMRC to scrap outrageous £100 fee for late tax returns

The taxman is reconsidering penalties - and the hated £100 late fee could go

Tax return form 2014

HMRC is finally seeing sense over its much-hated £100 fee for filing your self assessment tax return after the deadline. At the moment, even if your return is submitted a few seconds after midnight, the taxman will send you a bill for £100 as punishment for your oversight. It has long been despised, as a draconian punishment for a small and insignificant failure. And now it looks like the system is finally going to be changed.

The current system catches out hundreds of thousands of taxpayers every year - recent figures revealed that an incredible 890,000 people ended up with a £100 bill for late filing this year. HMRC accepts that the approach is flawed, because it ends up punishing people who make mistakes rather than those who are trying to avoid paying their tax.

It has published a discussion paper, as the first step in changing the punishments for late filing of returns. It said that ironically by running a system that people believe is unfair or disproportionate, research shows that over time it makes people less likely to follow the rules and pay their tax on time - so the current system does exactly the opposite of what it was established to do.

What will change?

The discussion paper suggests that the system needs to be improved in a number of ways. HMRC has highlighted that it needs to differentiate those who miss the deadline by a day or two from those who didn't make any attempt to file a return at all. This could mean updating the definition of what constitutes a 'reasonable excuse' for missing the deadline, to make it more wide-ranging.

It could also mean treating people differently if this is the first time they have filed late - or the very first time they have had to file a return.

One possible approach could be a system of penalty points (like the one for motoring offences) where the penalty for non-compliance is initially non-financial, but if you build up too many points you will face serious financial sanctions.

The new system could also include higher rates of interest on tax debts - instead of fines - which will make the size of the punishment match the seriousness of the unpaid tax bill.

The only fly in the ointment is that we can't expect radical change overnight. HMRC is asking for anyone affected by the regime to submit their comments on the paper by 11 May. After that, the organisation will ask for comments on a specific proposal. Then the government will take a while to draft new legislation, and finally it needs to be passed before it can be implemented.

There's a chance that the new system could be in place for next January, but with a couple of consultations, a general election, and an uncertain political landscape, it's worth getting your tax return in on time just in case.

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