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HMRC issues new penalties for late filing

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HMRC brings in New Late Filing Penalties and New Penalties for Offshore Evasion

The difference between tax avoidance and tax evasion is the thickness of a prison wall - Denis Healey

Late Filing Penalties

HMRC has issued a draft order which will bring in a new set of penalty rules for late filing and late payment of tax from 6 April 2011. This will apply to returns and payments due for tax years 2010/11 onwards.

The penalties for late filing will include:

  • An immediate £100 penalty for filing after the due date (whether or not the tax has been paid);
  • Daily penalties of £10 per day for returns that are more than 3 months late, running for a maximum of 90 days;
  • Penalties of 5% of the tax due for the return period (or £300 if greater) for prolonged failures (over 6 months and again at 12 months);
  • A higher penalty of 70% of the tax due where a person fails to submit a return for over 12 months and has deliberately withheld information necessary for HMRC to assess the tax due;
  • This becomes a maximum 100% penalty if the behaviour is deliberate with concealment.

The penalty regime for late payment of any tax due will be:

  • A penalty of 5% of the amount of tax unpaid, generally 1 month after the payment due date (or at the filing date of the relevant return);
  • Further penalties of 5% of any amounts still unpaid at 6 months and 12 months;
  • Suspension of late payment penalties where the taxpayer agrees a time to pay arrangement with HMRC.

New Penalties for Offshore Evasion

We've blogged before here that HMRC has run several initiatives along the lines of amnesties over the last few years. And while the carrot has always been a reduced penalty for full disclosure, the stick was always the promise that anyone subsequently caught would be severely dealt with.

HMRC has decided to upgrade to a bigger stick.

The new penalty regime is an enhancement of the penalties for:

  • Failure to notify
  • Inaccuracy on a return
  • Failure to file a return on time

Under the new legislation, these penalties will be 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.

There will be three new levels of penalty:

  • Where the income or gain arises in a territory in 'category 1', the penalty rate will be the same as under existing legislation;
  • Where the income or gain arises in a territory in 'category 2', the penalty rate will be 1.5 times that in existing legislation - up to 150 per cent of tax;
  • Where the income or gain arises in a territory in 'category 3', the penalty rate will be double that in existing legislation - up to 200 per cent of tax.

The Treasury has laid legislation before Parliament which describes which territories are in 'category 1' and 'category 3'. All other territories (except the UK) are in 'category 2'. Where penalties are due, HMRC retains the right to reduce them depending on how helpful the individual is in assisting it to establish the correct amount of tax due. The largest reductions will be for unprompted disclosures (basically, where you tell HMRC about a tax issue which you have no reason to believe HMRC would have discovered).

Anybody who needs to get their affairs in order is recommended to contact a professional immediately. The new penalties come into force from 6 April 2011 and 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.

Act now if you think you’re affected.