£100 fine for late filing of tax return to be scrapped?

Frequently Asked Business Question:

I heard in the recent Budget that HMRC are going to scrap the £100 fine for filing your personal tax return. Is this right and do I still need to file my tax return before 31 January deadline?

Top Tip:

HM Revenue & Customs (HMRC) is planning to scrap the initial £100 penalty for taxpayers who fail to file their self-assessment tax return on time. Under the current system, individuals who miss the 31 January deadline face an automatic £100 fine. This is followed by a series of escalating penalties for continued failure to complete the return after three, six and 12 months.

However, HMRC has now announced plans to scrap the initial fine for those taxpayers who miss the deadline by only one or two days, arguing that it may be ‘better to differentiate between deliberate and persistent non-compliers and those who might make an occasional error for whom alternative interventions are more appropriate’.

Proposals for a new approach include charging higher interest rates on tax debts, and introducing a system of penalty points for persistent non-compliance. Now the government has said it is pressing ahead with these plans to replace the fines with a points system, like that for driving offences. These proposals were first proposed almost 3 years ago and it looks like the government is planning to push ahead with them now.

The commitment was buried in the small print of the Budget. It said: “The government will reform the penalty system for late or missing tax returns, adopting a new points-based approach.”

The move to overhaul late filing penalties comes after pressure on the government to rethink a penalty regime introduced in 2012. This left many late filers facing bills running into thousands of pounds, even if they had no tax to pay. Under a points system previously floated by HM Revenue & Customs, it appeared that “some persistent defaulters might avoid a penalty, while some more compliant taxpayers could incur a penalty”.

While HMRC is starting to treat accidental errors more leniently, it appears to be taking a harder line on errors that it believes are deliberate. HMRC imposes penalties for “deliberate behaviour” when it believes an inaccuracy on a tax return was made intentionally, or that a taxpayer knew of an inaccuracy and did nothing to correct it. Deliberate penalties allow HMRC to charge a much higher fine than the other category of penalties — for “careless behaviour”. The rise reflects pressure on HMRC to collect more revenue by imposing bigger penalties and does not necessarily mean more people are making deliberate errors. Penalties for ‘deliberate errors’ are the latest weapon to be used by HMRC in its relentless hunt for extra revenue.

This year, 840,000 taxpayers — 7 per cent of the total — missed this January’s online filing deadline, although HMRC waives fines in cases where there is a “reasonable excuse”, such as serious illness. In the recent Budget, the government announced its intention to reform the penalty system for late or missing tax returns. It also said it would consult on whether to simplify and harmonise penalties and interest due on late payments and repayments, to “ensure that the system is fair, simple and effective across different taxes”.

We understand that a public consultation on the changes will run until May.

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.