The Penalty Escape HMRC ‘Overlooked’

Mark McLaughlin points out that penalties imposed by HMRC for late tax returns should be checked carefully.

The tax system in the UK might seem harsh when it comes to imposing penalties for non-compliance with statutory obligations. A common example is penalties for the late filing of self-assessment tax returns by individuals.

HM Revenue and Customs (HMRC) automatically charges a fixed penalty of £100 in the above example if the tax return is not submitted by the filing date (i.e. normally 31 October following the end of the relevant tax year for a ‘paper’ return, or 31 January if the return is filed online). If the failure continues after three months, a penalty of £10 per day can be charged for up to 90 days (i.e. £900 in total).

For longer periods of late submission, HMRC may impose tax-related penalties. If the return is six months late, the penalty is the greater of 5% of the tax liability which would have been shown in the tax return, or £300. If the tax return is still outstanding after 12 months, a further penalty of 5% or £300 may be imposed (or higher in cases of deliberately withheld information) (FA 2009, Sch 55, paras 3-6). 

However, there is an important potential limitation to the above tax-related penalties. The total late filing penalties chargeable after 12 months that are calculated by reference to the tax liability from the return in the above example must not exceed 100% (or higher in cases of deliberately withholding information) of the tax liability (FA 2009, Sch 55, paras 1(3), 17(3)).

This limitation in late filing penalties was highlighted in Jackson v Revenue and Customs [2018] UKFTT 64 (TC), albeit in the context of a non-resident capital gains tax (NRCGT) return. In that case, the non-UK resident appellant disposed of two residential properties in Liverpool in May and September 2015. A NRCGT return filed in respect of both properties was received by HMRC in October 2016 (n.b. the filing date for NRCGT returns is 30 days following completion of the relevant property disposal). The appellant appealed against late filing penalty notices subsequently issued by HMRC.

The appellant accepted that the returns were filed late. The First-tier Tribunal determined (among other things) whether HMRC had applied the penalty legislation and calculated the penalty correctly. The tribunal considered that in making four assessments of £300 (under FA 2009, Sch 55, paras 5, 6), HMRC overlooked the above provisions which limit the aggregate amount of those penalties to 100% of the tax liability. No CGT was due on the sale of either property, and 100% of a nil tax liability was nil. The tribunal therefore concluded that none of the four penalties of £300 should stand.

The penalties originally imposed in Jackson amounted to £1,600 in respect of each property (i.e. £3,200 in total), comprising a fixed penalty of £100, daily penalties totalling £900 and two further penalties of £300 each. However, HMRC used its discretion to reduce the daily penalties to nil. The total penalties therefore fell from £3,200 to £1,400. The tribunal’s finding about the four penalties of £300 further reduced the total penalties to only £200 (i.e. the fixed penalties of £100 per return). 

If penalties are otherwise chargeable, there is a possible let-out if the taxpayer had a reasonable excuse for late filing, including where the reasonable excuse ceased if the return was filed without unreasonable delay after the excuse ended (FA 2009, Sch 55, para 23). Late filing penalties may also be subject to a reduction due to ‘special circumstances’ in some cases (Sch 55, para 16).

In Jackson, the tribunal considered whether the appellant had a reasonable excuse for failing to submit his returns on time. The appellant stated that he had missed the changes made in UK law (from 6 April 2015) relating to the 30-day submission deadline for notifying the disposal of UK residential property by non-UK residents. When he became aware of this change in law, he immediately completed the NRCGT returns. Unfortunately, the tribunal held that ignorance of the law cannot provide a reasonable excuse. However, in respect of special circumstances, the tribunal reduced the second fixed penalty of £100 to nil because the appellant had been given no opportunity to learn from his non-compliance on the first property disposal. Only the fixed penalty of £100 on the first property disposal was therefore payable.

Clearly, it is much better to avoid the risk of penalties in the first place by ensuring that tax returns are filed on time. However, there are circumstances (such as in Jackson) where this does not happen. If HMRC charges penalties for a late return, check that the return is in fact late; if so, check whether HMRC has correctly addressed and notified the penalties; also ensure that HMRC has applied the penalty legislation correctly and calculated the penalties correctly; consider whether there is a ‘reasonable’ excuse’ and/or ‘special circumstances’; and appeal to the tribunal, if appropriate.