PENALTIES - 08.09.2020

Tax declaration deadline approaching

Shrinking self-assessment

Ever since self-assessment (SA) was introduced 25 years ago HMRC has been trying to move people out of it and wrest more control of the assessment process for itself. This resulted in the introduction of informal assessments ( P800s ) and simple assessments which HMRC can use to collect tax from those outside of SA. It’s happy to use these even though it often means it has to estimate income details. This isn’t ideal as you need to contact HMRC and go through an appeals process to overturn incorrect figures. Worse still, the system leaves you at risk.

HMRC guesswork

HMRC’s assessment systems can only deal with predictable tax liabilities. If your financial circumstances change or you have a windfall it won’t know and can’t therefore assess the tax. This leaves you open to a fine for failing to notify a tax liability. You might be in the same predicament if HMRC overlooks you in its annual review to identify those it needs to send assessments to.

Tip.  You don’t need to worry about small liabilities, i.e. a few tens of pounds.

Failure to notify penalty

If you owe income or capital gains tax and fail to notify HMRC of this within six months of the end of the tax year, i.e. 5 October, a penalty applies. This can be up to 100% of the tax liability not reported. In practice, unless you deliberately chose not to tell HMRC the penalty will be reduced to as little as 10% of the tax. HMRC actively imposes this penalty, sometimes running roughshod over the rules which contain get-out clauses.

For detailed commentary on failure to notify penalties, visit http://tipsandadvice-tax.co.uk/download (TX 20.21.06).

Tip. HMRC isn’t entitled to penalise you where any unreported tax liabilities relate to:

• income which was subject to PAYE tax, even if not enough tax was deducted, say because your code number was wrong
• income of the type that the PAYE regulations allow HMRC to include in your tax code, e.g. benefits in kind, expenses and state pension
• dividends covered by the dividend nil rate band, i.e. where the total you receive is no more than £2,000 (for 2019/20 and 2020/21)
• income from which income tax has been deducted. For example, loan interest paid to you by a company. However, if the tax liability occurs solely because you’re a higher rate taxpayer a penalty can apply.

Notifying HMRC

If you have a tax liability to report to HMRC it’s not enough say that. You must provide sufficient information to allow it to confirm the liability; essentially the same information you would provide in your tax return had HMRC left you in the SA system.

Missed the deadline

If HMRC hasn’t asked you to complete a SA tax return for 2019/20 and you’re reading this after 5 October 2020, don’t panic. You can still avoid a penalty if you act quickly. Tip. Call HMRC, ideally before 31 October, explain your situation and ask it to issue you with an SA tax return. As long as you submit this no later than the usual SA deadline (31 January 2021) you won’t face a penalty.