It’s in your interest to understand how HMRC penalties are calculated and imposed to help your business avoid a nasty shock.
When you’re doing your absolute best to stay on the right side of HMRC, the last thing you want is to be hit with a penalty for an obligation you simply weren’t aware of. Of course the ultimate penalty apart from those mentioned below is a compulsory liquidation of the company via a winding up petition.
HMRC charges penalties for a range of situations which include: inaccuracies, underpaid tax, understated, over-claimed or under assessed as a result. If you’re not honest with HMRC that any tax assessment is too low, this may also trigger a penalty.
This article will explore, in brief, HMRC’s current legislation about penalties on late tax payment.
What are your responsibilities?
As a business owner, director or officer of the company, you are responsible for your tax returns, calculations and payments, regardless of whether you work with a tax accountant or file your returns yourself.
A tax accountant will be authorised to deal with HMRC tax penalties on your behalf, but ultimately, the responsibility for any penalties for filing late returns, making late payments, or any errors present on the paperwork legally remains with you.
Self-assessment HMRC Tax Penalties
For returns not submitted by 31 January, there will be a penalty of a hundred pounds. For returns that are submitted more than three months late, you will need to use HMRC’s online calculator to assess how much is owed. You can find that link here.
PAYE HMRC Tax Penalties
PAYE is payable by the 19th if using the post, by the 22nd of each month when paying electronically. Late PAYE penalties are calculated on a percentage basis of the amount that is late in the relevant tax month. Current rates are available here.
National Insurance Late Payment Penalties
National insurance penalty rates are identical to those for PAYE
PAYE Penalties for Late or Inaccurate Returns
HMRC is extremely strict about requiring employers to pay on time and accurately. PAYE penalties will be incurred if your full payment submission (FPS) was late, or if you did not submit the expected number of FPSs. The failure to submit an Employer Payment Summary (EPS) were not paying employees in a tax month can also lead to a penalty.
Specific details about PAYE penalties and their exceptions are available here
VAT Tax Penalties and Surcharges
Since VAT is essentially HMRC’s money, they take a serious view of late payment. There are separate penalty structures for VAT that is underpaid (i.e. you owed £20,000, but you only declare £10,000) than for default payments themselves (simply haven’t paid at all). For details on what interest is due for underpaid or overpaid VAT to see the latest figures here.
If you have defaulted on a VAT payment, which means you have either not submitted a return or made payment by the deadline, then your penalty will increase depending on the number of times you have defaulted within a 12-month period. Check the figures here.
Late CIS Returns and Penalties
Construction Industry Scheme Payments have their penalty structure. If you’ve made no payments to subcontractors during a given month, you need not file a return, but you must tell HMRC that no return is due.
Monthly returns are due on the 19th of every month and, in the case of late payment, the latest CIS penalty figures can be read here.
HMRC’s Penalties for late Payment of Corporation tax
HMRC imposes penalties for several issues surrounding corporation tax.
(1) Not informing HMRC of a Company’s Liability – Directors have responsibility to inform HMRC of any tax liability within 12 months of the end of the corporation tax accounting period. A ‘failure to notify’ penalty will follow if this is not undertaken, which will be calculated as a percentage of the amount of tax that you owe. This percentage will vary depending on the apparent severity of the error. In these situations, HMRC distinguishes between carelessness, the deliberate attempt to send incorrect information, and the most serious offence in which a director might intentionally send false information as well as attempt to conceal the error. Up-to-date penalty figures for these three scenarios are available here.
(2) Penalties for not filing corporation tax on time – The latest figures are here
(3) Penalties for Inaccurate Company Tax Returns – Where HMRC corrects a mistake on your behalf, a penalty will be levied as a percentage of the extra tax due. The main point here is that HMRC offers leniency to those who informed them about any errors before they find out themselves – this is known as ‘unprompted disclosure’. If you feel HMRC is about to find out, or they confront you about it and you then confess, this is known as ‘prompted disclosure’ and is hence a harsher penalty. The latest figures for those scenarios are available here
(4) Penalties for not Keeping Sufficient Corporation Tax Records – Guidelines for keeping accurate company records are available here. Failure to do so could lead to a £3000 fine or disqualification as a company director.
(5) Penalties on Instalment Payments – companies declaring profit of more than £1.5 million for each accounting period, HMRC instalment payments are now standard practice. Where these are made either too late, or in insufficient amount, HMRC may charge you a penalty. The specific legislation for that is available in the HMRC enquiry manual here.
What Constitutes ‘Reasonable Care’?
Every individual or business that has to file their taxes and duties is expected to take reasonable care to keep records that allow them to produce accurate, complete returns. If they are unsure of their responsibilities regarding a certain tax or duty, they are also expected to check with HMRC to confirm the correct position. When trading as a limited company not having accurate company records can lead to accusations of wrongful trading aimed at the director.Companies have also been known to be wound up for not having records or presenting annual returns so be aware.
What constitutes reasonable care actually changes according to the status of the taxpayer. For example, a small business or self-employed individual with relatively straightforward tax returns will only need to maintain a simple system that is regularly updated. A larger business with more complex tax affairs would be expected to have a more sophisticated system. Guidance from HMRC gives a clearer idea of what constitutes reasonable care for individuals and employees, employers and businesses and corporations.
How is the ‘Inaccuracy Penalty’ Calculated?
If a penalty is incurred by an individual or business due to a lack of reasonable care, the level of the penalty will depend on why the error was made and how much extra tax was due.
- If the error was the result of carelessness, the penalty will be for between 0 and 30 percent of the extra tax due;
- If the error is deliberate, the penalty will be for between 20 and 70 percent of the extra tax due;
- If the error is deliberate and concealed, the penalty will for between 30 and 70 percent of the extra tax due.
However, the inaccuracy penalty can be reduced if you do everything you can to explain to HMRC why the error was made. Depending on the quality of your disclosure, HMRC may decide to reduce the penalty if:
- You tell HMRC what errors were made
- You help HMRC calculate what extra tax is due
- You give HMRC access to check the figures
You can read more about HMRC inaccuracy penalties, how they have calculated and the potential reductions here.
What is a ‘Failure to Notify’ Penalty?
Businesses and individuals must inform HMRC when changes occur that affect their level of tax or duty liability. If they fail to do so, they may face a ‘failure to notify’ penalty if any of the following applies:
- You are liable to tax because your new business has made a profit
- Your business is liable for Corporation Tax
- Your business’ turnover has reached the VAT registration threshold
- You sell an asset and make a capital gain
- You start a type of business that must be registered with HMRC – e.g. one that pays Excise Duty or betting and gaming duties
- Your circumstances change in a way that affects your tax position
The penalty for a failure to notify is calculated in much the same way as the inaccuracy penalty, and can also be reduced with a full explanation of the failure
Do You Need Help Negotiating Your HMRC Tax Penalties
As some of the UK’s most experienced mediators with HMRC over tax issues, we can give you free confidential advice, and work together to resolve your situation in the best manner possible.