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A breakdown of HMRC penalties and how they are avoided

Business owners potentially face a number of different penalties associated with tax, VAT and other duties but, with an understanding of the system, fines can generally be avoided.

Penalties are typically applied if there are errors or inaccuracies in tax returns and other documents, if tax returns are filed late, or if business owners are late to pay any tax they owe. Failing to notify HMRC that circumstances have changed that could make someone liable for tax, VAT or other duties will also incur a penalty.

Penalties due to lateness

In many cases, penalties are due to missing deadlines, with common examples being missing the date to file a tax return, or the deadline for paying tax owed. Normally, a tax return on paper must be returned to HMRC by 31st October in the year that the tax year ended. When returns are filed online, this must be done by 31st January in the year following the end of the tax year.

Whether any tax is owed or not, the fine for missing either of these filing dates is £100. Should late filing extend to three months past the deadline, a further fine of £10 a day kicks in, up to a £900 maximum. If six months pass and the tax return is still not filed, then a £300 penalty is added (or 5% of any tax owed, if this represents a larger amount). After a year, another fine of £300 (or 5% of tax owed) is considered due and, in some cases, people may be charged 100% of the tax they owe.

Avoiding these fines means being aware of the relevant dates and ensuring paperwork is dealt with well in advance. Alternatively, a professional could be employed to deal with accounting matters, and this should ensure any penalties for lateness are avoided, as well as reducing the risk of errors.

If a tax return has been completed in time but someone fails to pay the tax owed by the date HMRC has set, then interest is normally charged, starting the day after the missed deadline. Setting aside a proportion of any income earned to pay future tax bills is good practice, and should ensure the money is available when needed.

‘Failure to notify’ penalties

Whenever anyone acquires a new income source that might be liable for tax, HMRC must be notified by 5th October in the same year that the relevant tax year ended. Penalties applied by HMRC for failing to do this are usually based on tax that is due but has not been paid, and they vary in amount. Therefore, anyone who starts a business needs to contact HMRC as soon as possible to avoid a fine.

Anyone who receives a tax return must fill it in and file it by the proper deadline or risk a penalty, but some people who are in this situation may be able to have a tax return officially withdrawn by phoning HMRC and explaining that, for instance, all of their income is already being taxed under the PAYE system. There is a deadline for asking HMRC to allow a tax return to be withdrawn, and this is two years after the tax year ends.

Posted by Louise
June 6, 2014

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