Tax penalty, and how to negotiate the best outcome when things go wrong

“A tax is a fine of doing well, a fine is a tax of doing wrong”

When you make a profit, the taxman has to take a cut which means you have to pay a fair share of tax. However, when you do submit your tax return to HMRC and something goes wrong you will then have to pay a fine.

Penalty for Missing the Tax Submission Deadline

If you submit a tax return late and miss the deadline the HMRC system will detect this and will automatically issue you a penalty. This means it is issued by default because they do not know the reason behind the late submission. The penalty depends on how late your tax return is submitted. If this is the case and you do have a reasonable excuse you are able to appeal the penalty. Having supporting evidence will maximise the chance and if they accept your reason they will cancel the penalty. If you cannot negotiate the penalty then you just have to pay the full amount.

Reasonable Excuse

There are some excuses that HMRC will accept:

  • Illness – If you are critically ill then you cannot fill in the tax return which may be accepted depending on the circumstances.
  • Documents Destroyed by Accidents – If you are self-employed and your business records have been destroyed by the accident then that is a reasonable excuse as well.
  • No UTR Number – Another common scenario is if you do not have your unique taxpayer reference number (UTR). The UTR has to be issued first in order to submit a tax return. If it has been issued late then that is not your fault.

Unreasonable Excuse

There are some common excuses that people give and are not seen as reasonable:

  • Being Busy – This is not a reasonable excuse because if you are busy you are able to ask for help. You can ask for help from an accountant as they can make sure everything is submitted on time.
  • Too Complicated – If you think it is too complicated for you then that is not acceptable too. There are a lot of experts out there and the tax authorities give you 9 months to prepare your tax return. Even if you do work with an accountant, the primary responsibility is yours. You need to chase up your accountant and if you do not receive a response you can always find another one.

The reasons stated can always be prevented and if you are in this position, HMRC will not accept these excuses.


Penalty of Errors or Mistakes in Tax Return

If you make any mistakes on a tax return or VAT return then there may be a penalty as well. The penalty amount will be based on the potential loss of revenue or how much tax you owe to HMRC. For example, if you are expected to pay £5000 tax within the year but you only declare that you have £4000 outstanding then the remaining £1000 is a potential loss of revenue. HMRC would charge a percentage of that £1000, the percentage will be determined by your behaviour and intention.

  • Because of a Lack of ‘Reasonable Care’ – This means every individual is expected to keep records in order to provide a complete and accurate return.HMRC expects you to check with your accountant, or HMRC, to confirm the correct position, if you are not sure. However, ‘reasonable care’ is different according to each individuals circumstance. For example, someone with straightforward tax affairs may only need a simple system of record keeping that is regularly updated. A large business is expected to have a more sophisticated system that is well-managed. The penalty is levied at 0% – 30% of the amount of tax due.
  • Deliberate – This occurs if you intentionally send incorrect information. The Penalty is 20% – 70% of the amount of tax due.
  • Deliberate and Concealed – If you intentionally send incorrect information and take further steps to hide the error. The penalty can be up to 100% of the amount of tax due.

The level of the penalty is linked to the reason why the error occurred. The more serious the reason, the higher the maximum penalty can be. HMRC can reduce the penalty if you help them to put things right.

Ways to Negotiate the Best Outcome

  1. Telling – If you find something out and you tell HMRC, they will consider what you have informed them whilst determining the next steps. You should make them aware of any issues even if they do not know.
  2. Helping – It is important to help HMRC understand your scenario and where it went wrong.
  3. Giving – Enable HMRC to have access to your records to help them investigate further. You need to show them your intention of wanting to put it right and that you want to pay back any outstanding tax. After doing so, HMRC will decide what penalty they will give you or they may decide to remove the penalty completely.


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