Why are non-taxpayers being fined by HMRC?

Low-Income Tax Filing Fines

HMRC this week admitted that nearly half a million taxpayers had received late filing penalties, despite having little or no tax to pay. This occurred over a two-year period between April 2018 and April 2020 (the last year for which data was available).

Low-Income Tax Filing Fines: Background

Campaigning journalist Dan Neidle of Tax Policy Associates, recently turned his attention to campaigning against self-assessment penalties for people who pay little to no tax. Neidle is calling for fixed-rate late self-assessment penalties to be automatically cancelled if HMRC determines that a taxpayer has no taxable income.

The campaign was prompted by a freedom of information request to HMRC, which found that between 2018 and 2020 nearly half a million individuals earning less than £13,000p.a. received a penalty for a late tax return filing. During this period, few of these people hit with penalties, would have paid tax because the personal allowance was £11,850 in 2018/19 and £12,500 in 2019/20.

Low-Income Tax Filing Fines: Penalties are automatic

Those who miss the 31st January filing deadline are automatically hit with an initial fixed penalty of £100 on 1st February, even if there was no tax to pay. The fine starts increasing after three months, with additional daily penalties of £10 per day, starting on the 91st day. Then after six months, the taxpayer faces a further £300 charge, and then another £300 after 12 months.

This is a change from how the penalty scheme worked up until 2011 — prior to this a late filing penalty was cancelled if a return had no tax to pay. Caroline Miskin, a senior technical manager at ICAEW’s Tax Faculty, pointed out that: “One impact of the previous regime was if taxpayers got years behind with returns, because the penalties were max £200 per year HMRC debt management didn’t chase very actively. They do now with the amount being £1,600.”

This of course beggars the question, why is HMRC demanding tax returns from people who pay little to no tax. Miskin suggests that an urgent review of the “arbitrary” self-assessment filing criteria should be undertaken, saying “Many of those required to file a return only need to do so because of limitations and inefficiencies of HMRC’s systems.”

Low-Income Tax Filing Fines: Delayed MTD throws a spanner in the works

Dan Neidle had hoped that the penalty rules would soften with the arrival of the new MTD points-based penalties system, due to come in to force on 6th April 2025, but this has once again been postponed. One has to wonder whether implementation of to Making Tax Digital for everyone, will ever be introduced.

It now appears that MTD will only apply to taxpayers with total property and/or business turnover over £50,000, which makes it extremely unlikely that the new softer penalty system will be introduced for self- assessment taxpayers before 6th April 2025, if ever.

Time for a rethink?

Neidle acknowledged that HMRC appeared unaware of the disproportionate impact of the penalties on low earners, but is encouraging the tax authority to start monitoring late submission penalties to understand the impact and the level of penalties, prior to a review.

He also suggested that attention should be given to the self-assessment (SA) process, to determine how many taxpayers should not be required to submit a return in the first place. He suggested the HMRC revise their systems, to avoid taxpayers with little or no tax to pay from submitting a return.

Neidle’s last recommendation was to automatically cancel (and if paid refund) fixed-rate late penalties if the taxpayer has no taxable income. He also called for the reduction of penalties by around 50% if a taxpayer has a low taxable income of say, less than £15,000,

Low-Income Tax Filing Fines: This issue is not new

The concern surrounding penalties is not a new, I first raised it myself in 2015, following a report from the Office of Tax Simplification (OTS). The OTS report from that year showed that a whopping 1½ million tax returns were processed which resulted in zero tax being collected.

Regretfully, the OTS has recently been abolished, but up to that date 4 months ago, they had been working hard on the problem, including recommending the removal of some individuals from SA, providing more warnings and pointing out that other countries like New Zealand and Canada base their late filing penalties on tax owed not a fixed amount.

Tax Accountant’s view

Having first raised this issue in a Blog 7 years ago, I still believe that transparent equity in the tax system is the way forward and that penalties based on arbitrary rules are inherently unfair and should be replaced.

I’ll leave the last word to HMRC chief executive Jim Harra, who said last week “There are no penalties for innocent errors in your tax affairs” after former Chancellor Nadhim Zahawi reached a £5m tax settlement with HMRC which included a £1½ million penalty!