Payment of Income Tax. Payment of Interest and HMRC Penalties.
If you pay your income tax liabilities late you will be charged interest. Interest may be charged or added to repayments of income tax. This article will help you identify the dates on which incometax is payable and outlines for you how HMRC calculate the interest due on underpaid or over paid tax. This article will also explain how HMRC considers financial liabilities or payments that may arise as a result of non-compliance with UK tax law. We are experts in the field of UK Self-assessment and as such offer tax advice as part of our London bookkeeping service to all our London Small to medium sized business clients.
Under the self-assessment system income tax which is not deducted at source is payable as follows:
1. The taxpayer’s income tax liability for the tax year in relation to all sources of income is aggregated as a total income. This tax liability is increased by the amount of any Class 4 National Insurance contributions which are due for the year.
2. Payments on account of the total liability are due on 31 st January in the tax year and on the following 31 st July. For example, the payments on account for 2018-19 are due on 31 st January 2019 and 31 st July 2019. Each payment on account is equal to 50% of the taxpayers liability to income tax and Class 4 National Insurance Contributions for the previous tax year, less any tax which was paid by deduction at source ( including tax paid by means of the PAYE system ). Note that:
Payments on account are not required if the taxpayer’s total liability to income tax and Class 4 National Insurance contributions for the preceding year (less tax deducted at source) was under £1000.
- Payment on account are also not required if more than 80% of the taxpayer’s liability for the previous year was satisfied by deduction of tax at source.
- A taxpayer who believes that his or her liability for the current year will be less than in the previous year may claim to make reduced Payments on account. There are penalties for making such a claim fraudulently or negligently.
- A balancing payment (Or repayment) is normally due on 31 January following the end of the tax year. For example, the 2018-2019, balancing payment is due on 31January 2020. But note that:
1. If a return notice is issued late (i.e. after 31 October following the end of the tax year to which it relates ) and this has not been caused by the taxpayer’s failure to notify his or her chargeability to tax, the balancing payment is due three months after the date of the notice.
2. If a self-assessment is amended by the taxpayer or by HMRC (or if a discovery assessment is raised) any additional amount payable is due 30 days after the date of its notification to the taxpayer or on 31 st January following the end of the tax year, whichever is the latest. However, this rule does not defer the date from which interest accrues on the additional tax. The amount of the balancing payment is equal to the income tax and Class 4 National insurance contributions liability for the year, less any tax deducted at source and less the Payment on Accounts. The taxpayer’s liability to Class 2 National insurance contributions is added to this payment, along with any capital gains tax payable for the year.
Taxpayers with employment income may request that a balancing payment which does not exceed £3000 should be collected via the PAYE system. Any amount paid in this way is treated as if paid on the first day of the tax year in which the tax is collected. For instance, a balancing payment which is collected via PAYE during tax year 2018-19 is treated as if paid on 6 th April 2018.
Interest is charged if any payment is made after the due date. Late payment penalties may also be imposed. Taxpayers receive regular statements from HMRC showing the amounts due, the amounts paid to date and the amounts of any interest and penalties.
DIGITAL TAX ACCOUNTS
As from April 2018, taxpayers who have digital tax accounts and update these accounts at least quarterly can adopt a “pay-as-you-go” system for tax payments. This will allow such taxpayers to choose more suitable payment patterns and to manage their cash flows better.
Direct Recovery of Tax Debts
Legislation has been introduced which allows tax debts owing to HMRC to be recovered directly from a taxpayer’s bank and building society accounts. There must be a meeting with the taxpayer before such action is taken and there is a right of appeal against a direct recovery decision.Safeguards are in place to protect vulnerable taxpayers and to ensure that at least £5000 remains in the taxpayer’s accounts after a tax debt has been recovered. HMRC may also collect tax debts of up to £17000 through the PAYE system (depending on the size of the taxpayer’s employment income) with or without the taxpayers consent.
Late Penalty Payments
In addition to the interest that is charged on tax paid late, a taxpayer who makes a late balancing payment may also incur a late payment penalty. Broadly, the late payment penalty system imposes a penalty equal to 5% of any tax not paid within 30 days of the due date, with two further 5% penalties for tax remaining unpaid six months and 12 months after the due date. The detailed rules are as follows:
1. If all or part of a balancing payment remains unpaid more than 30 days after the due date, a penalty is charged equal to 5% of the amount unpaid.
2. The “penalty date” ( Ie: the date on which the first late payment penalty is charged ) is the date which falls 31 days after the due date of payment.
3. If any of the balancing payment is not paid within the five-month period beginning on the penalty date, there is another penalty equal to 5% of the amount still unpaid.
4. Finally, if any of the balancing payment is not paid within the eleven-month period beginning on the penalty date, there is a further 5% penalty.
5. If a taxpayer is liable to a late payment penalty, HMRC must issue the taxpayer with a penalty notice. Late payment penalties are due for payment within the 30-day period beginning with the day on which the penalty notice is served.
6. The late payment penalty system does not apply to Payment on Accounts. Late payment penalties also apply to discovery assessments and amendments to self-assessment.
Interest on Overpaid Tax
Repayments of overpaid Payments on accounts, balancing payments and penalties attract interest. This is calculated at the greater of 0.5% per annum and the official Bank of England rate. Such interest is referred to as repayment interest and is itself exempt from income tax. Interest is calculated daily and runs from the repayment interest start date to the date on which the repayment is made.
The penalties charged in relation to failure to notify chargeability, inaccuracies in a return or document and deliberate withholding of information are higher if offshore matters are involved. In some cases, the penalty could be as much as 200% of the amount of tax concerned.
FAILURE TO NOTIFY CHARGEABILITY TO TAX
An individual must notify HMRC if he or she is liable to income tax, even if a notice requiring a return has not been issued for that year. Notification must be made within six months of the end of the tax year concerned.
The penalty regime which applies to a “failure to notify” is not confined to income tax but covers a range of taxes, including capital gains tax, corporation tax and Vat. Under this regime, the penalty for a failure to notify liability to income tax for a tax year is expressed as a percentage of the tax which (because of the failure) remains unpaid on the 31 st January following the end of that year. But no penalty is charged if the taxpayer has a reasonable excuse for the failure to notify. The applicable percentage is determined as follows;
1. For a “deliberate and concealed” failure to notify, where the failure is deliberate and the
taxpayer has attempted to conceal it, the percentage is 100%.
2. For a failure which is “deliberate but not concealed” the percentage is 70%.
3. Otherwise, the percentage is 30%.
These penalties may be reduced if the taxpayer discloses the failure. There are greater reductions if
the disclosure is “unprompted” that if it is “prompted”. A disclosure is unprompted if it is made at a time when the taxpayer has no reason to believe that the irregularity has been discovered or is about to be discovered.
Late Submission of a tax return. The penalty regime which applies to the late filing of a self-assessment tax return is explained below. This regime will eventually apply across a range of taxes.The late filing penalties are as follows:
1. A £100 penalty is charged as soon as a tax return is late even by a single day. This applies whether or not the tax liability for the year has been paid and if the taxpayer has no tax liability that financial year or is owed a tax repayment for the year.
2. If a tax return is more than 3 months late, HMRC may charge a penalty of £10 per day whilst the return remains outstanding (up to a maximum of £900).
3. If a return is more that 6 months late, another penalty arises equal to the greater of £300 and 5% of the tax liability for the year.
4. If a tax return is more than 12 months late, a further penalty arises, again equal to thegreater of £300 and 5% of the tax liability for the year.
5. If a tax return is more than 12 months late, a further penalty arises, again equal to the greater of £300 and 5% of the tax liability for the year. But if the taxpayer has deliberatelywithheld information from the HMRC, the percentage used in the penalty calculation becomes 70% and not 50%. This rises to 100% if the withholding of information is deliberate and concealed. These higher penalties may be reduced if the taxpayer discloses the information which has been withheld.
The penalties which are calculated as a percentage of the tax liability have to be estimated by HMRC in the first instance and they will be re-assessed when the taxpayer files the late tax return. No penalties will be charged if the taxpayer has a reasonable excuse for failing to submit a tax return on time such as a serious illness or accident.
Submission of an incorrect Tax Return.
A single penalty regime applies in relation to the submission of incorrect tax returns for the purposes of income tax and many other taxes. This common regime applies if an incorrect return leads to an understatement of the amount of tax due and the inaccuracy was either careless or deliberate. No penalty is charged if the taxpayer has taken reasonable care. The regime also applies in an assessment issued by HMRC understates the amount of tax due and the taxpayer fails to take reasonable steps to notify HMRC within 30 days.
The amount of any penalty under the regime is expressed as a percentage of the potential lost revenue. For a “deliberate and concealed” inaccuracy, the percentage is 100%. This percentage falls to 70% for an inaccuracy which is “deliberate but not concealed “. Otherwise the penalty fine is 30% in cases where the taxpayer has failed to notify HMRC of an under-assessment. As with the “failure to notify chargeability” penalties these penalties may be reduced if the taxpayer discloses the infringement and there are greater reductions if the disclosure is unprompted than if it is prompted.
Fraud or negligence when claiming reduced payment on accounts
A taxpayer who makes a claim for reduced Payment on Accounts and so fraudulently or negligently may be subject to a maximum penalty equal to the difference between the Payment on Accounts made and the Payment on Accounts that should have been made.
Failure to keep records.
A taxpayer who fails to maintain or retain adequate records in support of the year’s tax return may be subject to a penalty of £3000.
In every case, the penalty described above is charged in addition both to the tax itself and to any late payment penalties or interest charged in relation to that tax.
If you require any additional help in relation to income tax, vat or other tax fines please do not hesitate to contact us.
This article was written by London Bookkeepers 17th May 2019.