{"id":8832,"date":"2023-03-09T13:36:38","date_gmt":"2023-03-09T13:36:38","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=8832"},"modified":"2023-06-27T08:25:25","modified_gmt":"2023-06-27T07:25:25","slug":"penalties","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2023\/03\/09\/penalties\/","title":{"rendered":"Penalising the poor: HMRC charged 400,000 with penalties when they had no tax to pay"},"content":{"rendered":"\n

This is now out of date. Our more recent report is here.<\/a><\/p>\n\n\n\n

Between 2018 and 2020, almost 400,000 people earning less than \u00a313,000 received a penalty for not filing a tax return on time. Very few of them had any tax to pay (the tax-free personal allowance was around \u00a312,000). But, by failing to submit a tax return, they were fined at least \u00a3100, and often thousands of pounds.<\/em> For most of those affected, the penalty represents more than half their weekly income.<\/em><\/strong><\/p>\n\n\n\n

This paper illustrates the scale of the problem<\/em><\/strong>. We believe the law and HMRC practice should change, and we make three key recommendations.<\/em><\/strong><\/p>\n\n\n\n

UPDATED with some of the personal stories people sent us.<\/strong> You can submit your own story here.<\/a><\/strong><\/p>\n\n\n\n

The full report is here in PDF form. <\/a>A web version follows below. The original FOIA is here<\/a> and the spreadsheet with the full data is here. <\/a>.The BBC’s original report is here<\/a>, and the new report from The Sun is here<\/a>. And the first comment below this article is extremely well-informed, written by someone who I know has huge personal experience advising in this area.<\/p>\n\n\n

Background<\/h2>\n\n\n

Self assessment<\/strong><\/p>\n\n\n\n

Most people in the UK aren\u2019t required to submit a tax return – where a person\u2019s only income is employment income and a modest amount of bank interest, then in most cases a tax return isn\u2019t required.<\/p>\n\n\n\n

For this reason, out of the 32 million individual taxpayers[1]<\/a> in the UK, around a third (12 million people) are required to submit a \u201cself assessment\u201d income tax return[2]<\/a>.<\/p>\n\n\n\n

Tax returns must be filed online by 31 January, or three months earlier (31 October) for people submitting paper forms. <\/p>\n\n\n\n

Penalties<\/strong><\/p>\n\n\n\n

If HMRC has required a taxpayer to submit a tax return, but he or she misses the deadline (even by one day), then a \u00a3100 automatic late filing penalty is applied.<\/p>\n\n\n\n

After three months past the deadline, the penalty can start increasing by \u00a310 each day. After six months, a flat \u00a3300 additional penalty can be applied, and after twelve months another \u00a3300. By that point, total penalties can be \u00a31,600.[3]<\/a> Those advising taxpayers on low income commonly see clients with over \u00a31,000 of penalties (and sometimes thousands of pounds if multiple years are involved). Filing appeals for late payment penalties often makes up a significant amount of their work.<\/p>\n\n\n\n

Until 2011, a late filing penalty would be cancelled if, once a tax return was filed, there was no tax to pay. However now the penalty will remain even if it turns out the \u201ctaxpayer\u201d has no taxable income, and no tax liability.<\/p>\n\n\n\n

Appeals<\/strong><\/p>\n\n\n\n

Anyone receiving a late payment penalty who has a \u201creasonable excuse\u201d for not paying can make an administrative appeal to HMRC, either using a form or an online service.[4]<\/a> If HMRC agree, then the penalty will be \u201ccancelled\u201d. If HMRC don\u2019t agree, then a judicial appeal can be made to the First Tier Tribunal, but this is very rare for late filing penalties. All the \u201cappeals\u201d discussed in this report are administrative form-based appeals.<\/p>\n\n\n

The data<\/h2>\n\n\n

Data provided to Tax Policy Associates by HMRC under a Freedom of Information Act request clearly demonstrates that late filing penalties are being disproportionately levied on those on low incomes, most of whom in fact have no tax to pay.<\/p>\n\n\n\n

The chart below shows the percentage of taxpayers in each income decile who were charged a \u00a3100 fixed late filing penalty in 2018\/19. The green bars show where penalties were assessed but successfully appealed. The red bars show where the penalty was charged.<\/p>\n\n\n\n

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And this is the data for 2019\/20, a less representative year:[5]<\/a><\/p>\n\n\n\n

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The charts clearly show taxpayers in the lowest three income deciles receiving a disproportionate number of penalties \u2013 210,000 in 2018\/19 and (likely less representative) 167,000 in 2019\/20.<\/p>\n\n\n\n

But the critical problem is that almost none of these taxpayers have any tax to pay<\/strong>.<\/p>\n\n\n\n

We know this for two reasons.<\/p>\n\n\n\n

First, the personal allowance was \u00a311,850 in 2018\/19 and \u00a312,500 in 2019\/20, and anyone earning less than that had no income tax liability. Taxpayers in the lowest three income deciles earn less than \u00a313,000 \u2013 so very few will have tax to pay.<\/p>\n\n\n\n

Second, this is confirmed by the data on penalties issued for late payment (as opposed to late filing). The first three deciles pay almost no late payment penalties[6]<\/a>. This won\u2019t be because they are more punctual at paying than they are at filing; it will simply be because they almost always have no tax to pay.<\/p>\n\n\n\n

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The impact of penalties on the poor<\/strong><\/p>\n\n\n\n

A \u00a3100 fixed penalty is a large proportion of the weekly income of someone on a low income (indeed over 100% of the weekly income for someone in the lowest income decile), but inconsequential for someone on a high income:<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

And, whilst the data shows the numbers of people receiving \u00a3100 fixed penalties for late filing, many of the same people will have received late filing penalties which are much higher \u2013 up to \u00a31,600 for one year, and more than that where a taxpayer fails to file for more than one year.<\/p>\n\n\n

The human cost<\/h2>\n\n\n

Since publishing our initial report, we’ve been inundated with people’s stories, often very distressing.<\/p>\n\n\n\n

These are vulnerable people, at a low point in their lives – and the same difficulties which meant they missed the filing deadline mean they often won’t lodge an appeal, and may take months before they pay the penalties (racking up additional penalties in the meantime).<\/p>\n\n\n\n

Here are a representative sample:<\/p>\n\n\n\n

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Will the 2025 changes change the position?<\/h2>\n\n\n

The income tax self assessment penalty rules will likely be changing from 6 April 2025.<\/p>\n\n\n\n

From that date, a one-off failure to file will not incur a penalty; rather it will result in a taxpayer incurring a \u201cpoint\u201d, and only after two points (for an annual filer) or four points (for a quarterly filer) will a penalty be issued. [7]<\/a><\/p>\n\n\n\n

At the same time, the fixed penalty amount will increase to \u00a3200.<\/p>\n\n\n\n

This might overall reduce the penalties imposed on low earning taxpayers (for example if they are currently missing the filing deadline by a few weeks, and then filing), but it could equally well worsen the position (if they are missing multiple deadlines, and particularly if they don\u2019t open correspondence). At this point we have insufficient data to say. However we can say that insufficient consideration appears to have been given to the impact on the low paid when the new rules were drawn up.<\/p>\n\n\n

Conclusions<\/h2>\n\n\n

We believe that the Government, HM Treasury and HMRC are acting in good faith, and have to date been unaware of the disproportionate impact that penalties have on the low paid.<\/p>\n\n\n\n

In light of the data revealed by this report, we have three recommendations:<\/p>\n\n\n\n

1. Cancellation<\/strong><\/p>\n\n\n\n

Fixed rate late submission penalties should be automatically cancelled (and, if paid, refunded) if HMRC later determines that a taxpayer has no taxable income. Most likely that would be after a subsequent submission of a self assessment form; but no further application or appeal should be required.<\/p>\n\n\n\n

Similarly, there should be an automatic abatement of penalties (by, say, 50%) if HMRC determines that a taxpayer has a taxable income but it is low (for example less than \u00a315,000).<\/p>\n\n\n\n

In both cases, an exception could be made where HMRC can demonstrate that the failure to file was intentional (i.e. for truly exceptional cases, and not applied by an automated process).<\/p>\n\n\n\n

Whilst it is possible that some cancellations could be achieved under HMRC\u2019s existing \u201ccare and management\u201d powers , we expect that creating a general cancellation and abatement rule falls outside those powers, and therefore may require a change of law.<\/p>\n\n\n\n

This is not a radical proposal; before 2009 penalties were automatically capped at the amount of a taxpayer’s tax liability. UPDATE: <\/em><\/strong>It’s well worth reading the first comment below, from the respected retired tribunal judge Richard Thomas, for more background on this.<\/p>\n\n\n\n

2. Monitoring<\/strong><\/p>\n\n\n\n

HMRC should start monitoring late submission penalties across income deciles, (using other sources of data, i.e. not limited to those provided to us) to provide a more complete picture of the impact on the low paid, including the level of penalties paid (i.e. not just the data on \u00a3100 penalties presented in this report).<\/p>\n\n\n\n

And how many penalties are never paid by these deciles and get written off? We expect a fairly high proportion \u2013 in which case all that is being achieved is stress for the recipients of the penalties, and administrative cost for HMRC.<\/p>\n\n\n\n

Armed with that data, HMRC should aim to reduce the disparities identified in this report, and report annually on its progress.<\/p>\n\n\n\n

3. Rework processes<\/strong><\/p>\n\n\n\n

The data reveals that there is a significant population of self assessment \u201ctaxpayers\u201d who are being required to complete an income tax self assessment, are charged a late submission penalty, but turn out to have no tax to pay.<\/p>\n\n\n\n

HMRC should analyse this population with a view to determining:<\/p>\n\n\n\n