95,000 with low incomes and no tax liability suffer £100 penalties

The in-tray for any incoming government is likely to be overflowing but there is plenty of scope to make improvements that could address perceived unfairness in the tax system. One such opportunity would be to look again at the rules and proposed changes to the tax return penalty system.  

Following a freedom of information request submitted by RSM UK, HMRC has confirmed that for the 2021/22 tax year, c.95,000 individuals with income below £12,570 and no tax liability suffered a £100 penalty for the late filing of their self assessment tax return or partnership tax return in which they are a partner. The amount of £12,570 represents the income tax personal allowance and those with income within this do not typically suffer tax.

HMRC has also confirmed that c.155,000 late filing penalties were initially issued to individuals with income for the 2021/22 tax year below £12,570 and no self-assessment tax liability, meaning that c.60,000 £100 late filing penalties were cancelled.

There are various reasons why a £100 late filing penalty might be cancelled and taxpayers can appeal to HMRC within 30 days of being issued with a penalty notice. HMRC will accept a reasonable excuse but ignorance of a requirement to submit a return is unlikely to be successful.

It might well be the case that many individuals on low incomes are unfamiliar with the self-assessment rules and have perhaps incorrectly assumed that no tax return is required in circumstances when there is no tax liability. The data indicates that of the individuals with no tax liability, it is those with the lowest incomes who are more likely to be hit with a penalty, as 8% of individuals with income under £12,570 were issued with a £100 late filing penalty for the 2021/22 tax year. That percentage reduces to 5% when cancelled penalties are excluded.

For those with higher incomes, the proportional percentage of individuals who had no tax liability but suffered a late filing penalty is around 3% when cancelled penalties are excluded.

An argument might reasonably be made that a deterrent is needed to encourage individuals to meet their tax return filing obligations. Prior to April 2011, it used to be the case that the penalty for the late filing of an individual’s tax return would be nil provided all tax had been paid on time. However, that led to some individuals paying their tax but submitting their tax returns late. Part of the logic of the change in 2011 was seemingly to try and penalise persistent offenders who paid their tax but did not submit their returns on time.

Changes are already afoot to reform the self-assessment penalty regime, with a move to penalise frequent offenders of the rules. This will be a points based system which should hopefully mean that a lot of individuals who inadvertently miss the tax return deadline once should not be caught. Similarly, there have been changes introduced by HMRC as to who is required to submit a tax return which should have an impact on the number of individuals fined.

Nevertheless, HMRC’s data indicates they raised £9.5m in penalties from those who can afford it the least and where there was no loss to the Treasury. It remains to be seen whether the proposed changes to the penalty rules go far enough to reduce this. A relatively simple change to the legislation could make a significant difference to those hit by a fine that might feel disproportionately penal.