Special reductions and late filing penalties

Tough late filing penalties

Several years ago HMRC vastly ramped up the penalties it can charge if a taxpayer submits a tax return late. Oliver Hampel (H) felt the full force of this when HMRC charged penalties for two late tax returns that equated to between a fifth and one third of his annual income.

The undisputed facts

When H’s business income fell sharply he decided to ditch his accountant and complete his personal returns himself. Unfortunately, his inexperience resulted in his 2015/16 and 2016/17 returns being submitted late and so HMRC demanded penalties. He appealed against them to the First-tier Tribunal (FTT) on the grounds that he had a reasonable excuse for the lateness. If the FTT agreed the penalties would be cancelled.

A reasonable excuse?

H’s first excuse was that he had trouble logging on to HMRC’s self-assessment system. Anyone who’s used HMRC’s self-assessment filing system will sympathise with H, as did the FTT. However, this did not relieve H of his responsibility. It was his fault that he left submitting his tax return to the eleventh hour when it was too late to get help. H’s alternative argument was that he was not sure where to report his income: on his personal tax return or that for his company. This is also a lame-duck argument for the same reason as H’s other excuse. He couldn’t shirk his responsibility to file a tax return simply because he didn’t understand the tax rules. The FTT could not accept either of H’s arguments as reasonable excuses and therefore the penalties had to stand.

Unreasonable penalties

That might have been the end of the matter for H but the FTT wasn’t done, and this time it was HMRC that came under fire. The FTT decided that the amount of penalties compared to H’s income meant that HMRC should have considered a “special reduction”.

The tax rules specifically allow for a special reduction of penalties in various circumstances

HMRC’s responsibility

HMRC failed to take account of H’s low income following his appeal against the penalties. The judge said that it is “clearly possible for a penalty imposed for failure to make a return to be disproportionate when compared to the taxpayer’s income” . Therefore, while the fixed penalties are usually justifiable the variable and daily penalties introduced more recently can soon add up to a sum which is unreasonably high and disproportionate; this was the position in H’s case. As a result, the FTT ruled that the penalties should be reduced to the fixed amounts, which in this case were £100 for the 2015/16 return and £400 for 2016/17.