CHAPTER 18B PENALTIES FOR LATE RETURNS AND LATE PAYMENT

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1 CHAPTER 18B PENALTIES FOR LATE RETURNS AND LATE PAYMENT In this chapter we will look at the penalties for late returns and late payment of VAT including: - penalty periods; - the amount of the penalties; and - how tax based penalties can be reduced. 18B.1 Introduction Finance (No 3) Act 2010 amended FA 2009 Schedule 55 and Schedule 56 to extend the new penalty system for late returns and late payment of tax to VAT. The new provisions will replace the current VAT default surcharge at some point the changes are dependent on amendments to HMRC s computer systems and therefore will be implemented over the next few years. However, for the purposes of the ATT examination you are only required to know the new rules and will not be examined on the default surcharge provisions. 18B.2 Late filing of returns fixed penalties and the penalty period Where a quarterly VAT return is filed late, a penalty of 100 will be charged where it is the first late return and a penalty period is not in place. The first late filing of a return will also result in a 12 month penalty period running from the day after the return should have been filed. 55 Para 13B If returns are filed late during the penalty period, the late filing penalty increases by 100 in respect of each failure up to a maximum of 400. So, the first late return in the penalty period (the second late return overall) will result in a penalty of 200, the second late return in the penalty period will result in a penalty of 300 and third and subsequent late returns will result in a penalty of Para 13C In addition, when returns are filed late during a penalty period, the penalty period will be extended to the anniversary of the filing date for the latest return to be filed late. Reed Elsevier UK Ltd B.1

2 Illustration 1 Alpha Ltd, who has always submitted its quarterly VAT returns on time, submits VAT returns as follows; Quarter to Date submitted The first late return is the return to 31 March This is the first late return so a penalty of 100 will be levied. In addition, a penalty period will run for 12 months from 1 May 2011 to 30 April The next late return is the return to 30 September This is the first late return in the penalty period and therefore a penalty of 200 will be charged. In addition, the penalty period will be extended to 12 months after the filing date for the return to 30 September 2011, being 31 October The next late return just falls into the 12-month penalty period because it is the return to 30 September This is the second late return in the penalty period so Alpha Ltd will incur a penalty of 300. The penalty period is extended to 31 October If any subsequent returns are filed late in the penalty period, Alpha Ltd will incur a penalty of 400 in respect of each return (and the penalty period will be extended). Reed Elsevier UK Ltd B.2

3 18B.3 Late returns returns more than 6 months late If a return is more than 6 months late, there will be an additional penalty of 5% of any liability to tax which would have been shown in the return (ie the amount which would have been shown to be due and payable by the taxpayer), or 300 if greater. An additional penalty of 5% of any liability to tax (or 300 if greater) will also be levied if the return is more than 12 months late. If the return has not been submitted within 12 months and by failing to make the return the taxpayer is deliberately withholding, but not concealing information, which would enable HMRC to assess the tax liability, the maximum amount of the penalty increases to 70% (or 300 if greater). If the withholding of information is deliberate and concealed, the maximum amount of the penalty is 100% of the tax liability (or 300 if greater). Penalties that apply where a person has deliberately withheld information, can be reduced for both prompted and unprompted disclosure of the information. 55 Para 13D 55 Para 13E 55 Para 14 Disclosure takes place where a taxpayer tells HMRC about the relevant information, gives HMRC reasonable help in quantifying the tax unpaid as a result of the information being withheld and allows HMRC access to records to check the amount of unpaid tax. Disclosure is unprompted if it is made when there is no reason to believe that HMRC have discovered or are about to discover the information. The actual reduction in the penalty depends on the quality of the disclosure, including timing, nature and extent. HMRC have not yet issued guidance on how they will apply this rule in practice although it is likely to work in a very similar way to the provisions we looked at in Chapter 17 in respect of late notification penalties. The table below details the maximum and minimum penalties that could apply: Behaviour Max penalty Min penalty with unprompted disclosure Min penalty with prompted disclosure Deliberate but not concealed Deliberate and concealed 70% 20% 35% 100% 30% 50% The minimum penalty is 300 if greater. Reed Elsevier UK Ltd B.3

4 18B.4 Late returns returns filed monthly The rules in relation to penalties for late filing of monthly returns are very similar to the rules for the late filing of quarterly returns. The only difference is that the first 5 late returns in a penalty period incur a 100 penalty. The 6 th and subsequent late returns in a penalty period incur a penalty of Para 13G & H 18B.5 Late returns other points HMRC have the power to reduce the penalty if there are special circumstances. The maximum aggregate penalty (calculated as a percentage of the liability to tax) that can be charged in respect of the late filing of a return is 100% of the liability to tax. 55 Para 17(3) Where a penalty for a late return is calculated based on a tax liability, the amount of the penalty is reduced by any other penalty calculated in relation to the same liability, for example a failure to notify penalty. However, the penalty is not reduced by a penalty for late payment of tax (see below). In other words, if a return is filed late and the tax liability is paid late, the taxpayer will incur both late filing and late payment penalties. 18B.6 Late payment quarterly returns If a VAT return is filed late, we have seen that a late filing penalty will be incurred. In addition, if the VAT due is paid late a late payment penalty may also be incurred. The first time that VAT is paid late, a penalty will not be incurred unless the tax is outstanding for more than 6 months. However, a penalty period will run for 12 months from the day after the tax was due. Para 8B Sch 56 FA2009 If a late payment of tax occurs within the penalty period, a penalty will be charged. In addition, the penalty period will be extended to 12 months after the day the tax was due. The amount of the penalty will depend on the number of late payments or defaults in the penalty period. The first default in the penalty period will result in a penalty of 2% of the tax paid late. The second default will result in a penalty of 3% of the tax paid late. The third and subsequent defaults will result in penalties of 4% of the tax paid late. Para 8C Sch 56 FA2009 Reed Elsevier UK Ltd B.4

5 In addition, where any amount of VAT is outstanding more than 6 months after the due date, an additional penalty of 5% of the tax due will be charged. A further 5% penalty will be charged if the tax is still outstanding more than 12 months after the due date. Para 8D & 8E Sch 56 FA2009 The late filing penalty period and the late payment penalty period operate independently of each other and will not always be the same. Illustration 2 Beta Ltd, who has always submitted its quarterly VAT returns and paid the VAT due on time, submits VAT returns and payments as follows; Date Date Quarter to submitted VAT due VAT paid , , (5,000) N/A , , , , , The return for the quarter ended 31 March 2011 is submitted on time so no late filing penalty is incurred. However, the VAT due for the quarter ended 31 March 2011 is paid late. As this is the first time VAT is paid late, no late payment penalty is incurred but a late payment penalty period will run for 12 months until 30 April The return for the quarter to 30 June 2011 is submitted late and the VAT due for this period is paid late. A late filing penalty of 100 will be incurred as this is the first time a return is filed late. A late filing penalty period will run until 31 July The late payment of VAT is the first default within the late payment penalty period and therefore a penalty of 2% of the tax paid late will be charged, being 200. The late payment penalty period will be extended to 31 July Reed Elsevier UK Ltd B.5

6 The return for the quarter ended 30 September 2011 is submitted late. As this is the first late filing within the late filing penalty period, a penalty of 200 will be incurred. The late filing penalty period is extended to 31 October As there is no VAT due, the late payment penalty period continues to run to 31 July Finally, the return for the quarter ended 30 September 2012 is submitted late and the tax due is paid late. This is the second late filing of a return in the late filing penalty period and Beta Ltd will incur a penalty of 300. The late filing penalty period will be extended to 31 October However, the original late payment penalty period came to an end on 31 July A new late payment penalty period will run until 31 October 2013 but the current late payment will not incur a penalty. 18B.7 Late payment monthly returns As with late filing penalties, the late payment penalty system in respect of monthly returns is very similar to that for quarterly returns. The difference relates to the amount of the penalty. A penalty of 1% of the tax due is charged in respect of the first 3 defaults in the penalty period. This increases to 2% for the next 3 defaults (being defaults 4, 5 and 6), 3% for the next 3 defaults (being defaults 7, 8 and 9) and 4% for any subsequent default. 18B.8 Late payment penalties - Suspension of penalties Taxpayers who fail to make payments of tax by the due date may request that payment be deferred for a period. If HMRC agree to the deferral request (known as an agreed time to pay arrangement ), the taxpayer will not be charged any late payment penalties. Para 10 Sch 56 FA2009 However, if the terms of the agreement are broken, for example if the taxpayer fails to pay the amount due at the end of the deferral period, HMRC can charge the late payment penalties. 18B.9 Late filing and late payment penalties - Annual accounting When a business uses the annual accounting scheme, only one VAT return is submitted for a year and estimated payments on account are made during the year with a final VAT balance due at the year end. Reed Elsevier UK Ltd B.6

7 The penalties that apply for late filing and late payment when a business operates the annual accounting scheme are therefore different to those which apply to traders with monthly or quarterly returns and payments and the rules in respect of penalty periods do not apply. If the annual VAT return is filed late, an intial penalty of 100 will be incurred. Additional daily penalties of 10 per day may be levied in respect of returns which are more than 3 months late. The daily penalty can be imposed for a maximum of 90 days. 55 Para 3 & 4 If the return is outstanding for more than 6 months, then the late filing penalty rules are the same as for quarterly returns. A penalty of 5% of the tax shown on the return will be charged (or 300 if greater) and this will be repeated when the return has been outstanding for 12 months with increased penalties where there is deliberate withholding of information. Late payment penalties will not be charged if any of the 9 estimated monthly payments are paid late (although this could result in HMRC withdrawing authorisation to use the scheme). However, a penalty will be charged if the balancing payment is made late. A penalty of 5% of the unpaid tax will be charged. A further 5% penalty will be charged in respect of tax outstanding more than 5 months after the first penalty is charged. Finally, an additional penalty of 5% will apply to tax still outstanding more than 11 months after the first penalty is charged. Para 3 Sch 56 FA B.10 Other points re penalties Late filing and late payment penalties must be paid within 30 days of the date the notice assessing the penalty is issued, or interest will be charged. The decision to issue a penalty or the amount of the penalty payable can be appealed against by the taxpayer. Para 11 Sch 56 FA2009& 55 Para 18 Para 13 & 20 Sch 56 FA2009 Where a late filing and/or late payment penalty period exists, the taxpayer must file 4 VAT returns and/or make 4 payments of VAT on time in order to bring the periods to an end. 18B.11 Reasonable Excuse Late filing and/or late payment penalties will not be charged if the taxpayer has a reasonable excuse for the failure. An insufficiency of funds is not a reasonable excuse (unless due to events outside the taxpayer s control). Relying on a third party is also not a reasonable excuse, unless the taxpayer took reasonable care. 55 Para 23 Para 16 Sch 56 FA2009 Reed Elsevier UK Ltd B.7

8 The term reasonable excuse is not defined in the legislation and HMRC s view is that each claim should be considered on its own unique merits. HMRC has previously issued advice as to what may, or may not, be considered as a reasonable excuse in relation to VAT returns and payments. Examples of what may be considered a reasonable excuse include: Computer breakdown: where the records needed to complete your VAT return are held on computer and the computer breaks down, either just before or during the preparation of your return. The taxpayer must have taken reasonable steps to correct the fault. Illness: where the person normally responsible for completing the VAT return is unable to do so because of illness. The taxpayer will need to show that there was no one else capable of completing the return. If it is a prolonged illness the taxpayer will need to show that they have taken reasonable steps to get someone else to do the return. Loss of key personnel: where the person responsible for completing the VAT return leaves the job at short notice just before the due date and there is no one else to complete the return on time. Unexpected cash crisis: where funds are unavailable to pay your tax due following the sudden reduction or withdrawal of overdraft facilities, sudden non-payment by a normally reliable customer, insolvency of a large customer, fraud, burglary or act of God such as fire. Loss of records: where records are stolen or destroyed. This excuse applies only to the current tax period. Reed Elsevier UK Ltd B.8

9 Example 1 Charlie Ltd, who had previously submitted all VAT returns and payments on time, submitted the VAT return for the quarter ended 30 June 2011 on 15 August 2011 and paid the VAT due of 10,000 on the same date. The return for the period ended 30 September 2011 was not submitted until 15 May 2012, when the tax due of 50,000 was paid. Calculate the late filing and late payment penalties which will be charged in Charlie Ltd (on the assumption that Charlie Ltd does not have a reasonable excuse for the delays). Reed Elsevier UK Ltd B.9

10 Answer 1 Return for the period ended 30 June 2011 Late filing penalty 100 (Late filing penalty period will run until 31 July 2012). First late payment therefore no penalty (Late payment penalty period will run until 31 July 2012) Return for the period ended 30 September 2011 Late filing penalty (first late filing in penalty period) 200 Return more than 6 months late 5% x 50,000 = 2,500 (Late filing penalty period extended until 31 October 2012). First late payment (default) in penalty period 2% x 50,000 = 1,000 Tax due more than 6 months late 5% x 50,000 = 2,500. (Late payment penalty period extended to 31 October 2012) Reed Elsevier UK Ltd B.10

SELF ASSESSMENT YEAR ENDED 5 APRIL Obligation to notify HMRC Failure to notify. The amount of the penalty Suspension of penalties

SELF ASSESSMENT YEAR ENDED 5 APRIL Obligation to notify HMRC Failure to notify. The amount of the penalty Suspension of penalties Page Heading Sub headings 1 Registration Obligation to notify HMRC Failure to notify 2 Filing Notice to complete a tax return Due dates for tax returns Late filing penalties 3 Payment Instalments Claim