Mark McLaughlin warns that delaying tactics by taxpayers for tax compliance purposes can have unfortunate consequences.
Taxpayers are generally aware that submitting their tax returns could trigger substantial tax bills. If faced with a large tax liability and insufficient funds to pay, some individuals might be tempted to put off submitting their tax returns to HM Revenue and Customs (HMRC) to delay the dreaded tax bill, sometimes for several years.
Unfortunately, this tactic is not only flawed, but potentially expensive.
Think of a number…
In the absence of a completed tax return, HMRC has powers to estimate the tax due, in the form of a determination, within three years after the tax return filing date.
HMRC’s determination is treated as a self-assessment, so the estimated tax becomes payable. However, if the taxpayer files the tax return within the time limit for superseding a determination (i.e., within the above three-year time limit or within 12 months of the determination date, if later), the taxpayer’s self-assessment automatically replaces the determination (TMA 1970, s 28C).
It's a penalty!
In addition, the individual is liable to penalties for filing the return late (and possibly penalties for late payment of any tax due) unless there is a ‘reasonable excuse’ and subject to any ‘special circumstances’ meriting a ‘special reduction’. An initial fixed penalty of £100 is followed by daily penalties of £10 per day if the return is over three months late (capped at £900), and a tax-geared penalty (i.e., the greater of 5% of any tax liability which would have been shown on the return, or £300) if the return is more than six months late.
If the return has still not been filed after 12 months, but in failing to file the person does not deliberately withhold information that would enable or assist HMRC to assess the person’s tax liability, a further 5% (or £300) penalty arises. However, the penalty percentage increases if the person’s withholding of information is deliberate but not concealed (i.e., up to 70%) or even higher (i.e., up to 100%) if the person’s behaviour is deliberate and concealed (NB those maximum penalties are increased further if the withholding of information involves an ‘offshore matter’ or ‘offshore transfer’).
Disputes sometimes arise between taxpayers and HMRC about whether the taxpayer’s behaviour was deliberate, and if so, whether it was ‘deliberate but not concealed’ or ‘deliberate and concealed’.
For example, in Futcher v Revenue and Customs [2022] UKFTT 401 (TC), on 16 August 2019, the appellant filed his tax return for 2015/16. It was 927 days late. This followed an HMRC determination issued on 1 July 2019. HMRC charged a tax-geared penalty at 35% based on the ‘deliberate but not concealed’ withholding of information. The appellant disputed that his behaviour was deliberate. The First-tier Tribunal concluded (among other things): (1) The appellant’s failure to file his 2015/16 tax return on time was a conscious, deliberate act; (2) By that act, the appellant withheld from HMRC the information needed to assess his liability to income tax (as he intended); (3) He had no reasonable excuse for this failure and there were no special circumstances.
Practical tip
Taxpayers in a similar situation to the taxpayer in Futcher should consider submitting their tax return on time and contacting HMRC before the tax becomes due, with a view to arranging for time to pay.
