A PROPORTIONATE PENALTY?

 

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A PROPORTIONATE PENALTY

 

A recent article in Accounting WEB, an online publication, caught my eye.  It complained that “almost 400,000 self-employed people have had late filing penalties disproportionately levied on them despite having little or no tax to pay”.  I like that word “disproportionately”.  Disproportionately to what?

 

Unlike in many countries, the UK does not burden all of its citizens with the chore of completing a tax return each year.  Instead, it leaves it to HMRC to decide who is likely to have untaxed income and request only such people to file tax returns.  This is backed up by an obligation on the citizen who has not been asked for a tax return to notify HMRC if he has a new source of income or a capital gain of which HMRC are likely to be unaware.  That gives HMRC the opportunity to decide whether or not to ask him for a tax return.

 

By and large this system works well.  It relieves roughly half of all taxpayers from having to complete a tax return.  These are taxpayers whose only or main source of income is taxed under PAYE.  If such a person has a small amount of untaxed income, HMRC normally amend his PAYE Code number to collect the tax painlessly (or relatively so) without requiring a tax return.  This not only reduces the burden on taxpayers but relieves HMRC from the routine task of checking millions of tax returns where the taxpayer has already been fully taxed.

 

The system does not work perfectly.  While taxpayers can be expected to realise that they need to tell HMRC if they have a new source of income, it seems questionable whether they can reasonably be expected to realise that they also need to notify HMRC if they have some other non-income item on which Parliament has chosen to impose tax.  In a recent blog, I raised the issue of the High Income Child Benefit Charge, but the same issue applies to a number of other types of taxable amounts such as gift-aid payments in excess of taxable income and tax charges for breach of pension scheme rules.

 

Even if a taxpayer, anxious to get his affairs right, were to read the relevant tax legislation (which I would not myself recommend) he would find that the way that Parliament has expressed this obligation (in Taxes Management Act 1970, s 7(3)) somewhat obtuse:

 

“A person shall not be required to give notice under subsection (1) above in relation to a year of assessment if for that year

 

a)      the person’s total income consists of sources falling within subsections (4) to (7) below,

b)      the person has no chargeable gains, and

c)      the person is not liable to an amount of tax under any provision listed in relation to the person in section 30 of ITA 2007 (additional tax)”.

 

If the taxpayer is determined to understand his obligations, he will discover that para (a) means income taxed under PAYE.  He can then discover from TMA 1970, s 118 that “ITA 2007” means the Income Tax Act 2007 and if he moves on to looking that up, he will discover that s 30 relates to HICBC and the other items mentioned earlier.  Personally, I think it disproportionate to expect the man in the street, the honest workman, to do so much research to discover his obligations.

 

But to get back to the 400,000 self-employed people – although actually that appears to be journalistic licence rather than fact.  The writer explains that a freedom of information request “found that between 2018 and 2020, nearly 400,000 people earning less than £13,000 received a penalty for a late tax return”.  I doubt that most, or even many, of such people are self-employed.  Many are likely to be small landlords.

 

So what would a proportionate penalty be for someone who is asked to complete a tax return in early April, is given virtually 10 months until the following 31 January to do so, and yet flouts this obligation?  Campaigners think that it should be “nil”, but that does not strike me as proportionate, bearing in mind that HMRC have had to expend scarce resources on issuing the request for a return and will have to spend further resources in chasing for its submission.  The actual penalty is £100.  Is that really disproportionate?

 

Of course if that £100 penalty does not galvanise the individual into submitting his return, further penalties will arise, but HMRC normally warn the taxpayer that this will happen if he does not submit the return by 30 April.  If he still does not do so, the further penalty is £10 a day for a maximum of 90 days.  I can understand that being regarded as disproportionate.  But how disproportionate?  After all, HMRC do not know if the citizen has no income to disclose or if he owes tax but is happy for HMRC to remain in ignorance of that fact – even though he himself may be ignorant of it too.  They therefore need to chase up the missing return in case there is tax owing.  If the return is still outstanding at the end of the 90-days period, i.e. it is over 6 months late, there is a further penalty of £300 (or 5% of the tax due if greater).  Again, £300 does not seem to me disproportionate where a citizen has an obligation to do something and still has not done it after 6 months.  A similar penalty arises after a year, so a taxpayer who owes nothing but persists in ignoring his obligation to submit a return can end up with a total penalty of £1,600.  But he has to be very tardy to do so.  And after the first £100, the penalties apply only if the taxpayer cannot show a reasonable excuse for his tardiness. 

 

There is a particular – and obvious – issue with the self-employed.  This is that their income fluctuates, because it depends on the work they are able to obtain.  HMRC has no way of knowing if any particular year their income is above £13,000.  Leaving aside time for holidays and bank holidays, that is less than 30 hours a week on the national living wage.  Most of us would not expect that many workers consistently earn below the minimum wage year on year.  So is it disproportionate to ask such people to tell HMRC what they have earned?  Surely not?  If such income is below the individual’s personal allowance, that is not something that HMRC will know unless the taxpayer tells them what that income is.  But if it is greater than the personal allowance, so tax is payable, HMRC will not know that either unless the taxpayer tells them.  It is thus surely essential to the operation of the tax system for all self-employed taxpayers to submit tax returns.  That is not a disproportionate obligation; it is to elicit essential information.

 

 

ROBERT MAAS