Penalty for late notification of liability to tax
Written by Ray Coman
The onus is on the taxpayer to notify HMRC that they are liable to tax. The most common situations in which this requirement arises is in relation to income tax on self-employed income, or VAT where the business turnover exceeds the threshold.
The penalty for late notification is based on the tax liability at the due date. Any penalty is calculated as a percentage of tax due, and the percentage depends on whether the reason for late notification is deliberate and whether it is hidden.
If a the reasons for the late notification is not deliberate, the penalty is only 30%, if it deliberate a higher 70% penalty applies, and if it is both deliberate and concealed the highest penalty of 100% of the outstanding tax could be charged.
The above penalties apply where HMRC has discovered that the failure to notify has taken place, and HMRC are forced to uncover all the necessary facts. Where the taxpayer co-operates fully with HMRC and discloses information when asked to, the penalties are reduced. This would likely include allowing HMRC access to your records, and assisting HMRC to determine the actual tax due, probably with the assistance of a tax adviser.
If the enquiry over being late to notify is initiated by HMRC the disclosure cannot be said to be unprompted, however provided full information is made available to HMRC the penalties will usually be halved.
Where the taxpayer volunteers that they have been late to notify, rather than being prompted to do so by HMRC, the penalties are reduced further to 10%, 20% and 30% respectively. For a disclosure to be unprompted, the taxpayer should have no reason to believe that HMRC are about to discover the late notification.
The penalty is calculated as a percentage of the tax underpaid, according to the following table.
| Reason for late notification | Original penalty | Prompted disclosure | Unprompted disclosure |
| Not deliberate | 30% | 10% - 20% | nil - 10% |
| Deliberate | 70% | 35% | 20% |
| Deliberate and concealed | 100% | 50% | 30% |
The penalty system is similar to that for inaccuracies in your tax return, but with three main differences. Firstly, there is no account taken for 'reasonable care.' It is possible however to put forward a reasonable excuse for being late. The reasons accosted by HMRC as an excuse for being late are typically limited and documentary evidence in support of the reason may be required.
Second, if the reason for the lateness is not deliberate a lower rate penalty for prompted and unprompted disclosure applies if the tax due is paid within 12 months of when the tax was due.
For example, if you were due to pay tax by 31 January 2013, and you make an unprompted notification to HMRC that you were due to pay tax for the 2011-2 tax year, you would not be charged a penalty, provided the tax is fully paid by 31 January 2014.
Notwithstanding, HMRC would issue a penalty for late filing a tax Return and would charge interest on late payment of tax from when the tax was due to when it is paid.
Examples of a late notification which was deliberate and concealed
A taxpayer would not be required to notify HMRC of their tax liability if they had no taxable income. If a taxpayer falsified information to misrepresent their taxable income as non-taxable taxable income, they would be open to the 100% penalty.
Example where the late notification is deliberate but not concealed
If no attempt to conceal a liability has been made, it could be argued that it is less straightforward for HMRC to demonstrate that the fault was deliberate. However, HMRC may argue that if a taxpayer is late to notify twice, that with the matter brought to the taxpayer's attention on the first occasion, the reason for the delay on the second occasion were deliberate.
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Comments
A reasonable excuse is what is used to appeal a late filing, or late payment, penalty. It is usually related to ill health or family bereavement.
Failure to take reasonable care is the reason given for being late with notifying HMRC. While it sounds incriminating, it is the least worst option because the alternative is to state that the errors, omissions or failure to notify have been deliberate.