Telling HMRC about unpaid tax from previous years
Written by Ray Coman
Telling HMRC (via gov.uk) about underpaid tax from previous years is usually because of rental income, income from a business or freelance activity, or from investment income and gains, such as cryptocurrency.
Late notification to HMRC of chargeability to tax will result in tax fines. However, these can be reduced where the notification is unprompted or there is a reasonable excuse. In this report we will guide through the HMRC penalty and interest for late tax filing and late tax payment. We address how to appeal a late Tax Return penalty if no tax due. How to tell HMRC tax code is wrong is subject of a separate article, as the guidance below concerns telling HMRC about untaxed income.
Late filing penalties if HMRC have issued a notice to file a Tax Return
Where late filing penalties have been charged but the notifications to file were not received
Late filing penalty but Tax Return not required
Reasons for needing to file a Tax Return
Penalties for failure to notify HMRC of income
The process for making a disclosure to HMRC
What are the penalties for paying tax late
Late filing penalties if HMRC have issued a notice to file a Tax Return
If HMRC have written to the taxpayer to request a Tax Return, the filing deadline has passed and the Return has not been filed, late filing penalties will be issued. These penalties are:
- £100 if the tax has not been filed by 31 January following the end of the tax year.
- A daily penalty of £10 if the Tax Return is more than 3 months late. This will usually start on 1 May. For instance, for the 2023/24 tax year the daily penalty would start on 1 May 2025. The daily penalty continues for 90 days until it reaches £900. As May and July have 31 days, the last day of the daily penalty would be 29 July.
- A further £300 applies if the Tax Return is still not filed six months after the filing deadline, i.e. by midnight on 31 July.
- A final 12-month late filing penalty apples for Tax Return still unfiled. Therefore, a taxpayer who has still not filed the 2023/24 Tax Return by 31 January 2027 would have a total of £1,600 in penalties to pay.
The Tax Return filing deadline is three months from the notice to file a Tax Return by HMRC and 31 January following the end of the tax year, whichever is the later. Therefore, for notices sent after 2 November following the end of the tax year, the filing deadline would be later than 31 January.
By way of recap, the late filing penalty only applies where HMRC have sent a notice to file a Tax Return. If HMRC do not know about a Tax Return requirement and have not sent a notification to the taxpayer, the timelines for late filing penalty would not apply. Therefore, a taxpayer with a comparatively modest tax lability say of under £1,000 per year, need not be concerned about a fixed £1,600 penalty for tax years that are long in the past. The late filing penalties apply only where HMRC notices have been ignored. Refer to the following section on late notification for guidance on the penalty regime that would apply.
Where late filing penalties have been charged but the notifications to file were not received
HMRC sends a notice to file a Tax Return by post to the address that they hold for the taxpayer. However, sometimes the taxpayer has moved from this address and therefore the notice to file and subsequent penalties are not received.
It is up to the taxpayer to notify HMRC of a change of address. Where the taxpayer has had employment earnings and tells their employer about their new address, HMRC is usually updated by the employer.
With effect from April 2015, HMRC have collected data from employee address information from employers, (as part of the roll out of Real-Time Information.) Employees are obliged to tell HMRC about the new addresses of employees. Therefore, HMRC will often hold new address details about taxpayers who are pensioners or employees as part of the payroll process.
It is the responsibility of the individual to update HMRC about their new address and this is usually done via the online portal. On leaving the country, a leaver is obliged to complete a form P85 to notify HMRC the full address in their new country of residence. It is rare therefore that there would be any circumstances in which not receiving a postal notification would be justifiable as a reason for failure to send in a Tax Return.
Late filing penalty but Tax Return not required
For any tax year in which there has not been a reason to file a Tax Return but HMRC has sent a notice in any case, a taxpayer can make an appeal. Often those appeals are successful, however, HMRC usually insist that a Tax Return is filed for the tax year in question before an appeal against the late filing for said tax year can be appealed.
A requirement to file can be withdrawn for instance because the sole source of income was from employment earnings.
Reasons for needing to file a Tax Return
A requirement to notify HMRC of chargeability to tax arises when a self-employed person first turns a profit, when a person has savings or taxable investment income or gains over the applicable threshold or when a landlord first starts receiving rents. A requirement can arise from various other less common reasons such as receiving Trust or foreign income, or making capital gains.
Penalties for failure to notify HMRC of income
Disclosing income to HMRC where the taxpayer has not been prompted and can show that the oversight resulted from carelessness (rather than any deliberate attempt to dodge tax.) This will result in the lowest rate of penalty.
The late notification penalty in this case is usually:
- 10% of the tax owed; or
- 0% of the tax owed if less than 12 months after the payment deadline
To provide an example, if the disclosure includes a tax year 2023/24 and is submitted to HMRC before 31 January 2026, there would be no penalty associated with that tax year.
The process for making a disclosure to HMRC
For a landlord, the let property campaign can be used, for overseas investment income and gains the worldwide disclosure facility can be used, for UK investment income and self-employment profits, the voluntary onshore disclosure facility should be used.
HMRC response to a disclosure
Once the disclosure has been submitted, HMRC often request further tax calculations and explanations. A concern of the taxpayer is that the HMRC follow up queries will be unduly intrusive and/or cause considerable extra administrative burden. Often, the queries simply address obvious omissions or internal inconsistencies in the information provided by the taxpayer. The HMRC process will require -as a minimum- a coherent and complete account of events and related income.
In some cases, HMRC will not be able to process a disclosure because a Tax Return has been requested for a specific tax year but not filed. In that case, HMRC can raise an assessment. It is not uncommon for HMRC to use the tax assessed in the disclosure as a basis for a discovery assessment amount.
Usually, HMRC allow 30 days to respond to their queries about any so called ‘errors’ or requests for more information. Once this has been provided, HMRC will correspond back with a letter agreeing the tax, penalties and interest owed. There is typically 30 days from that date of that letter within which to meet the payment obligation.
What are the penalties for paying tax late
Tax which is paid late according to that 30-day window would be subject to late payment penalties. These penalties are the same as those applied to tax which would normally be due by 31 January following the end of the tax year, i.e. 5% of tax owed for any tax not paid within 30 days. It is possible to avoid penalties by coming to a ‘time to pay’ arrangement. The payment of tax is a matter of separate negotiation between the client and HMRC.
A credit on the HMRC account refers to an amount that is paid by not yet allocated to a tax year. Any credits or payments made to HMRC will be applied to earlier tax years first. This means that the credits will be applied most favourably to the taxpayer. This is because late payment penalties are more likely to be applied to an earlier tax year.
Interest for late tax payment
The HMRC late payment interest uses a rate that tracks the base rate. It is 1.5% above the base rate of the bank of England. It is a requirement that the disclosure include self-assessment of the amount of interest. Interest runs on the amount underpaid from the due date (which is 31 January following the end of the tax year) to the payment date. A future payment date (for tax, penalties and interest arising from the disclosure) therefore needs to be established in advance of the disclosure. Usually, a payment date 30 days ahead of the date the disclosure has been prepared will be about right. The payment must be made on the date determined by the disclosure and for the amount stated in the disclosure. If too much is paid, for instance because the payment is made on an earlier date, HMRC could reject the entire disclosure. Coman&Co can assist with getting the payment date and amount right.
Summary
There are a number of reasons that a failure to notify chargeability can arise. In many cases, the shortcoming arises from ignorance of the law and/or carelessness. HMRC is aware and will reduce penalties for coming forward voluntarily. A dilemma can come about where even though the taxpayer wants to make a disclosure to HMRC, the consequences of not disclosing seem greater than those of disclosure. However, the penalty implication is not necessarily so severe and will be lower for a voluntary disclosure than one which results from an HMRC prompt.
Telling HMRC about income for freelancing, rents or investments could be as low as 0% to 10% of the tax owed. Talk to Coman&Co in a free, no obligation meeting to clear up past income and get into a system of reminders going forward about what to pay and when.
