CASE STUDY (WIN): Multiple Late Self-Assessment Penalties

This kind of case comes up fairly frequently, in this instance it concerns an individual, who for the sake of privacy I will call Mr A. In this case he was late with his 2003/04, 2004/05, & 2005/06 self assessment tax returns.

Mr A came to me in a bit of a panic as he had been receiving correspondence from HMRC asking him to pay a sum in the region of £3,700. Furthermore, a debt recovery firm was also chasing him on behalf of HM Revenue & Customs for these sums that were “overdue”.

Upon enquiring as to why this amount was overdue, Mr A confessed that he had not submitted any tax returns since he started his retail outlet, and this was three to four years ago. He further admitted he was confused as to how the sums due had grown to such an extent as he was aware that he would be charged a £100 late filing penalty for each year he was late and in his mind, 3 x £100 did not equate to £3,700. I explained to him that, in addition to the late filing penalties, he had been subject to a revenue determination plus interest on those amounts.

Revenue determination

A revenue determination is an estimate that can be made if you haven’t sent in your Self Assessment Tax Return on time. HM Revenue & Customs (HMRC) estimate the amount of Income/Capital Gains Tax you owe. The determination also forms a basis for Payments on Account for the following return year.

There’s no right of appeal against this estimate. The only way to change the amount you have to pay is to send in your Self Assessment Tax Return for the outstanding year. In the meantime, you’ll still have to pay the amount due. HMRC may take legal action to recover the amount due and any costs. This could involve the removal of your goods to be sold at public auction or HMRC could take court action.

Action

The client delivered eighteen (yes – eighteen!!!), black bags stuffed full of receipts, till rolls and bank statements. I found it somewhat amusing that he had been diligent enough to retain everything yet not attend to his tax affairs. None-the-less I processed this mountain of paperwork, some of which was messy (his industry involved a lot of mess of the kind that you wouldn’t care to spread across every available surface you owned – but regardless of this, I did) and prepared accounts for each year and then tax returns ready to file.

Results

The process took three weeks. It turned out the first return only covered a couple of months of his setting up the business and trading until 5 April 2004. He made a loss that year which we set against his employment income of the same year. (He left his job to start his business). He ended up with an income tax rebate of around £400 for that year.

For the year ending 5 April 2005, he had made a small loss and this loss was carried forward to be used should he make any profit in subsequent years. No income tax was due for that year.

For the year ending 5 April 2006, he made a profit of around £3,400. As this was his only source of income and the personal allowance for that year was £4,895, again, no income tax was due for that year.

The returns were submitted to HM Revenue & Customs and I included an argument (as this was allowable back then) stating that as there was no tax due there should not be any penalties as HMRC had not been deprived of any collectable taxes. The revenue determinations were replaced by the real tax calculations, and all the penalties plus interest written off.

Net result: Mr “A” is up £400.00, up to date with his tax affairs, and no longer scared of the contents of his mail each morning.

Lessons

Mr A spent a lot of time worrying about this matter and burying his head in the sand and only when stronger worded letters arrived did he look to remedy the situation as by then, he was extremely worried. This amount of time spent worrying must have had some impact on his motivation or performance which we know is detrimental to our efforts to succeed at doing what we do, with what we know. Mr A was relieved once the task was completed and I believe the process was much less painful and costly, than he had anticipated.

This wont be the first case study, nor will it ever be the last, as I continually meet a new “Mr A” regularly. If the situation above seems familiar to you do not be fearful as I, and my team at Cooper Bradshaw Ltd, can take the problem away, fix it, and set up a system to ensure the problem does not reoccur again. In the majority; these problems are not as bad as people think they are and quite often; the results of solving such a problem reveals a hidden reward!

About the author

Ben Laws is Director of Cooper Bradshaw Ltd, in Ramsgate, Kent. His firm specialises in Tax Investigations, Appeals, Enquiries, Disclosures and associated compliance matters. Although his practice mainly covers the Margate, Broadstairs, Ramsgate & Thanet areas of Kent, he also advises clients throughout the UK, as well as overseas.

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