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What counts as a ‘reasonable excuse’ to appeal a tax penalty?

We all know that documenting and filing taxes is a complex and often stressful process. Despite our best efforts, some of us may miss deadlines or misrepresent information on our tax returns – leading to HMRC issuing a tax penalty. Whether you’re self-employed or part of a small business, nobody wants the additional stress of paying tax penalties on top of the actual tax and interest.

However, if you can prove that you had a ‘reasonable excuse’ for the action that incurred the tax penalty, then HMRC might agree to amend or waive the fine. You’ll still have to pay any outstanding tax and interest, but a successful tax penalty appeal will reduce the penalty or remove it altogether.

So, what counts as a ‘reasonable excuse’ for late or incorrect tax returns, according to HMRC? How much will you have to pay if you get a tax penalty, and what can you do to avoid getting one?

What are HMRC tax penalties issued for?

There are plenty of common mistakes people make when filing their tax returns that can result in HMRC flagging a problem and issuing a fine. Here are some of the reasons for HMRC tax penalties:

  • Failure to keep necessary records
  • Errors or inaccuracies in details provided
  • Late submission and/or late payment
  • Not informing HMRC of tax liability changes

Whether you deliberately misrepresent your situation or genuinely make a mistake by accident, HMRC can and will fine you for not complying with tax reporting and payment rules.

To avoid receiving a Penalty Explanation Letter laying out what you’ve done wrong, you should do your best to file and pay accurately and on time. If you become aware of an issue before receiving one, contact HMRC as soon as possible – this could result in a penalty of reduction.

How much is a HMRC tax penalty?

The penalty you might receive for the reasons above depends on the type of tax, the time period, and the particular fault. For example, if you filed your Self-Assessment Tax Return late by one day, you would receive a fine of £100 (though this doesn’t apply for returns due on 31st January 2022).

HMRC will add £10 per day for missing the deadline by up to 90 additional days. If you fail to pay for 6 months or more, HMRC will also charge £300 or 5% of the outstanding tax – whichever is higher. You’ll also be fined for missing the payment deadline and accrue interest for every passing day.

For Corporation Tax Returns, limited companies will be fined £100 for missing the deadline for filing or payment by one day, then another £100 for failure to pay within three months. If the company still hasn’t filed or paid in six months, HMRC will charge the estimated tax bill plus a 10% penalty.

In the case of undeclared income or inaccurate information, HMRC will calculate the penalty based on the reason and a percentage of the amount of tax due:

  • Lack of ‘reasonable care’ – 0% to 30%
  • Deliberate error – 20% to 70%
  • Deliberate and concealed – 30% to 100%

Penalties are lower for carelessness than what HMRC could perceive as attempted tax evasion. They may reduce the penalty if you disclose the error and help them to calculate the tax that’s overdue, either by providing documentation or allowing HMRC access to your records.

Bear in mind that HMRC is switching to a late submission points system as they move all taxes to a digital platform, so this could change in the coming years. The new system starts from April 2022 for VAT, but won’t be implemented until 2024-2025 for Self-Assessment Tax Returns.

What’s a reasonable excuse for filing taxes late?

If you receive a HMRC penalty letter, you’ll have the chance to appeal against it. Extenuating circumstances and unexpected life events can strike at any time, so HMRC is likely to be lenient if you have a valid reason for missing tax return deadlines. ‘Reasonable excuses’ might include:

  • Bereavement (a partner or close relative passed away before the deadline)
  • Unexpected hospital stay for a severe illness or life-threatening health issue
  • Fire, flooding, or theft prevented you from completing the return (e.g. loss of records)
  • Unforeseen events causing a delay or loss of paper tax returns sent in the mail
  • Your software failing just before the deadline despite you maintaining it properly
  • HMRC is responsible (e.g. the online portal crashed just before the deadline)
  • Mental or physical disability that prevents you from dealing with your tax affairs
  • A dependent (such as a young child) suddenly experiencing serious illness or disability

HMRC considers appeals on an individual case-by-case basis, so just because an ‘excuse’ worked for one person doesn’t mean they’ll accept it for another. If you think your excuse is reasonable but don’t see it in the list above, don’t be put off from appealing, as the assessment is up to HMRC.

They still expect everyone to have taken ‘reasonable care’ to make sure everything was submitted accurately – even if you have a tax agent who manages tax returns on your behalf. This means keeping the appropriate records and running the proper software to complete your tax forms.

The important thing is to take steps to correct your mistake and fulfil your tax obligations as soon as possible. The more you co-operate with HMRC, the more likely you are to succeed in your appeal.

What isn’t a reasonable excuse for late filing?

There are many flimsy excuses for failing to comply with tax regulations that won’t hold up against HMRC’s judgement. For example, simply forgetting about the deadline or being generally unaware about tax rules isn’t a good enough reason.

You can’t make excuses like saying that you were too busy, you were waiting for a reminder from HMRC, or the forms were too complicated for you to complete. They expect you to stay on top of your obligations and seek the relevant assistance if you need it.

Similarly, HMRC won’t accept it if you say you couldn’t file or pay because you didn’t have the funds or were waiting on a third party. Their judgement will depend on the circumstances – for example, they might allow it if you couldn’t pay Capital Gains Tax until receiving the sale proceeds.

Illness (of yourself, a partner, close relative, or dependent) will only be considered a ‘reasonable excuse’ if it was unexpected and genuinely affected your ability to complete your tax return before the deadline. If it was a foreseen issue or a relatively mild illness, HMRC will expect you to have made other arrangements to get your submission and payment sorted in time.

Is COVID-19 a reasonable excuse for late tax returns?

As you may know already, HMRC has made adjustments to the late filing and late payment penalties for taxes due by 31st January 2022 due to the negative impact of the COVID-19 pandemic on many businesses and individuals in the UK. You can read more about this here.

However, coronavirus is not a blanket excuse for failing to file or pay correctly, and HMRC will still charge interest on late payments. If isolation, shielding, or contracting COVID-19 on or before the due date prevented you from completing your obligations, HMRC might consider this a ‘reasonable excuse’ – but only if you fulfil those obligations as soon as possible.

How to appeal against HMRC tax penalties

When you receive a HMRC tax penalty notice, you’ll usually have 30 days from the date on the letter to appeal against it. The notice should include an appeal form and instructions on how to lodge your appeal, including which supporting information you’ll need to provide.

You can either file an appeal through the Self-Assessment Tax online portal or download the SA370 form, fill it out, and send it to HMRC through the postal service. There are separate forms available for companies appealing for late VAT Returns or Corporation Tax Returns because of IT problems, though you should also have the ability to appeal through your online account.

When you make an appeal, a new impartial HMRC officer will review the penalty decision. If they decide that your excuse is reasonable, they may amend or cancel your tax penalty. You should be notified of HMRC’s decision in the same way you appealed – i.e. online or via post.

Do you need help with handling your tax returns or appealing against a tax penalty? Want to make sure that you don’t end up missing the deadlines and paying the penalty again? Get in touch via info@gbac.co.uk to discuss our tax consultancy services. You can also contact us, GBAC, accountants in Barnsley, on 01226 298298.