Can you cancel a tax return to avoid a penalty?

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From April 2013 HMRC will be allowed to cancel a tax return that’s been issued and any late filing penalties that go with it. But where do you stand if you’ve just missed the January 31 deadline?

Tax return issues

Whether or not you need to complete a tax return ought to be a straightforward question.  But tricky self-assessment (SA) rules, inflexible HMRC practice and poor training of its staff have resulted in a running battle with taxpayers over late filing penalties.  More recently, tribunal judge have waded in with criticism of HMRC’s handling of late returns.  But things are about to improve.

New rules for this year’s returns

The law will change in April to allow taxpayers to ask HMRC to withdraw an SA tax return where they don’t think they need to complete one.  any penalties linked to the return will also be cancelled.   However, this will only apply to tax returns for individuals, partnerships and trusts for 2012/13 onwards, i.e. returns for which the normal filing deadline is January 2014 and later.

Earlier years – what the law says

HMRC has developed its own liberal, but somewhat illogical, criteria for when an individual must complete an SA form.  But until April it doesn’t have the legal authority to cancel a return once it’s been issued.  Therefore, if you’re late submitting a form, HMRC’s hands are tied it must issue a penalty. However, it has discretion to cancel, if you appeal.

Tip.  A point often overlooked is that there’s no requirement to complete a tax return unless you receive a notice (or SA form) from HMRC.  For example, where it’s sent to the wrong address and never reaches you, it has no right to a penalty.  Instead, it must re-date and reissue the form or notice and allow you three months to submit your completed SA return.

Trap.  While you won’t be liable to a late filing penalty in the circumstances described above, a different rule says that you must notify HMRC within six months from the end of a tax year if you have income or Capital Gains Tax to pay,.  Penalties can apply if you don’t do this.

Earlier years – what the Taxman says

In January last year HMRC responded to criticism over penalties and issued a “Brief”, which indicates a softer approach.  It says HMRC will “be sympathetic in exercising our discretion where people are prevented by circumstances outside their control from filing on time.  In such cases, we will cancel the penalty, but the taxpayer must still file as soon as possible”.  Previously, HMRC would only cancel a penalty if you experienced both “exceptional2 and “unpredictable” difficulties.

Tip.  Where circumstances out of your control e.g. computer failure, causes you to be late with your 2011/12 tax return, you should be able to rely on the wording of HMRC’s Brief to have a penalty cancelled. This also applies to penalties for late 2010/11 returns.  It might also be worth giving it a try on penalties for earlier years if you’re still arguing with the Taxman over whether these are payable.

If you have any queries please give us a call.

Sue Stephens
Personal Tax Consultant