HMRC set to receive windfall from late-payment tax penalties

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HM Revenue & Customs is likely to receive a “windfall” from taxpayers who miss the tax return filing deadline, due to late payment interest rates hitting their highest level in 16 years.

HMRC charges a late-filing penalty of £100 and late payment interest when people required to fill in a self-assessment return fail to do so by January 31.

The tax authority’s late payment interest is set at the Bank of England’s base rate plus 2.5 per cent. The current Bank of England rate is 5.25 per cent, meaning HMRC’s late payment rate is 7.75 per cent.

The last time the rate was higher was in January 2008. This has led tax experts to suggest the government could take in significantly higher penalties than usual this year.

Dawn Register, head of tax dispute resolution at BDO, an accountancy firm, said: “There could be tens of thousands of people who will have been drawn into the self-assessment tax net for the first time in the 2022-23 tax year. Many may be unaware of their obligations to file a tax return before January 31 2024 and could run the risk of penalties.”

HMRC said on Tuesday that 3.8mn people had yet to file their tax return with only one week to go until the self-assessment deadline.

The tax agency expects more than 12.1mn tax returns to be filed for the 2022-23 tax year. So far, more than 8.3mn online returns have been received.

Stefanie Tremain, tax partner at accountancy firm Blick Rothenberg, said the current late payment rates were in stark contrast to recent years. For instance, the interest charged by HMRC in February 2022 was 2.75 per cent. 

“Penalties can rack up quickly and it’s important that taxpayers file their returns and pay their tax by the deadline or as soon as possible afterwards,” she said. “With the rate currently at 7.75 per cent this can quite quickly become a painful additional cost.”

Ray McCann, a consultant at tax adviser Charter Tax and a former HMRC inspector, argued the late payment rules were “entirely at the discretion of HMRC and . . . operate to economically advantage HMRC”.

He added: “The rules on late payment interest need to be revised. They are manifestly unfair.”

Late filing of self-assessment tax returns attracts an initial £100 penalty, which applies even if there is no extra tax to pay or if the tax due is paid on time. After three months, there are additional daily penalties of £10 a day, up to a maximum of £900. After six months, there is a further penalty of 5 per cent of the tax due or £300, whichever is greater. After 12 months, another 5 per cent or £300 charge applies, whichever is greater. 

Lucy Woodward, partner at Saffery, an accountancy firm, advised people worried they cannot pay their tax debt by January 31 to set up an instalment plan with HMRC, known as a “time to pay” arrangement.

This would reduce penalties, although interest would still be charged, she said. She also suggested people who cannot file their tax return in time to make an estimated tax payment by January 31.

“[This] is advisable to mitigate late payment interest accumulating,” she added.

Myrtle Lloyd, HMRC director-general for customer services, said: “If you are a self-assessment taxpayer, now is the time to take action and get your return done. People can familiarise themselves with the process by checking out HMRC’s online resources on gov.uk.

“Once a tax return is submitted, it’s easy to find out what’s owed and to pay online or using the HMRC app.”

HMRC added that it would “consider a customer’s reasons for not being able to meet the deadline. Those who provide a reasonable excuse may avoid a penalty”.