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October 22, 2021

Excuse me!: Tax Penalties, Reasonable Excuses & Special Reductions

When it comes to the UK tax system, HMRC impose various penalties to ensure compliance and to encourage taxpayers to file their tax return by the 31 January deadline following the end of the tax year (or 31 October for paper returns).

The penalties for missing the tax return filing deadline can be punitive, with HMRC also issuing the following penalties in relation to tax returns:

  • For the late payment of tax;
  • Failure to notify penalty, where a new source of taxable income or capital gains are received;
  • Errors or inaccuracies on the return;
  • Failing to keep sufficient records.

Penalties for Late Filing of Tax Returns

HMRC issue standard penalties for failing to submit your tax return on time, whereby these penalties apply to all taxpayers irrespective of whether they have incurred a tax liability during the year. Under the current rules, these penalties are as follows:

  • £100: applied immediately where the deadline has not been met;
  • £10 per day: imposed once the return is 3 months late for a maximum of 90 days;
  • the higher of £300 or 5% of the tax due: applied if the return is submitted 6 months late; and
  • a further £300 (or 5% of the tax due if greater): charged if the return is submitted 12 months late.

Reasonable Excuses

HMRC provide exceptions to charging penalties when there is a genuine reason for a taxpayer not being able to submit their tax return by the deadline, where HMRC refer to these as ‘reasonable excuses’. However, there are very few reasons that HMRC will accept as valid for the late filing of your tax return.

In the case where you believe that there is a reasonable excuse that prevented you from submitting your tax return on time, you must disclose all the relevant details of the reason(s) to HMRC, where the law on reasonable excuse requires you to submit the late tax return within a reasonable amount of time after the excuse has ended.

HMRC published a list of reasonable excuses on GOV.UK that they usually accept as valid reasons for not filing your tax return on time, including illness, death of a family member, or computer issues. However, this list is not exhaustive and HMRC consider the relevant facts of each case.

Further to the above, the government announced in 2020 that they will consider COVID-19 as a potential reason for taxpayers filing their tax return late. However, there must be a clear reason as to how the pandemic stopped you from meeting your tax return obligations.

Appealing Against a Penalty

In most cases, HMRC will allow you to appeal against a penalty providing you do so within 30 days of the date of issue of the penalty.

As a result of the impact of COVID-19, HMRC allowed an extra three months for an appeal to be made where the pandemic prevented the taxpayer from lodging an appeal within the 30-day limit. However, for penalties issued from 1 October 2021, the appeal time extension has been removed and has reverted back to the 30-day limit.

You can use the Self-Assessment online portal to lodge an appeal against any initial £100 late filing penalties that have been issued to you by HMRC for the 2015/16 tax year onwards. For all other penalties, you can send form SA370 to HMRC stating your grounds for the appeal.

If you disagree with HMRC’s decision on the appeal, you can then make a further case to the tribunal within 30 days of the review decision to hear the case. Decisions made by the tribunal on a point of fact are binding, whereas a decision on a point of law can then be taken to the courts.

Special Reduction

‘Special reduction’ is a tool used by HMRC to reduce or remove penalties in certain circumstances, where this can apply to various types of penalties including taxpayers failing to file a tax return on time.

The special reduction rules apply where HMRC deem there to be ‘special circumstances’ that led to the non-compliance, although these circumstances are not defined in the legislation and will depend on the precise facts of each case. This may result in the stopping or suspending enforcement of a penalty, or foregoing all or some of a penalty.

HMRC advise that special circumstances are either uncommon or extraordinary, and therefore considers it unlikely that a special reduction will apply to a penalty where the taxpayer’s behaviour is considered to be deliberate.

For example, in Arnfield v Revenue & Customs [2015] UKFTT 53 (TC), the taxpayer filed a late tax return and HMRC issued a late filing penalty of £100. The taxpayer’s appeal to the penalty was rejected on the basis that it was the taxpayer’s responsibility to ensure that the return was filed on time.

However, the tribunal proceeded to see if there were any ‘special circumstances’ to consider. The tribunal concluded that HMRC's failure to act on forms 64-8 and SA1 sent by the taxpayer’s accountants was a contributory factor in her failure to file the return on time. In light of this, the taxpayer’s penalty was reduced to £60.

Tax Return Filing Penalties Going Forward

The rules regarding tax return penalties will change from the 2023/24 tax year onwards with a new points system being introduced, please see our previous blog for further details on this.

HMRC have confirmed that you will still be able to appeal a HMRC point or penalty as long as you have a reasonable excuse, and penalties will still be reviewed under the special circumstances discussed earlier in the article.

If you have any queries on any of the topics discussed in this article around the potential penalties on the filing of your tax returns, please do not hesitate to get in contact with a member of the team for expert tax advice.

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