Don’t put it behind the kettle

Brown envelopes are almost always bad news - they bring bills, payment reminders, tax returns. They’re not thrown away, but hidden behind the kettle to be dealt with another day.  

In April the taxman sent out the latest batch of tax returns. One may have landed on your doormat. Perhaps it is nestling behind the kettle, lost among other brown envelopes.

This could be a mistake - sending in a late tax return has just got much more expensive. You can pay over £1,000 in penalties even if you don’t owe any tax.

The penalties work like this:

•      One day late: £100.
•      Three months late: £10 a day, up to a maximum of £900.
•      Six months: £300 or 5% of the tax due, whichever is higher.
•      One year: another £300 or 5% of the tax whichever is higher.

That isn’t the end of the story. There are also penalties for late paid tax. These are 5% of the tax due if the payment is 30 days late, 5% for being 6 months late, and a further 5% if the payment is a year late. Plus, you have to pay interest on any late paid tax, at an interest rate which is currently 3%.

These numbers can be confusing, so here are a couple of examples:

Mike is a self-employed taxi driver. He gets his tax return in April 2011 and knows he should sort out his tax by January 31 at the latest. He props the return up behind the kettle, and promptly forgets about it.

In February 2012 he realises he’s missed the deadline, but the same thing happened last year and it didn’t cost him much. He’s got a lot of work on at the moment, so he doesn’t bother with the return. He finally files it online on 31 September 2012 and pays the £4,000 of tax that was due on 31 January.  

HMRC charge him £1,780 in penalties and interest - almost a 50% increase on his tax bill. This is worked out as follows:  

His partner Anna has been off work for a year and has no tax to pay. She ignores her tax return too, but finally sends in to HMRC at the same time as Mike. Although she owes no tax, she still has to pay £1,300 - because these are penalties for not returning the form, and it is irrelevant that she doesn’t owe anything.

To avoid these painful penalties, fill in the return and send it back in good time. The deadline is 31 October 2011 if you use a paper return. If you file by Internet, you have until 31 January 2012, but don’t leave it to the last minute as it takes time to register for online filing. Generally, the deadline for paying any outstanding tax is also 31 January. And when you have finished, fill the kettle and have a well-earned cup of tea.

Anne Redston is a visiting professor at King’s College, London and a barrister at Temple Tax Chambers

The information contained in this article is intended to provide only a general outline of the subjects covered.  It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice.  The author and the publisher disclaim all responsibility for any loss arising from any action taken or not taken by anyone using the information in this document