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HMRC internal manual

Self Assessment: the legal framework

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Automatic interest and late payment penalties: late payment penalties on unpaid Income Tax and Capital Gains Tax for 2010-11 onwards

Background

This page describes the financial penalties for failing to pay Income Tax and Capital Gains Tax on time for the tax year 2010-11 and any subsequent tax year. The relevant legislation is in Schedule 56 Finance Act 2009.

SALF307 describes the penalties for failing to pay Income Tax and Capital Gains Tax on time for the tax year 2009-10 and any earlier tax year. The rules set out in SALF307 apply to any late paid tax for 2009-10 or an earlier year irrespective of when the tax was charged.

A late payment penalty will arise on any tax paid late

Paragraph 1 Schedule 56 FA 2009

The self assessment system is based on voluntary compliance. So it is essential that those taxpayers who pay the right amount of tax at the right time feel confident that the system does not reward non-compliance in any way.

However, the interest charged on late payments is not a penalty. It is designed to cancel the immediate financial advantage for those who pay late over those who pay on time.

So, in addition to any interest that may arise on tax paid late there is also a scheme of late payment penalties to encourage prompt payment. A late payment penalty is payable in respect of any tax (including capital gains tax or student loan repayments) which:

  • is shown as due in any self assessment (whether calculated by the taxpayer or HMRC) but which is not covered by any payment on account or balancing payments made (Section 59B)
  • in the context of a formal enquiry is shown as due in an amended self assessment, or discovery assessment, but which is not postponed pending an appeal (Section 55 - see SALF400).

The late payment penalty is also payable on any Class 4 NICs unpaid as if those contributions were income tax chargeable under Chapter 2 of Part 2 of the Income Tax (Trading and Other Income) Act 2005 (S16(1) Social Security Contributions and Benefits Act, 1992).

There are three late payment penalties

There are three late payment penalties, each equal to 5% of the unpaid tax. They are based on the amount of tax unpaid on the penalty date. The penalty date is date on which a penalty is first payable and is the day after the date specified in the Table in Paragraph 1 Schedule 56. For amounts payable under Section 59B(3) or (4) TMA, the date given in the Table is 30 days after the date specified in Section 59B(3) or (4) as the date by which the amount must be paid.

The first late payment penalty is 5% of any tax unpaid after 30 days

Paragraph 3(2) Schedule 56

Where a balancing payment or payment on account is still unpaid more than 30 days from the due date for that year’s balancing payment, a late payment penalty automatically arises equal to 5% of the tax unpaid at that date.

There will always be some taxpayers who intend to pay on time but, for some genuine reason, fail to do so. The 30 day period before a late payment penalty arises ensures that these taxpayers do not incur such a penalty.

There may also be some taxpayers who, having calculated their final liability for a tax year, realise that they will have insufficient funds to pay the balance due at the due date. The 30 day period gives these taxpayers time to contact HMRC to arrange a suitable scheme of payment.

The second late payment penalty is 5% of any tax unpaid five months after the penalty date

Paragraph 3(3) Schedule 56

Any tax that remains unpaid after the end of the period of 5 months beginning with the penalty date is again subject to a late payment penalty equal to 5% of the unpaid tax.

The third late payment penalty is 5% of any tax unpaid 11 months after the penalty date

Paragraph 3(4) Schedule 56

Any tax that remains unpaid after the end of the period of 11 months beginning with the penalty date is again subject to a late payment penalty equal to 5% of the unpaid tax.

Example: Late payment penalty

Abigail completes her self assessment for 2011-12 showing a total tax liability of £9,000. Payments on account are paid on time. The balancing payment due on 31 January 2013 is £5,500, but she makes a payment of only £1,750. £3,750 is outstanding.

  • Interest will arise on the £3,750 from 31 January 2013 to the date of payment
  • If the £3,750 is still outstanding at midnight on 2 March 2013 a late payment penalty of £187.50 is due (£3,750 @ 5%) (Paragraph 3(2)). If that late payment penalty is assessed on 3 March 2013 (the penalty date), interest will run on the penalty from 2 April 2013 until it is paid (Paragraph 11).
  • If the £3,750 is still outstanding on 2 August 2013, a second late payment penalty of £187.50 is due (again £3,750 @ 5%) (Paragraph 3(3)). If that late payment penalty is assessed on 3 August 2013, interest will run on the penalty from 2 September 2013 until it is paid (Paragraph 11).
  • If the £3,750 is still outstanding on 2 February 2014, a third late payment penalty of £187.50 is due (again £3,750 @ 5%) (Paragraph 3(4)). If that late payment penalty is assessed on 3 February 2014, interest will run on the penalty from 5 March 2014 until it is paid (Paragraph 11).

Late payment penalties on additional tax payable on an amended self assessment

Although the tax due in a self assessment may be increased following an amendment, whether made by HMRC or the taxpayer, the due date for interest purposes remains the original due date. So any interest payable or repayable will be calculated by reference to the normal due date for the year regardless of the date of amendment.

But the due date for the additional tax payable is 30 days after the amendment if that is later than the usual due date (Schedule 3ZA TMA). A late payment penalty is payable on any of the additional tax that remains unpaid 30 days after that due date.

So, for example, where an estimate is entered in the self assessment, and the final figure becomes known some months later, no late payment penalty will be due providing the additional tax due is paid within 60 days of the amendment. Interest will run from the original due date.

Special Reduction

Paragraph 9

If HMRC think it right because of “special circumstances”, they may reduce any late payment penalty. For this purpose, a special circumstance does not include ability to pay or the fact that a potential loss of revenue from one taxpayer is balanced by a potential overpayment from another.

For guidance on special reduction, see the Compliance Handbook.

Suspension of late payment penalties - agreement for deferred payment

Paragraph 10

Where a taxpayer makes a request to HMRC to defer payment of an amount of tax and HMRC agrees that payment may be deferred for a period, the taxpayer will not be liable to a late payment penalty on that amount between the date of the request and the end of the deferral period. However, if the taxpayer breaks the agreement by failing to pay the amount of tax in question by the time the deferral period ends or by failing to comply with a condition, HMRC can serve notice on the taxpayer specifying any late payment penalty to which the taxpayer is now liable.

Paragraph 10 legislates the former HMRC practice not to impose late payment surcharges during the currency of a time to pay arrangement provided the taxpayer complied with conditions as to payment etc.

HMRC must assess a late payment penalty

Paragraph 11

An officer of the Board is required to serve a notice of assessment stating the period in respect of which the penalty is assessed. The assessment is to be treated in the same way as an assessment to tax.

Interest charged on unpaid late payment penalty

Paragraph 11

A late payment penalty must be paid within 30 days of the date on which the notice of assessment of the penalty is issued. Late payment interest will run from the end of the 30 day payment period until payment.

Appeals against late payment penalties

Paragraphs 13 to 15

There is a right of appeal against HMRC’s decision that a penalty is payable and / or against the amount of the penalty payable. There is no obligation to pay the penalty before an appeal against the assessment of the penalty is determined.

On appeal, the First-tier Tribunal may affirm or cancel HMRC’s decision or substitute for HMRC’s decision another decision that HMRC had power to make. This includes consideration of HMRC’s decision on special reduction under paragraph 9.

Reasonable excuse

Paragraph 16

Under paragraph 16, liability to a late payment penalty does not arise where the taxpayer satisfies HMRC or (on appeal) the First-tier Tribunal or Upper Tribunal, that there is a reasonable excuse for the failure. For this purpose:

  • an insufficiency of funds is not a reasonable excuse unless attributable to events outside the taxpayer’s control
  • reliance on any other person to do anything is not a reasonable excuse unless the taxpayer took reasonable care to avoid the failure
  • where the taxpayer had a reasonable excuse but that excuse has ceased, they are treated as having continued to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased