How Serious are Late Tax Returns?

As a business manager or a self-employed individual, tax returns become your responsibility in a way they weren’t before. For the most part, this responsibility is solved through the use of a professional, whether an in-house accountant or employing a tax accountant to handle this for you.

For those taking it on themselves, tax returns are often put off until the last minute. However, any complications you run into then won’t be resolved in time to meet the filing deadline – or perhaps you’ll choose to meet the deadline and risk errors in the report.

Either option opens up more than just financial issues. Fixing these can take real time, under pressure from HMRC, which means less time spent on your business or your home life and increased stress levels while you’re working on it.

Financial Penalties for Late Tax Returns

If you miss your tax return deadline (usually 31^st January, but if you’re providing paper tax returns, it’s earlier – the 31^st October), you automatically incur a £100 fixed penalty.

This kicks in even if you wouldn’t owe any tax, for example if you’re running a new business which hasn’t yet had the time to reach the minimum tax threshold.

From there, however, the clock is already ticking. You have three months to submit overdue returns before additional penalties are levied, but once you’re past that point, every day you miss submission of a tax return costs an additional £10 per day.

The amount you can be penalised through this is capped at £900, which means that if you’re six months late to submit your tax return, that’s £1000 in penalties, alongside whatever you might owe in tax. If you imagine someone who calculated they didn’t owe tax and consequently thought they didn’t need to file a return, that’s a significant extra payment they’ll have to find.

After six months, an additional penalty is levied. This will be either £300 or 5% of the tax liability owed, whichever is higher. This penalty is repeated if the return is a full year late.

Not only that, but HMRC can issue a fine of up to 100% of the amount owed if they believe the payment is being deliberately withheld.

As you can see, the upper limit on this is significant. Failing to submit a tax return for a year because you owed no tax can cost you £1600 on its own.

This alone should be enough incentive to make sure returns are submitted correctly and on time. That’s much harder to do if you haven’t been preparing your accounts through the year!

Penalties and Interest on Unpaid Tax

For online filing, filing late also means paying late as the deadline is the same. If your payment is made late, you face interest on the payment – 8% per annum calculated on the unpaid amount.

However, late payments also mean penalties. If you fail to take interest into account, you can end up with penalties on the interest (and on any other unpaid amount). At 30 days late, an additional 5% of tax owed at that date is added. The same calculation is run if the payment is six months late, and again if the payment reaches 12 months late. Note that interest on its own would increase payments by 8% even without these penalties, so this can end up being a significant increase.

Penalties like this can have a significant impact on the company’s liquidity, so they should be avoided wherever possible.

Hidden Costs

As well as affecting the business’ cash-flow (with payments potentially being needed at awkward points within your billing cycles, when you may not have the liquidity to handle it), there’s also a clear cost to late returns in administration time.

Whether you handle that or someone else, this is worked time spent dealing with a problem that could have been prevented in the first place – effectively, it’s a waste of paid time.

We won’t pretend this is a zero-stress situation, either, as there can be real uncertainty until you have full confirmation from HMRC that everything’s revolved.

Making Sure Your Returns Aren’t Late

We often hear from people who handle their tax returns in one marathon session just ahead of deadline, but this tends to come with a collection of risks.

Instead, we recommend maintaining comprehensive digital records of income and expenditures, including what they’re for, throughout the year. Doing this through good accounting software makes it much easier to track, and may also make it easier to know roughly what funds to set aside to cover the ongoing tax burden. That way you don’t risk the interest and penalties on a late payment.

The most efficient and the least stressful way to handle all of this, of course, is to engage an accountant to support you. For businesses in the Lancaster and Morecambe area we’re standing by, ready to help – just get in touch.