HMRC provide advice on self-employed tax returns
Tens of thousands of people who earn too little to pay tax are being hit with hundreds of pounds in fines for failing to file a tax return on time.
Currently, individuals earning less than £12,570 a year do not pay income tax. However, those who are self-employed must complete a self-assessment tax return each year, even if they don’t reach these earning thresholds.
Failure to file this before the paper deadline on October 31 or the online deadline on January 31 results in an automatic fine.
More than 83,000 people earning less than the threshold were issued with a £100 penalty by the tax authorities in 2021-22. Only 17,000 of those fines were later cancelled on appeal.
Those with low incomes fare even worse when it comes to the £300 fines handed out for filing a year late. Half of all the 61,000 fines were to people who earn too little to pay tax. Some 12,000 were successful on appeal.
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By contrast, far fewer people earning more than £100,000 were hit with fines. Only 20,000 people in this category were penalised and, following appeals, just 5,000 of them were fined.
The figures have been uncovered under the Freedom of Information Act by the Tax Policy Associates (TPA) thinktank and were reported by the Observer.
The findings have raised concerns about the extent to which people who are vulnerable or facing financial hardship are being issued with the penalties for failing to submit a self-assessment tax form on time.
The figures have triggered calls for a return to an earlier system in which anyone who did not end up paying any tax was effectively spared a fine.
The founder of TPA, Dan Neidle, said: “It’s shameful that tens of thousands of people on very low incomes, often with difficult lives, have their lives made more difficult by HMRC penalties.
“We should go back to how things were before 2010: nobody should have to pay a penalty if their income is too low for them to have a tax bill.”
One of the thousands to have faced the issue, a self-employed photographer who wished to remain anonymous told the Observer that he had been issued with many fines, despite the tax authorities acknowledging he did not earn enough to pay tax.
He said he had not earned enough to pay income tax since 2017 and had subsequently lived off savings, small amounts from odd jobs and money from a legal settlement that is non-taxable.
He said confusion had played a major part in his case, adding: “I was sent reminders for tax, I ignored them and they sent more and the fines kept increasing,” he said.
“And then they sent me a letter saying, ‘we can now see you haven’t been making enough to tax so actually you’re not due anything’.”
He said he believed this was the end of the issue, yet a few months later he received an even larger demand. “Two or three months later they sent me a bill for £3,000, not for tax due but for fines,” he said. He said that the fines, combined with the struggling to restart his business during the pandemic, had left him in a “dark place,” he said.
“Mentally I’ve struggled, and all of this is quite burdening. There seems to be an attitude of ‘you are guilty unless you can prove you’re innocent’.”
The latest figures on fines, however, do suggest their use is falling. In the previous year, 92,000 people among the lowest paid 10% of the population were fined by HMRC for late filing of their tax return.
In an attempt to deal with the issue, a new system is being introduced that gives people warnings before they are given a fine. However, tax campaigners say that delays to the new system have caused confusion and unfairness.
Joanne Walker, a technical officer for the Low Incomes Tax Reform Group, said: “The current penalty regime will continue alongside the new regime for a few years.
“This has the potential to be unfair on those who remain in the current, arguably harsher, regime, especially those on low incomes as it is recognised that the new regime will be fairer.
“We suggest that, until the new system can be introduced for everyone, HMRC should take steps to make late filing penalties fairer and more consistent for all taxpayers.”
An HMRC spokesperson said: “The government recognises that taxpayers who occasionally miss the filing deadline should not face financial penalties and reform of the system is under way. Our aim is to support all taxpayers, regardless of income, to get their tax right and avoid fines.
“The overwhelming majority of customers file on time.”
More than 83,000 people earning less than the threshold were issued with a £100 penalty (Image: Getty)
Who must send a tax return?
You have to fill in an annual tax return if any of the following apply to you:
You were self-employed as a ‘sole trader’ and earned more than £1,000 (before taking off anything you can claim tax relief on)
You were a partner in a business partnership
You had a total taxable income of more than £150,000
You had to pay capital gains tax when you sold or ‘disposed of’ something that increased in value
You had to pay the high income child benefit charge
You have until October 31 2024, to submit your tax returns for the year.
If you disagree that a penalty is due, you can appeal against it to HMRC.
To challenge a fine by the HMRC, you must first write to them, and then if no agreement can be made, then you have to request an internal review.
The taxman said you should consider paying the penalty even if you appeal.
If you do not, and your appeal is rejected, you’ll have to pay interest on the penalty from the date it was due to the date you paid it.If HMRC approves your appeal, it will repay what you’ve paid back to you with interest from the date you paid it.
You have 30 days from the date of the notice to appeal against it in writing.
