Syllabus A. UK Tax System & Administration A6. Penalties for non-compliance

A6a. Late payment interest

Syllabus A6a)

Calculate late payment interest and state the penalties that can be charged.

Penalties for incorrect returns

The amount of penalty is based on the amount of tax understated, but the actual penalty payable is linked to the taxpayer’s behaviour, as follows:

  1. There will be no penalty where a taxpayer simply makes a genuine mistake.

  2. There will be a moderate penalty (up to 30% of the understated tax) where a tax payer fails to take reasonable care.

  3. There will be a higher penalty (up to 70% of the understated tax) if error is deliberate.

  4. There will be an even higher penalty (up to 100% of the understated tax) where the error is deliberate and there is also concealment of the error.

A penalty will be substantially reduced where the taxpayer makes disclosure, especially unprompted disclosure to HMRC.

Late payment for balancing payments

The late payment penalty for balancing payments are 5% for tax unpaid 30 days after payment due date, further 5% if still unpaid after 6 months and a further 5% if still unpaid after 12 months.

Late payment interest

If a tax liability is paid late, in addition to the late payment penalty, interest will be charged. 

It will be charged at the rate of interest of 3%p.a.

If the liability is outstanding for less than a full year, then this will be apportioned accordingly. 

For example a corporation tax liability of £300,000 was outstanding for 4 months.

How much late payment interest will be payable assuming a rate of 3%?

4/12*3%*£300,000 = £3,000