HMRC fined more than 180,000 low earners for late tax return over money they didn't owe

More than 180,000 people on low incomes were fined by HMRC last year for filing a tax return too late, despite them earning too little to pay tax.

HM Revenue and Customs sent out penalties to 184,000 people who were paid less than £12,500 in the 2020/21 financial year, for not submitting a self assessment tax return on time.

In the analysis carried out by the independent think tank Tax Policy Associates, low earners experiencing financial hardship often misunderstood the initial fine and were sent further penalties which landed them in thousands of pounds worth of debt.

In one case, the think tank knows of, someone was made homeless because of debts racked up from HMRC over tax they didn't need to pay.

Speaking to the Tax Policy Associates, one person said they missed the tax return deadline and were issued with a £100 fine. Due to health reasons they didn't deal with the first penalty and now owe more than £1000, despite not owing a penny of tax in the first place.

Dan Neidle, who founded the organisation, said: "Something’s gone badly wrong when 40% of HMRC’s late filing penalties are issued to people who earn too little to pay tax. The law needs to change."

Most people in the UK aren’t required to submit a tax return, with the majority of the earning population getting their income from employment and a modest amount of bank interest.

Only about a third of taxpayers (11 million people) are required to fill in the form, with a £100 fine if they miss the deadline even by one day.

The fine increases three months after the deadline. It can go up by £10 each day for a maximum of 90 days, and after six months a flat £300 penalty can be added to the penalty. After 12 months, another £300 can be added - leading to a total penalty of more than £1600.

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Until 2011, a late filing penalty would be cancelled if, once a tax return was filed, there was no tax to pay.

The law has since changed and now the fine will remain in place even if it turns out the supposed taxpayer has no tax to pay.

Since publishing its report, Tax Policy Associates said it has been "inundated" with stories from people on low incomes who have been affected by unnecessary penalties.

"These are vulnerable people, at a low point in their lives – and the same difficulties which meant they missed the filing deadline mean they often won’t lodge an appeal, and may take months before they pay the penalties (racking up additional penalties in the meantime)," a spokesperson said.

"A successful appeal is not a success – it means that someone with limited time and resources has had to navigate what is to many a complex and difficult administrative system."

Of the 184,000 fines issued last year, this was reduced to 126,000 after successful appeals.

The think tank is now calling for a change in the current law so that late filing penalties are automatically cancelled if HMRC finds the applicant has no taxable income.

"We believe that the Government, HM Treasury and HMRC are acting in good faith," it said, "and until our report last year were unaware of the disproportionate impact that penalties have on the low-paid."

Mr Neidle added: "People are falling into debt, and in one case we're away of, actually becoming homeless, as a result of HMRC penalties."

A spokesperson from HMRC said: "The Government has recognised that taxpayers who occasionally miss the filing deadline should not face financial penalties, and has already announced reform of the system.

“Deadlines for returns are necessary for the efficient functioning of the tax system though, and we strongly encourage anyone who does not need to file a return to tell HMRC.

“Our aim is to support all taxpayers, regardless of income, to get their tax right and details of what to do if a person no longer needs to file a return are included in reminder letters every year.”

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