There are some people who may have been ignoring tax for some time, not too concerned as perhaps friends and the ‘pub experts’ may have misinformed them.
However in 2012 we are seeing four areas developing that will combine for some people to create the ‘Perfect Storm’, described by Wikipedia as an event where a rare combination of circumstances will aggravate a situation drastically.
1) Late tax returns – In the past if you missed the tax deadline but didn’t owe any tax you could apply to have the £100 penalty charge cancelled, so many people didn’t really pay attention to the deadline if they thought they fell into this category. Now however, the fine is for the return itself and cannot be cancelled if you don’t owe any tax. This has been known about for some time, indeed I blogged about the new tax return penalties back in March 2011. However, they appear to have passed most people by. In HMRC’s recent advertising all they have added is a line that fines are due even if no tax is. Whilst there was a helpsheet sent out with tax return forms, many people will have not read this.
Now the fines for a late tax return range from £100 to £1600, and HMRC has repeatedly said that they fully intend to apply the new penalties.
2) Tax penalties – some time ago, HMRC introduced new penalties for cases where people have not correctly declared their tax – these can be up to 100% of the tax due, so suddenly that £2000 tax bill you were not expecting could actually be £4000. Again, the introduction of these was missed by many people.
3) Payments on account – People may have had an idea that they owe tax on their self-employed activities but not realised that there are also payments on account that need to be paid in advance for the next tax year. So, the £10000 tax bill people had thought might be due on 31st January but put off dealing with is actually £15000 with a further £5000 due by 31st July. Payments on account are a very common area that people do not account for – along with National Insurance that self-employed people pay based on their profits.
4) Paying by Instalments – Having been hit by all of the above, people may think they can pay HMRC by instalments. They set up a special department to deal with these arrangements, and it has helped many people in the past, however it is increasingly unlikely that it will be of use. We have been hearing reports since last year that HMRC were telling people ‘this is a one-off and you should not expect to be able to arrange another payment plan next year.’ In addition, people contacting them now to arrange new plans are having a much tougher time being accepted.
I predict that we will see people this year fined heavily for late returns and for incorrect tax declared, in addition to the extra liabilities they hadn’t accounted for in respect of payments on account and National Insurance. The final straw for many people will be the unavailability of instalment payments.
Only those who act quickly may be able to avoid the worst of the storm. By the time many people realise what is happening it may be too late…