Many provisions of the Taxes Acts provide for interest and penalties to be charged. The most likely occasions for a taxpayer to be charged interest or penalties are:

• Because you have sent your self assessment tax return in late
• Following a tax enquiry
• Where you have failed to notify HM Revenue and Customs of a new source of income or that you have become self employed
• Where you have made an error in a return

Sending in your self assessment tax return late

If your return is received by the HM Revenue and Customs (HMRC) after the legal deadline, you will be charged an automatic penalty of £100. The usual legal deadline is 31 January following the end of the tax year. If your return is issued after the 31 October the normal deadline is 3 months from the date of issue. For more details see the article 'Sending back your self-assessment tax return'.

There is a further £100 penalty if it is more than six months late, and HMRC has powers to charge much heavier penalties - up to the amount of tax unpaid - if it is more than a year late.

Separately, HMRC can ask the Appeal Commissioners to impose a daily penalty - of up to £60 per day - on any late return, although this is not very common. Daily penalties are more likely where there are a number of years' tax returns outstanding.

The rules on late filing penalties are changing. Proposals include a fixed £100 penalty which would be charged even if all the tax has been paid; a new daily penalty of £10 per day for returns overdue by 3 months and tax geared penalties for longer delays. Reforms are expected in the 2009 Finance Bill.

New Penalties Regime

A new system of penalties applies to returns and documents submitted to HMRC after 1 April 2009 in respect of tax periods beginning after 1 April 2008 for Capital Gains Tax, Construction Industry Scheme, Corporation Tax, Income Tax, National Insurance contributions, PAYE and VAT. (From 1 April 2010 it will also apply to Environmental Taxes, Excise Duties, Inheritance Tax, Insurance Premium Tax, and Stamp Duties in respect of tax period after 1 April 2009.)

Penalties are tax geared and depend on taxpayer behaviour as follows:

Penalties for careless (but not deliberate) errors may be suspended for up to 2 years.

Penalties following a tax enquiry

If the tax office take a closer look at one of your self assessment tax returns and find that there are errors, they are likely to impose penalties. Penalties can be up to 100% of the additional tax due. For returns submitted after 1 April 09 in respect of tax period from 1 April 2008 the percentages are based on taxpayer behavior (see chart in previous section). Interest will also be charged. This is a complex area, so it would be best to take advice if this applies to you.

Failure to notify HMRC of a new source of income, or about starting self employment

Tax payers have an obligation to tell HMRC about any untaxed income, higher rate liability or gains they receive on which they are liable to pay tax. This should be done in time for HMRC to send out a self assessment tax return for the relevant year. The rule is that HMRC should be told by 5 October following the end of the tax year in which the income is received. If you fail to do this, you can be liable for a penalty of up to the amount of tax unpaid at 31 January following the tax year.

So if you receive income or gains in the year to 5 April 2009, you should tell HMRC by 5 October 2009 at the latest. If you fail to do this, and there is tax due and unpaid by 31 January 2010, you face a penalty. New rules are being introduced from 1 April 2010. These base late filling penalties on a percentage of the tax at stake. The percentage depends on taxpayer behavior (see chart in New Penalty Regime section above).

People who are newly self employed need to tell HMRC that they have started in business. Notification of self employment can be made by phone on 0845 915 45 15. The fixed £100 penalty for failure to notify liability to pay class 2 National Insurance does not apply to obligations arising after 6 April 09. Instead a penalty based on the tax unpaid applies from 31 January following the end of the tax year in which the new business commenced. If the taxpayer makes a full and unprompted disclosure to HMRC within 12 months of the 31 January deadline then the penalty can be reduced to zero. Beyond this date HMRC presumes that reasonable care has not been taken and the minimum penalty becomes 15% of any tax unpaid.