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Can you cancel a tax return to avoid a penalty?

From April HMRC will be allowed to cancel a tax return that's been issued and any late filing penalties that go with it. But where do you stand if you've just missed the January 31 deadline?

Tax return issues

Whether or not you need to complete a tax return ought to be a straightforward question. But tricky self-assessment (SA) rules, inflexible HMRC practice and poor training of its staff have resulted in a running battle with taxpayers over late filing penalties. More recently, tribunal judges have waded in with criticism of HMRC's handling of late returns. But things are about to improve.

New rules for this year's returns

The law will change in April to allow taxpayers to ask HMRC to withdraw an SA tax return where they don't think they need to complete one. Any penalties linked to the return will also be cancelled. However, this will only apply to tax returns for individuals, partnerships and trusts for 2012/13 onwards, i.e. returns for which the normal filing deadline is January 31 2014 and later.

Earlier years - what the law says

HMRC has developed its own liberal, but somewhat illogical, criteria for when an individual must complete an SA form (see The next step). But until April it doesn't have the legal authority to cancel a return once it's been issued. Therefore, if you're late submitting a form, HMRC's hands are tied: it must issue a penalty. However, it has discretion to cancel, if you appeal.

Tip. A point often overlooked is that there's no requirement to complete a tax return unless you receive a notice (or SA form) from HMRC. For example, where it's sent to the wrong address and never reaches you, it has no right to a penalty. Instead, it must redate and reissue the form or notice and allow you three months to submit your completed SA return.

Trap. While you won't be liable to a late filing penalty in the circumstances described above, a different rule says that you must notify HMRC within six months from the end of a tax year if you have income or Capital Gains Tax to pay. Penalties can apply if you don't do this (see The next step).

Earlier years - what the Taxman says

In January last year HMRC responded to criticism over penalties and issued a "Brief", which indicates a softer approach. It says HMRC will "be sympathetic in exercising our discretion where people are prevented by circumstances outside their control from filing on time. In such cases, we will cancel the penalty, but the taxpayer must still file as soon as possible".Previously, HMRC would only cancel a penalty if you experienced both "exceptional" and "unpredictable" difficulties.

Tip. Where circumstances out of your control, e.g. computer failure, caused you to be late with your 2011/12 tax return, you should be able to rely on the wording of HMRC's Brief to have a penalty cancelled. This also applies to penalties for late 2010/11 returns. It might also be worth giving it a try on penalties for earlier years if you're still arguing with the Taxman over whether these are payable.

HMRC isn't permitted to cancel self-assessment returns prior to those for the 2012/13 tax year. However, it now says it will take a softer approach on late filing penalties. It will cancel these where you can show that the lateness was beyond your control, e.g. computer failure.

If you would like any help with your tax planning, don't hesitate to contact us for a free initial meeting.

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How can we help?

We are a proactive firm of accountants who can assist you in all your financial needs in a friendly, efficient and professional manner.

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