How to avoid self-assessment penalties

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There are various types of penalty charged by HMRC, and they can soon add up to a considerable amount of money. The simplest way to avoid them is to ensure you comply with all deadlines, report new information in a timely manner and remain compliant with HMRC.

However, there are some easy methods of avoiding those charged for self-assessment.

Notify HMRC of all changes in circumstances

If you fail to inform HMRC of a change that has an impact on your liability to tax, you may be charged a penalty for ‘Failure to Notify’. Such changes must be reported to the organisation at the right time to avoid a penalty. Instances where you may be charged a penalty for failure to notify include not telling HMRC when your new business makes a profit and you become liable to pay tax. You must also let HMRC know when you start a company that must be registered with the organisation – for instance, when excise duty will be charged.

The penalty will be calculated based on Potential Lost Revenue (PLR), which is the amount of tax that would have been payable if HMRC had been aware. If you come forward to report the failure to notify to HMRC, the penalty may be reduced.

Check your tax returns and documents for errors

Before submission of any documents, including your self-assessment tax returns, check them for errors as you may be charged for mistakes that lead to the incorrect amount of tax being calculated. There are some scenarios where HMRC will charge a penalty, which includes not taking ‘reasonable care’ and deliberately providing incorrect information. Keeping accurate and timely business records is an indication of taking reasonable care, and HMRC may reduce the penalty if this can be proven.

The penalty is based on the PLR and the reasons for the mistake being made. Depending on the nature of the error, the penalty will be charged based on a percentage of the tax that will become due when the error is corrected. Reductions can be made when you come forward to admit the error.

File all tax returns and documents in a timely manner

If you fail to complete and submit your tax return by the relevant deadline, you will be charged an instant £100 penalty. If you still haven’t submitted the tax return after three months, further penalties will be charged.

If you outsource accountancy, your advisor may be able to help you avoid penalty charges, although the legal responsibility for filing remains with you, the client. Call us today if you want more information on this complex subject.