Self Assessment Surcharge Deadline for the year ended 5 April 2008 - 28 February 2009

For those individuals who at 28 February 2009 still have outstanding tax and National Insurance (NI) liabilities for the year ended 5 April 2008, a surcharge will be incurred. What does this mean for the taxpayer and is there anything that can be done to mitigate the potential liability?

What is the surcharge?

Tax and National Insurance (referred to throughout as tax) liabilities for those individuals in the income tax self assessment system for the year ended 5 April 2008, were due to be paid by 31 January 2009. Those who have all, or part, of their liability still outstanding at 28 February 2009 are liable to a surcharge equal to 5% of any outstanding liability. This is known as the 'initial surcharge', a further surcharge of 5% being payable six months after the due date (31 July 2009).

What about interest on any unpaid tax?

Interest on any outstanding tax will have been accruing, at a rate of 3.5% from 1 February 2009 and continues to accrue until any outstanding tax is paid. Interest charged on late payments is not considered by HM Revenue and Customs (HMRC) to be a penalty, it is designed to cancel the immediate financial advantage for those who pay late and serves to compensate HMRC for the loss of the use of the money.

Recently the rate of interest charged by HMRC on unpaid tax has been dropping, which although not specifically linked appears to follow the trend of the Bank of England base rate. This is in line with interest rates on other forms of borrowing and supports the fact that HMRC does not see interest charged as penal, merely as commercial restitution. The surcharge is therefore charged in addition to any interest payable (and the late filing penalty of £100 where the taxpayer failed to submit their tax return on time,) as a penalty for those who fail to pay.

HMRC will send a notice to the taxpayer advising them that a surcharge has been imposed. Interest is charged on any surcharge paid late and will run from the end of the 30 day payment period until payment.

Can the taxpayer appeal the surcharge?

A taxpayer may wish to appeal against a surcharge where they have a 'reasonable excuse' for not having paid the tax on time. HMRC's internal staff manuals provide details of what may be considered a reasonable excuse, which includes: payment lost in the post; payment dishonoured due to a bank error; serious illness; and bereavement. Examples of what HMRC does not consider a reasonable excuse include: shortage of funds; a cheque made out incorrectly; tax return not sent in; pressure of work; failure by a professional adviser; not knowing how much to pay; and absence of reminders from HMRC.

Where there is a reasonable excuse, this must have existed throughout the whole of the default period and therefore the payment should be made promptly once the reasonable excuse ends.

A taxpayer has 30 days from the issue date of the notice within which to make such an appeal against the surcharge. In practice HMRC allows the taxpayer 35 days to appeal.

What if the taxpayer has insufficient funds with which to pay their tax liability?

If the taxpayer has insufficient funds with which to pay any outstanding tax liability, then surcharges may be avoided if they contact HMRC to make 'payment arrangements' before the surcharge becomes due. Full guidance on payment arrangements can be found on the HMRC website. Payment arrangements could include deferring payment or paying the liability by instalments but HMRC may require details of the taxpayer's financial circumstances, such as details of income, savings, spending and other assets before they agree any arrangement. Although such an arrangement may mitigate penalties and surcharges, interest shall continue to accrue on the tax unpaid.

How can you pay your liability?

You can pay your tax liability at your bank or post office, by post, by setting up a direct debit or by paying online using your debit card via the HMRC website. Full details of payment methods can be found on the HMRC website. It is possible to make a payment via credit card, however a non refundable transaction fee of 1.25% will be added to the tax paid.

Sheena Hay, Senior Tax Manager at Grant Thornton says: "In the current economic climate many individuals may be having difficulties meeting their liabilities. The surcharge due on 28 February on any unpaid tax is a tax geared penalty, which has the potential to give rise to a substantial charge for some individuals, adding further pressure to those already struggling. Those individuals who are unable to meet their liabilities should seek assistance in order to mitigate any potential penalties and surcharges."

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