Hilary Osborne
Wednesday June 22, 2005

Taxpayers who file their self-assessment forms late could face increased penalties as the taxman attempts to cut the amount of outstanding income tax.

Last year £1.1bn in income tax was owed from 1.1m overdue tax returns.

In a report on HM Revenue and Customs, the department responsible for collecting tax, the National Audit Office (NAO), said there had been a fall in the number of people filing their returns late.

Just over 90% filed their returns by the end of January 2004 and 2005. However, the NAO said the department still had some way to go if it was to hit its target of 93% by January 2008.

To reach its target, the Revenue is focusing on the groups that have the worst track record on filing their returns on time. These include young males, those new to filing tax returns, those in the construction industry scheme and taxpayers in some parts of London.

East London recorded the largest number of late payers in the UK, with 24% of taxpayers filing their returns after the deadline. At the other end of the scale was Orkney, where just 5% missed the deadline.

The department is also simplifying tax forms and guidance and reviewing the way it penalises late filers. This, said the NAO, was "an opportunity to improve the effectiveness of the penalty regime". Currently, penalties are limited by law to £100 or the amount of tax owed, whichever is lower.

In some countries, it said, penalties for late filing are a percentage of the tax owed or are based on the taxpayer's take-home pay, based on the previous year's return until the late return is filed.

"The latter would be particularly appropriate for wealthy, late or non filers to whom a £100 penalty may have no deterrent impact," the NAO suggested.

The department could also make more of its power to apply daily penalties of up to £60. The NAO said there were "significant numbers" of people with two or more outstanding returns who have not yet had daily penalties imposed.

Awareness of penalties among taxpayers is low - research for the Revenue found that only one-third of taxpayers knew they could face daily charges for late filing.

The NAO's report also revealed that many taxpayers could be paying the wrong amount of tax. It said in the 2003/04 tax year, just 71% of taxpayers were given the right tax code, while two million coding errors were made.

It said improving on this performance would be essential to the success of plans to scrap self-assessment for one million people with very simple financial affairs.

The head of the National Audit Office, Sir John Bourn, said today: "The changes being made by HM Revenue and Customs to simplify income tax self-assessment returns should ease the burden for many taxpayers in completing their returns and reduce costs for the department.

"It is essential that these changes go hand in hand with more accurate processing of people's tax affairs by the department. No less important is that those who persistently fail to submit their tax returns be brought to book."