Scandal of thousands of £100 tax penalties paid in error. One in five taxpayers pay £100 or more for filing late tax returns when they don’t owe the taxman a penny in fines

The self-assessment clock is ticking now – 2 million taxpayers have to the end of October to file a paper tax return and hundreds of thousands of them will pick up a £100 fine for late submission.

Another 4 million taxpayers have until the end of January to file their self-assessment online.

Every year 1.3 million people pay £100 million to HM Revenue and Customs for filing their tax returns late.

The truth is HMRC does not have the power to fine thousands of taxpayers – but they pay up anyway without realising they can appeal the penalty.

Making the taxman play by the rules is just one way good tax advisers can save their clients money – and this scandalous scam that raises millions highlights how ‘self-accountants’ are misled over their rights by HMRC.

The self-assessment penalty is a carrot and stick process.

HMRC sends out letters to taxpayers demanding they file a tax return – this year paper returns have to reach tax offices on or before October 31 and online filings have a deadline of on or before January 31, 2011.

Taxpayers can claim their late filing penalty back

HMRC checks returns received against returns requested and churns out automatic fines to the missing million regardless of the taxpayer’s circumstances.

If the self-assessment return is not received on time, an automatic £100 fine is issued. Other fines and penalties can apply if the return is more than 28 days late.

But the taxman does let on that the fines are only due if the taxpayer has £100 or more in tax to pay – if the return is for a refund or tax due of less than £100, the taxpayer can appeal the penalty and the fine will be written off by HMRC.

Some taxpayers can also appeal late-filing penalties under a ‘special circumstances’ rule that covers a wide range of personal circumstances, like serious illness.

Because HMRC presumes a taxpayer guilty regardless, it’s up to the taxpayer to appeal the penalty and offer up an explanation of why the return was late.

The latest figures show HMRC picked up 15,083 appeals in nine months from taxpayers claiming they should not have been fined and cancelled 7,691 (53%) of them.

These claims are a drop in the ocean of the real number of taxpayers who could have appealed their penalties.

In many cases, it’s not too late for a taxpayer to get their money back for paying a fine they did not owe in the last tax year, so anyone who had a tax refund or owed less than £100 who paid up should check out their right of appeal.

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