If Rachel Reeves Wants A Simple, Low-Cost Yet Progressive Tax Reform, This Is It
5 min read
One tax reform should be easy for Rachel Reeves, writes Dan Neidle, who says an obscure technical change has become an ‘automated wrecking ball’ for hundreds of thousands of vulnerable people.
Andrea* struggled for years with severe mental‑health problems. She didn’t work and rarely left the house. Then Andrea started receiving a series of demands for payment. First, a brown envelope demanding £100. Next, a series of additional demands – after a year, they said she owed £1,600. After a few years, £10,000. She didn’t understand what the demands were and had no prospect of paying them.
The demands were from HMRC.
Andrea never owed any tax – she had no earnings at all. But for some reason, HMRC’s computer had decided she should complete a tax return. When she didn’t, she received an automatic £100 late filing penalty. The penalties then kept building up – entirely automatically, and without any human review.
Andrea’s case is not unusual. I’ve received hundreds of emails and letters from people like Andrea. None earned enough to pay tax. All had received a demand that they complete a self-assessment form, which they’d ignored.
Sometimes, as in Andrea’s case, HMRC’s correspondence is ignored because of mental illness. Sometimes it’s physical illness – we’ve heard from severely disabled people and people with terminal cancer. Sometimes it’s just people living difficult and chaotic lives. I heard from one person who became bankrupt as a result, and several who contemplated suicide.
But the truly shocking thing is how widespread the problem is. We used a series of Freedom of Information Act requests to discover how many HMRC penalties had been charged to people who earn less than the £12,570 personal allowance and therefore shouldn’t pay any tax.
The answer is 600,000 penalties over five years.
Far more penalties are charged to people in the bottom three income deciles (who mostly don’t earn enough to pay tax) than in the top three income deciles. People who owe no tax are statistically the most likely to be fined.
How can this happen?
It wasn’t always like this. Before 2011, penalties were capped at the tax due. So, someone who received a penalty would have that penalty cancelled if they then filed a tax return showing no tax was due.
HMRC pushed for a change in law to encourage more people to file. The Low Incomes Tax Reform Group warned about the possible consequences, but were ignored. Since then, the computerisation of penalties has meant that this obscure technical change has become an automated wrecking ball in the lives of hundreds of thousands of vulnerable people.
Why are they being asked to complete a tax return?
Why is someone who doesn’t earn much, or any, income being asked to complete a self-assessment form? There are several possible reasons.
One is HMRC error. Another is that they earned more than £12,570 in a previous year. And another is that they have over £1,000 of self-employment income (or did have in a previous year). Even this small amount of income is enough to trigger the requirement to complete a self-assessment return.
A response I sometimes hear is that it’s everyone’s responsibility to file their tax return, and if they don’t, then the consequences are on them. That is fair to judge a filing failure by a healthy middle-class professional. It’s not a realistic answer to the struggles of people like Andrea.
Another response is that penalties can be appealed. And, in addition to those 600,000 penalties charged, another 300,000 were charged but successfully appealed. This doesn’t demonstrate that the system is working. It means that someone with limited time and resources has had the time and stress of navigating what is to many a complex and difficult administrative system. Andrea’s penalty was successfully appealed by the amazing charity TaxAid – but they can help only a relatively small number of people.
Penalty reform – but not for the poor
The way penalties work is about to be reformed. Nobody will receive a penalty for the first missed deadline, and late filing penalties will be capped at £200. The new regime will phase in: applying to taxpayers earning £50,000 from April 2026, and eventually to those earning £20,000 from April 2028. There is no timescale for implementation for those with income below £20,000.
This isn’t intentional malevolence, but a technical consequence of tying the new penalty rules into the “Making Tax Digital” programme, which is highly complex and has become seriously delayed.
The consequences, however, are hard to defend. For the foreseeable future, a millionaire landlord filing his tax return late won’t pay a penalty; but his low-income tenant will continue to pay up to £1,600.
The solution
People like Andrea can’t wait until 2029. The Low Incomes Tax Reform Group asked HMRC last year to find ways of implementing penalty reform earlier, for example, by using its discretionary powers to waive penalties for people missing a deadline for the first time.
I agree. But the government should go further and restore the law to how it was before 2011. Nobody should face a late filing penalty when they don’t owe any tax. This is one tax reform that should be easy for any Labour chancellor. The cost would be less than £6m per year.
No government should be taking £6m from the poorest in society, and a Labour government, least of all.
*not her real name
