Tax on interest not received because of early closure penalty

masonic

Olinda99 said:

can someone give an example of a non-ISA account where early closure is permitted subject to a penalty ?

Lloyds bank 2 year fixed rate saver would be one example. I understand the high street banks often permit early closure with penalty to their non-ISA fixes. Most top paying savings institutions do not.

Olinda99

Thanks for that - unusual to allow closure of a fixed rate bond. 

Reed_Richards

masonic said:

If the fee was indeed 90 days' interest, then it wouldn't be possible to get back less than you invested.

Some financial institutions have conditions that make that true.  E.g. Natwest https://www.natwest.com/savings/isa-overview/fixed-isa.html

The Early Closure Charge will be the lower of the amount of interest earned on your account or 90 days’ interest.

Possibly the details T&Cs make it clear that the Early Closure Charge is a fee but the explanation here is ambiguous.  But again this is an ISA where fee or reduced interest is just an academic distinction.

masonic

Reed_Richards said:

masonic said:

If the fee was indeed 90 days' interest, then it wouldn't be possible to get back less than you invested.

Some financial institutions have conditions that make that true.  E.g. Natwest https://www.natwest.com/savings/isa-overview/fixed-isa.html

The Early Closure Charge will be the lower of the amount of interest earned on your account or 90 days’ interest.

Possibly the details T&Cs make it clear that the Early Closure Charge is a fee but the explanation here is ambiguous.  But again this is an ISA where fee or reduced interest is just an academic distinction.

I think you'd need to squint quite a bit to see the "Early Closure Charge" as a reduction in interest rather than a charge offset by interest, even if the last few words could have been clearer.

boingy

masonic said:

boingy said:

masonic said:

boingy said:

eskbanker said:

boingy said:

I'd have absolutely no qualms about declaring the actual amount I received on a tax return (not that I do tax returns any more). Let HMRC challenge it if they want to.

Your choice, but few would recommend knowingly making false declarations to government agencies, regardless of flimsy rationalisations....

It's all part of the game. Accountants all over the land routinely test the boundaries and usually get away with it. If HMRC disagree with your self-assessment they point out the errors and you pay the difference. Despite what they like you to think there is no penalty or fine or jail sentence at that point. That only happens if you continue to argue or delay making the extra payment. The truth is that they rarely challenge this stuff because they don't have the staff. Mostly they are just happy that you have submitted your self-assessment form on time. 

If you underpay tax through not declaring all of your income, then HMRC is entitled to charge 8% interest on the underpayment from the date it would have been due to the date you pay it. They can also add a penalty charge. It is not simply a case of paying the difference.

You may or may not be correct that you have a reasonable chance of getting away with low level tax fraud due to them not having the resources to go after everyone, but this goes beyond merely testing the boundaries into discussions that cannot take place on this forum.

Taxation is not black and white and the written rules are not the end of the story. I have decades of experience of running businesses, being self employed and employing accountants. HMRC are indeed entitled to charge interest, apply penalties etc but they don't.

I'm an engineer and I think there should be only one way to pay tax but it simply is not true and it's not fraud. It's being tax efficient. I doubt you'd find a tax specialist who will advise otherwise. I don't expect you to agree because you have already decided that the line is immovable but it really isn't. Have a great day. 

I don't think you can seriously expect any reasonable person to believe that every tax specialist will advise that under-reporting your interest in this manner is safe to do. Even if so, many have received tax advice that has led to them being pursued for tax evasion (rightly). So to the extent that some tax advisers operate in grey areas and take risks with their clients' money, I can believe what you are saying. One may choose their tax adviser on the basis of their own proclivities. 

Personally, the tiny difference in tax is simply not worth it to risk having the hassle of dealing with an investigation, even if I were temped to try it on, which I am not. We'll just have to agree to disagree that knowingly submitting figures generated contrary to settled law isn't fraud.

I can tell you haven't had much experience of dealing with HMRC. Whenever there is any doubt, and there is in this case, all tax specialists and most accountants will err in favour of the client and be prepared to negotiate from there. It's not under-reporting. It's not fraud. It's not tax evasion. It's reality. The rules really are not as not black and white as you think but, yes, we can agree to disagree. I've probably derailed this thread enough. 

masonic

boingy said:

masonic said:

boingy said:

masonic said:

boingy said:

eskbanker said:

boingy said:

I'd have absolutely no qualms about declaring the actual amount I received on a tax return (not that I do tax returns any more). Let HMRC challenge it if they want to.

Your choice, but few would recommend knowingly making false declarations to government agencies, regardless of flimsy rationalisations....

It's all part of the game. Accountants all over the land routinely test the boundaries and usually get away with it. If HMRC disagree with your self-assessment they point out the errors and you pay the difference. Despite what they like you to think there is no penalty or fine or jail sentence at that point. That only happens if you continue to argue or delay making the extra payment. The truth is that they rarely challenge this stuff because they don't have the staff. Mostly they are just happy that you have submitted your self-assessment form on time. 

If you underpay tax through not declaring all of your income, then HMRC is entitled to charge 8% interest on the underpayment from the date it would have been due to the date you pay it. They can also add a penalty charge. It is not simply a case of paying the difference.

You may or may not be correct that you have a reasonable chance of getting away with low level tax fraud due to them not having the resources to go after everyone, but this goes beyond merely testing the boundaries into discussions that cannot take place on this forum.

Taxation is not black and white and the written rules are not the end of the story. I have decades of experience of running businesses, being self employed and employing accountants. HMRC are indeed entitled to charge interest, apply penalties etc but they don't.

I'm an engineer and I think there should be only one way to pay tax but it simply is not true and it's not fraud. It's being tax efficient. I doubt you'd find a tax specialist who will advise otherwise. I don't expect you to agree because you have already decided that the line is immovable but it really isn't. Have a great day. 

I don't think you can seriously expect any reasonable person to believe that every tax specialist will advise that under-reporting your interest in this manner is safe to do. Even if so, many have received tax advice that has led to them being pursued for tax evasion (rightly). So to the extent that some tax advisers operate in grey areas and take risks with their clients' money, I can believe what you are saying. One may choose their tax adviser on the basis of their own proclivities. 

Personally, the tiny difference in tax is simply not worth it to risk having the hassle of dealing with an investigation, even if I were temped to try it on, which I am not. We'll just have to agree to disagree that knowingly submitting figures generated contrary to settled law isn't fraud.

I can tell you haven't had much experience of dealing with HMRC. Whenever there is any doubt, and there is in this case, all tax specialists and most accountants will err in favour of the client and be prepared to negotiate from there. It's not under-reporting. It's not fraud. It's not tax evasion. It's reality. The rules really are not as not black and white as you think but, yes, we can agree to disagree. I've probably derailed this thread enough. 

There is no doubt in this case, it's been taken to court and settled decades ago. Plus you have the bank reporting the correct amount of interest directly to HMRC. Even in cases where there was genuine doubt on the part of the submitter, being proven wrong still comes with at least the 8% interest and possibility of a further penalty described above. Experiences in which one has gotten away with other things may embolden an individual, but nobody knows when their luck will run out.

spider42

boingy said:
I can tell you haven't had much experience of dealing with HMRC. Whenever there is any doubt, and there is in this case, all tax specialists and most accountants will err in favour of the client and be prepared to negotiate from there. It's not under-reporting. It's not fraud. It's not tax evasion. It's reality. The rules really are not as not black and white as you think but, yes, we can agree to disagree. I've probably derailed this thread enough. 

I can tell you that I have had decades of experience in dealing with HMRC. I have been a Chartered Accountant and a Chartered Tax Adviser for about 30 years. I agree that if there is some doubt, then you would go for the best position for the client, and when doing this you would also need to make full disclosure of the position you have taken in the white space on the tax return, in order to protect against discovery assessments. However, there is absolutely no doubt in this case. If you are paid interest, and a separate penalty is deducted, it is completely beyond any doubt whatsoever that the taxable amount is the full amount of interest, without deduction of the penalty.

If you decide to deduct the penalty charge for the amount of interest when you declare the interest, then is absolutely is under reporting. It is is fraud. It is tax evasion. The rules in this case (although not in every case) are absolutely black and white.

If a client of mine insisted on deducting a penalty charge from their interest received, and this resulted in a tax reduction, then I would be required by law to file a money laundering report (no matter how small the amount), and would have no hesitation in doing so. You, as the client, would be blissfully unaware this had happened, as the accountant is not allowed to 'tip off' the client that this has been done. Sometimes HMRC will act on these reports, and sometimes they don't.

And as to your earlier point that HMRC don't charge penalties and interest, they absolutely do.

Regarding your earlier point "The truth is that they rarely challenge this stuff because they don't have the staff.". This is true, but that doesn't make it right. It is no different from saying "I'll commit a burglary, because the police are so overworked that they'll never catch me and I'll probably get away with it."

Reed_Richards

spider42 said:

If you decide to deduct the penalty charge for the amount of interest when you declare the interest, then is absolutely is under reporting. It is is fraud. It is tax evasion. The rules in this case (although not in every case) are absolutely black and white.

I have closed many a savings account without ever getting a tax certificate at the end and have had to go online to look up the final balance and interest on closure.  Most of the financial institutions I have used don't immediately delete the details of the closed account but some do, or did.  I don't recall that I ever encountered this particular situation of an early closure with penalty (for a non-ISA account) which may be just as well because hitherto I always thought that this was a loss-of-interest penalty.  So I would possibly have wrongly declared the interest, directly in my case but to my accountant or tax advisor if I had one.  Unwitting under reporting; a good thing it never happened.      

Kim_13

Wouldn’t it depend on how the provider themselves accounted for the penalty? 

I have never paid a penalty so cannot say for certain that providers do vary but in relation to other aspects of account operation, we do get posts here along the lines of provider A does X and provider B does Y. 

Theoretically there would be the following possibilities: 

a) There is already accrued interest in the account and the provider takes the penalty from this before adding any final amount due and closing the account. You would pay tax on the penalty money as it was already reported as interest before you took the penalty. 

b) Interest has so far not been applied to the account and the provider takes the penalty before applying what is left as interest. You don’t pay tax on the penalty money, as HRMC never sees the extra interest. They don’t know what rate interest is paid at after all, only how much the provider pays you. 

c) Interest hasn’t yet been applied to the account but the entries that are made on the account are for interest being credited in full and the penalty being deducted after that. You would pay tax on penalty money, as it was visible as interest first.

A and C seem more likely to me. A might also happen with the as yet uncredited interested being retained for the penalty and the remainder taken from the account balance, which would reduce the tax slightly if it was handled as in scenario B rather than C. 

Of course most accounts that allow early access/closure in exchange for a penalty are ISAs so there would be no tax to pay unless you had subscribed to a Fixed Rate ISA which was later deemed invalid. 

talexuser

I had already acknowledged the legal position in my first post but will make a last two points. In all of this I repeatedly and politely asked the Build Soc to just add one line to the interest statement declared to HMRC simply saying a penalty of X was applied, this obvious step would have solved the whole thing, but nowadays a big corporation does not pay any attention to a single customer.

Secondly on the personal issue of HMRC declaration, I calculate the penalty difference not declared represented 0.012% of interest declaration and 0.0006% of my total tax bill. If HMRC want to persue me they are very welcome, while we remain the money laundering capital of the world.