Time for a penalty shoot out

Last year, the Inland Revenue threatened nearly 823,000 people with the £100 penalty for late payment of tax. So why, when it overcharges you tax, is it so slow to return the cash and give such a paltry rate of interest?

If you overpay - even if it is the Revenue's fault - you will only collect interest at a mere 2.5% on the money: massively different from that 6.5% the taxman levies on taxpayers' missing funds.

Problems are most likely to arise if you are self-employed - Schedule D to the trade - and so do not have Whitehall's invisible hand taking funds from your account via Pay As You Earn.

First comes sending in details of your tax return. That has to reach your tax office by the January 31 after the end of the tax year. If you miss the deadline, even by a few days, your tax office can levy a flat £100 penalty.

If you pay the tax itself more than 28 days late, there will be interest at 6.5%, though that will not apply if you have a "reasonable excuse". Examples in Inland Revenue brochures imply that the rules are tough.

Fire or floods in your local post office will save you from penalties and so will major heart attacks, strokes or any serious mental or life-threatening illness, for instance.

So how does the government justify its heavy-handed penalties, compared with the low interest rates it offers if it has made a mistake? "The rate we charge to taxpayers is designed to make them pay up in time," says Shell Makwana of the Inland Revenue.

"The 2.5% we pay on overpayments is in line with the average returns the high street banks make on deposits. If we raised the rate on overpaid tax, it might encourage people to use us as a bank to collect higher returns than they could get elsewhere."

Accountants find that logic pretty dubious. "The two rates of interest should be the same," says Carolyn Steppler of leading accountants KPMG. "Both parties - government or taxpayer - lose the use of the money because it has not gone to the right place. So the recompense should be identical."

Other specialists claim that the idea people would use the Inland Revenue as a bank to get higher interest on "deposits" is absurd.

"There are endless difficulties and delays in getting money from them, and offices can be distinctly inefficient," says Mike Warburton of Grant Thornton. "They'd be useless banks.

"Whitehall is always talking about the need for a 'level playing field' in other contexts. In this case, there is at least a 30% tilt in the pitch in the government's favour, and the customer cannot win."

The government is also taking a tough line on underpayment of national insurance - even if the underpayment was a result of its own com puter error. Last week, the Inland Revenue announced that its computer errors had ensured that the 175,000 people who took the government's own advice to opt out of Serps, had been paid the rebates to which they were entitled twice over. What is more, they received the extra money for four years.

Now the Revenue wants the money back - even if it apologised last week, and is "considering compensation" to limit the sums involved. Officially, the money due is not tax but a national insurance repayment. But Mr Warburton believes Whitehall should write off the £82m involved.

"It beggars belief that tax offices did not notice what was happening on these rebates for almost five years," he says. "There is an extra statutory concession which allows the Revenue to forget about tax bills, where there have been serious and repeated errors. Technically, we are talking about rebates in this case, but the principle should be the same.

"Anyone investing the rebate in a pension fund will find its value has fallen sharply with the drop in share prices, anyway. So they will lose dramatically if the Inland Revenue wants the original money back in full."

Whatever happens in the rebates, it is likely to be the same story that different rules cover taxpayers' and tax offices' mistakes. Critics say that the Inland Revenue takes a considerably more lenient outlook on its own errors than to those by outsiders.

But don't be tempted to evade tax because of your anger - the penalties can be dramatic. The tax authorities can go back seven years - and make you pay up to twice the tax they decide you owe, plus interest. The financial penalties are bad enough, but the prospect of having investigators combing through your figures, line by line, is still more appalling, even if you have accountants to ward off the worst horrors.