Late payment of tax or filing returns may incur a penalty? How to apply for a tax filing extension?

Every tax season, many taxpayers worry: if they fail to pay taxes or submit their tax return on time, what consequences will there be?

This time, 10Life will set out the common consequences of late tax payment, including possible fines and surcharges, and explain how to apply for an extension. It will also cover how to submit a letter of appeal to the Inland Revenue Department in special circumstances, in the hope of securing a reduction or waiver. This gives everyone a clearer way to respond when facing tax pressures. 

The Inland Revenue Ordinance stipulates that tax must be paid on or before the due date stated in the notice of assessment. Even if payment is overdue by one day, it is legally regarded as “late payment of tax” and is therefore considered tax in arrears.

Late Tax Payment Penalties

Under Hong Kong’s Inland Revenue Ordinance, if a taxpayer fails to pay tax by the specified deadline, the Inland Revenue Department will impose an additional charge as a penalty.

• For the first late tax payment, an additional charge of 5% of the amount of tax in default will be imposed
• If the outstanding tax remains unpaid for more than six months, the Inland Revenue Department may impose a further additional charge of up to 10% on the outstanding amount (including the 5% additional charge), meaning the total liability may be as high as approximately 15% of the original tax due

Civil Proceedings

Where a taxpayer has been in prolonged arrears and has not communicated with the Inland Revenue Department, the Department may take more severe legal action. The Inland Revenue Department is empowered to apply to the District Court for civil proceedings to recover the debt through legal process. Once civil litigation commences, the taxpayer will, in addition to repaying the original tax due, also have to bear extra costs:

• Court fees
• Department of Justice costs
• Interest accrued during the period of default

This not only increases the financial burden; the resulting civil judgment or bankruptcy record will usually have an adverse effect on an individual’s credit rating, and may also make it more difficult to apply for loans and credit cards in future.

Travel Restriction

If a taxpayer intends to leave Hong Kong without paying the tax due, the Inland Revenue Department may impose travel restrictions. This is one of the more stringent tax recovery measures and is generally used in cases involving a substantial amount of tax in arrears, or where the Department considers there to be a risk of tax evasion. The Inland Revenue Department may apply to the court for a travel restriction order. Common situations include:

• Tax arrears reaching a certain amount
• The Inland Revenue Department considers that the taxpayer may be at risk of evading payment
• No response or repayment arrangement is made after repeated demands for payment

Once placed on the travel restriction list, the taxpayer will not be able to leave Hong Kong through customs until all outstanding tax and related fees have been paid in full.

Recovery of Tax from Relevant Third Parties

The Inland Revenue Department has broad tax recovery powers and may issue tax recovery notices to third parties associated with the taxpayer. This measure is designed to ensure that tax can be recovered successfully, even if the taxpayer is unable to repay it. It may affect the relationship between the taxpayer and the third party, and may even cause employers or business partners to have concerns about the taxpayer’s financial position. Common third parties who may be notified include:

• The taxpayer’s employer (deducted directly from salary)
• Banks (deducted from account deposits)
• Tenants (deducted from rent)
• Debtors or customers (deducted from amounts payable)

Applying for deferment of provisional tax

If a taxpayer expects a substantial reduction in income, they may apply for deferment of provisional tax before the tax payment deadline. The key is to make an application to the Inland Revenue Department in advance and explain the reasons, rather than waiting until after the deadline has passed. In general, the following circumstances are more likely to be considered by the Inland Revenue Department:

• The estimated net assessable income / assessable profits / net rent for the year of assessment is less than 90% of the corresponding amount for the previous year.
• The taxpayer is eligible for additional tax deductions or allowances (for example, child allowance, dependent parent allowance, self-education expenses, mortgage interest, etc.), but these have not been reflected in the provisional tax assessment.
• An objection or appeal has been lodged against the assessment for the previous year
• Unemployment, cessation of business, or sale of / no longer holding a property generating rental income during the relevant year

When applying, Form IR1121 must be completed and submitted no later than 28 days before the deadline for payment of provisional tax, or within 14 days after the issue of the demand note, whichever is later.  

Applying to pay tax by instalments

If a taxpayer is unable to settle the tax bill on time due to financial hardship, they may apply to the Inland Revenue Department to pay by instalments. This arrangement can ease the cash flow pressure of making a one-off payment. Applicants must explain the reasons for their financial hardship and provide supporting evidence. Please note the following when applying for instalment payments:

• The application must be submitted in writing using the prescribed form IR1360
• Supporting documents are required, such as bank statements and details of income and expenditure
• Business owners must also submit management accounts for the recent months
• Applications may be made by post, fax, or in person at the Tax Centre  

The Inland Revenue Department will assess the application based on the applicant’s financial situation. If there is a significant change in financial circumstances after approval, the Department must be notified proactively.  

In addition to applying for deferred tax payment, taxpayers can also make good use of tax deduction items to reduce their tax payable at source. In recent years, the Government has introduced a number of tax deduction tools related to healthcare and retirement, enabling members of the public to enjoy tax benefits while planning their long-term finances.

Common items eligible for tax deduction include:  

• Tax-deductible annuity (Qualifying Deferred Annuity Premiums): the maximum annual tax deduction is HK$60,000
• Voluntary Health Insurance Scheme premiums: the maximum annual tax deduction is HK$8,000 (per insured person)
• Mandatory Provident Fund voluntary contributions: the maximum annual tax deduction is HK$60,000 per year (shared with tax-deductible annuities. If the HK$60,000 tax deduction limit has already been fully used for tax-deductible annuities, MPF voluntary contributions will not be deductible) 

Please note that tax-deductible annuities and TVC share the HK$60,000 tax deduction cap. For example, if the tax deduction limit for tax-deductible annuities has already been fully utilised, the TVC portion can no longer be claimed as a tax deduction.

These deduction items can directly reduce assessable income, thereby lowering the actual tax payable. Taxpayers are advised to plan early within the tax year, ensure they meet the relevant eligibility requirements, and make full use of the tax deduction allowances.  

Although late filing of a tax return and late payment of tax are different in nature, both may lead to serious consequences. Under the Inland Revenue Ordinance, once a taxpayer receives a tax return, it must be filed by the specified deadline; even if there is ultimately no taxable income for that year, it should not be ignored and left unreported.

If the tax return is not submitted on time, the Inland Revenue Department may take the following actions:

• Court fine: If the case is brought before the court and the taxpayer is convicted, the court may impose a fine of up to HK$10,000, plus an additional penalty for the underpaid tax (up to three times the amount of that tax portion).
• Administrative additional tax: Without prosecution, the Inland Revenue Department may also levy “additional tax” under the relevant provisions of the Inland Revenue Ordinance. The amount can be as high as three times the underpaid tax, depending on the number of late filings, the amount involved, and the circumstances of the case.
• Risk of a criminal record: If the case involves a serious breach and results in a criminal prosecution and conviction, the conviction will generally form part of a criminal record and may adversely affect future job applications and credit applications.

If a taxpayer has not returned the tax return for an extended period, the Inland Revenue Department is entitled to make an “estimated assessment” based on the available information, i.e. to estimate the tax payable in the absence of complete information.

If a taxpayer repeatedly files tax returns late or is frequently delayed, the Inland Revenue Department will generally regard the case as higher risk and may impose stricter penalties in future, such as charging a higher percentage of additional tax, or even considering prosecution.  

Basis of the Inland Revenue Department’s discretion

Even if tax has already become overdue, taxpayers may still try to explain the situation to the Inland Revenue Department and apply for a waiver or reduction of surcharges or additional tax. In handling late tax payments, late filing of tax returns and related penalties, the Inland Revenue Department has a certain degree of discretion, and will decide whether to grant relief or reduce the penalty based on the actual circumstances of each case.

When exercising its discretion, the Inland Revenue Department will generally consider a number of factors, including:

• whether there is a reasonable explanation for the delay (for example, serious illness, accidents, postal or system issues)
• whether the taxpayer has always maintained a good record of filing returns and paying tax
• whether the taxpayer took the initiative to contact the Inland Revenue Department and rectify the matter as soon as the issue was discovered
• whether there is any element of deliberate evasion of tax obligations or concealment of income in the case

The usual approach is to submit an appeal letter in writing

If a surcharge notice or an additional tax/penalty notice has already been received, and the taxpayer wishes to seek a waiver, the usual approach is to explain the situation to the Inland Revenue Department in writing as soon as possible. Applications may be submitted by post, email or through eTAX; the key is to submit them clearly, in full and early.

The appeal letter should ideally include:

• basic personal details: name, tax file number, contact telephone number and correspondence address
• reasons for the delay or breach: set out the timeline of events and underlying reasons in a factual and detailed manner
• remedial action already taken: for example, the tax return has been filed, and the outstanding amount has been paid in full or in part
• future commitment: explain how you will ensure tax returns are filed and taxes are paid on time in future (for example, setting reminders or appointing a professional to handle matters)
• a clear request: explicitly state that you hope the Inland Revenue Department will consider waiving or cancelling the relevant surcharge/additional tax, and attach supporting documents (such as medical certificates, hospitalisation records and postal proof) to strengthen your case

Although the law does not strictly require an “appeal letter”, if you want the Inland Revenue Department to exercise discretion in your case, you will generally need to submit a written explanation and evidence in full.

An appeal is not necessarily granted

It is worth noting that even if an appeal letter has been submitted and an explanation provided, the penalty or surcharge will not necessarily be waived. The Inland Revenue Department will make an independent judgement based on factors such as the seriousness of each case, the length of the delay and the amount involved.

In general, the following situations are more likely to be considered for more lenient treatment:

• a first-time delay or a relatively minor breach
• a reasonable reason for the delay, with supporting documentary evidence
• the taxpayer proactively contacts the Inland Revenue Department and files the tax return or settles the outstanding amount within a short period
• an otherwise good record of filing returns and paying tax, with no signs of deliberate non-payment or tax evasion

By contrast, if a taxpayer repeatedly files tax returns late, has long-term tax arrears, or is unable to provide any credible reason, the chances of the appeal being rejected will increase significantly. They may even face a higher additional tax or be considered for prosecution. Therefore, the best approach is always to avoid lateness as far as possible. If difficulties are anticipated, one should discuss arrangements with the Inland Revenue Department or a professional as early as possible, rather than only trying to remedy the situation after receiving a penalty notice.

This English version of this article has been generated by machine translation powered by AI. It is provided solely for reference purposes. In the event of any discrepancy or inconsistency between this translation and the original Chinese version, the Chinese version shall prevail.