I understand from reading the letter, that they are not accepting the appeal from before.
Based on the information provided previously, you still should have had time to file and incurred a lessor base tax. However in so doing, if they accepted the return, they still did not abate the penalties and interest for later filing.
This sometimes occurs. Even in situations where a person may have refund or owe no additional tax, they can incur a penalty simply because estimated taxes were not paid timely. In th letter they are stating that in their opinion, the reason they are not abating the penalties and interest is because, again in their opinion, you did not exercise due diligence in this matter. In essence, they are saying that you should have known of the requirement and exercised your responsibilities voluntarily before hearing from them.
They tend to take a hard nosed view when dealing with persons from overseas. This is because of the prevalence of tax avoidance by U.S. expats and non-resident aliens.
I believe you were confused about the rules and legitimately did not think in your circumstances you would have to pay the tax. But to get that point across to the IRS you may have to file a more formal appeal using a tax attorney.
the penalties and interest are significant and are worth while fighting.
So while you may have reduced the basic tax due, they are not abating interest and penalties; then in their letter they are allowing you to yet appeal again. In this letter, they are also implying that you should use a tax attorney to file your appeal for you. (or other person authorized to practice law before the IRS...enrolled agent or CPA.). I recommend a tax attorney.
In the mean time, they are saying you need to pay the penalties, and if they later determine you were not required to pay the penalties and interest, they will automatically refund them to you; or if on appeal you are determined to be due a refund, or if they decide to abate them based on the facts, you will be refunded them. If you do not pay them, then they will continue to accrue yet additional penalties and interest.
So at this point, I in the interest of what we call, "do no harm"; I would have to recommend you pay the interest and penalties; and retain a tax attorney to help you get them reduced or rebated in the entirety.
My first recommendation for a tax attorney in the UK, who may able to help would be PWC.
I am trying to think of something you could have said in the original appeal that would have helped, but I can not think of anything. It would have been nice for you to have had those financial statements; but even those would not explain away the issue of not meeting prior year filing requirements.
If an employer were to write a letter confirming you were not told of your filing requirements, that would be helpful, but most employers would not open themselves up to that kind of admission. (their attorney's would advise them not to make such a statement).
A tax attorney may be able to skillfully make such an argument in your behalf. Third party influence of attorney's arguing for you, using legal precedence and knowledgeably citing law can sometimes be more effective.
I am surprised they did not abate the penalties and interest because you were still within the 3 year window for filing the return, and your return was a proper return.