Tax penalties

Updated on 10 May 2019

On this page, we look at the main types of penalty that HM Revenue & Customs (HMRC) might charge you. If you pay a penalty late, HMRC will also charge interest on the penalty. 

What penalties can HMRC charge me?

HMRC can charge you a penalty for various different reasons, if you do not comply with the tax rules. For example:

  • if you pay tax late;
  • if you submit a tax return or other paperwork late;
  • if you fail to tell HMRC about changes that affect your tax liability;
  • if you make an error on a tax return, payment or other paperwork that understates your tax liability or misrepresents your tax liability, unless you took reasonable care.

We look at these different types of penalty in more detail below.

When HMRC issue you with a penalty, they should also give you a Penalty Explanation Letter – this sets out the period over which the penalty has been charged and the type of penalty charged.

Tell HMRC as soon as you become aware of any mistake in your tax affairs. This will minimise any penalty. If you tell HMRC before they start an enquiry, and before they have given you notice that they are to inspect your records, then your penalty will be reduced substantially. Even if an enquiry has started, you will receive a much lower penalty by cooperating in this way.

Back to the top

Late payment penalties

I have been charged interest on my late tax payment. Is there anything I can do?

HMRC charge interest on late tax payments to compensate them for the delay in payment. The interest broadly puts you and HMRC in a similar commercial position to that you would have been in had you paid the tax on time. Interest is charged from the date the payment became due until the date of payment. It is an automatic charge.

If the dates HMRC have used to calculate the interest – the due date of the tax and the date you actually paid – are correct, then there is nothing you can do. If the interest has arisen because there was some kind of HMRC mistake, you should ask HMRC to correct the calculation. Keep a record of how and when you made tax payments in case any such dispute arises. GOV.UK gives more details on how you can make Self Assessment tax payments.

Why do I have to pay a penalty on late payment as well as interest?

Penalties are designed to encourage compliance with the system – this means they have an actual cost for you. You will not be charged a penalty if you have entered and stick to a Time to Pay arrangement with HMRC. You can find out more about Time to Pay on GOV.UK. Late payment penalties for income tax are as follows:

After payment is 30 days late 5% of tax outstanding
5 months after above charge (6 months late) A further 5% of tax outstanding
6 months after above charge (12 months late) A further 5% of tax outstanding


There is a tool on GOV.UK which estimates your penalty for late payments under Self Assessment.

Back to the top

Late submission penalties

There are standard penalties for sending in tax returns late. These apply even if you do not have a tax liability. These are as follows:

  • £100 – applied immediately the form is late;
  • £10 per day – charged once the return is 3 months late for a maximum of 90 days;
  • the higher of £300 or 5% of the tax due – applied if the form is 6 months late; and
  • a further £300 or 5% of the tax due (whichever is higher) – applied if the form is 12 months late.

If you are charged penalties you will receive a letter from HMRC like this:

self-assessment-late-tax-return-form

If you receive a letter like this click on the picture above to find out more about what you are being charged by HMRC and what to do next.

There is a tool on GOV.UK which estimates your penalty for late submissions under Self Assessment.

Back to the top

Failure to notify or late notification penalties

If you do not tell HMRC about changes that affect your liability to tax, you may be charged a penalty, known as a ‘failure to notify’ penalty. For example, you must tell HMRC about a new source of taxable income or a capital gain if you will need to pay tax on them.

The amount of a failure to notify penalty is calculated on the basis of a percentage of potential lost revenue – this means the amount of tax unpaid as a result of the failure to notify. HMRC can reduce the penalty if you tell them about the failure to notify and are cooperative.

We set out in the table the scale of penalty charges.

Reason for failure to notify Type of disclosure Penalty
Reasonable excuse   No penalty
Not deliberate Unprompted 0%-30% within 12 months:
after that 10%-30%
Not deliberate Prompted 0%-30% within 12 months;
after that 20%-30%
Deliberate Unprompted 20%-70%
Deliberate Prompted 35%-70%
Deliberate and concealed Unprompted 30%-100%
Deliberate and concealed Prompted 50%-100%

 

Back to the top

Penalties for errors

HMRC can charge you a penalty if you make an error, for example on a return or other paperwork that you submit to HMRC, which understates or misrepresents your tax liability. If you receive an assessment from HMRC, and it understates your tax liability, you can also face a penalty if you do not tell HMRC. This is known as an ‘inaccuracy penalty’. It is a tax-based penalty, which means it is calculated using the amount of tax you potentially did not pay because of the error.

HMRC will not charge a penalty if you have a reasonable excuse or if the error arose despite you taking reasonable care.

The amount of the penalty depends on:

  • the type of behaviour HMRC think is involved;
  • whether HMRC think you notified them of the error without prompting or not; and
  • a percentage of the potential lost revenue.

What is potential lost revenue?

The potential lost revenue ('tax lost') is generally the amount of tax underpaid (or the amount of tax not now due for repayment to you) as a result of the error. In some cases, though, the lost tax might be more than the actual tax you need to pay. This is because any losses that may now have been disallowed are also penalised.

What are unprompted disclosures?

An unprompted disclosure is where you tell HMRC about an error before they have started any enquiry into your tax affairs and before they have told you that they are going to inspect your records.

How do I minimise my penalty?

The percentage of the potential lost revenue depends partly on the type of behaviour (careless, deliberate, deliberate and concealed), partly on whether your disclosure is prompted or unprompted, and partly on the quality of the disclosure. This means the penalty can be reduced if you:

  • tell HMRC about the error;
  • help HMRC work out how much extra tax is due;
  • give HMRC access to information to enable them to check your figures.

The table sets out the scale of penalty charges.

Type of behaviour Unprompted disclosure Prompted disclosure
  Penalty – percentage of "tax lost"
Careless 0%-30% 15%-30%
Deliberate 20%-70% 35%-70%
Deliberate and concealed 30%-100% 50%-100%

 

How are different types of behaviour defined?

An error is careless if you failed to take reasonable care, but did not purposefully give incorrect information.

For a deliberate error, the burden of proof is quite high. HMRC would have to show that you knew about the obligation and then chose not to comply. As you may imagine this is easier for HMRC to assert if you have omitted income, for example, rather than if you were late notifying them of something.

If you were to make a false entry in your records, then your action would be deliberate. If HMRC then made enquiries about the false entry and you did not immediately confess to the deception, that deliberate action has been concealed. Concealment can also include other actions that cover up the truth, for example creating false documents or deliberately destroying documents.

Note that HMRC have 12 months from the date they establish the amount of tax lost to issue a penalty notice.

Back to the top

What is a reasonable excuse?

If circumstances have prevented you from complying with your obligations, you may be able to avoid a penalty by claiming that you have a ‘reasonable excuse’.

Where you think you have a reasonable excuse, you must provide full details to HMRC. It may be that a combination of reasons, rather than any single reason, together may constitute a reasonable excuse.

If you claim reasonable excuse, it is important that you comply with the obligation in question without further delay, for example, submit a late tax return or pay outstanding tax. This is because the law on reasonable excuse requires you to remedy a default within a reasonable time after the excuse has ended.

For example, if your child was taken seriously ill just before you were due to submit a tax return, then that is likely to be a reasonable excuse for filing it late. But you would then have to submit the form as soon as possible after the situation was resolved.

HMRC normally issue penalty notices automatically, so you must appeal a penalty if you wish to claim reasonable excuse.

HMRC’s list of accepted reasonable excuses is on GOV.UK – these are examples only, and not comprehensive. Do not be put off appealing or claiming reasonable excuse just because your situation does not exactly fit the examples given.

Other examples could include:

  • Problems with online filing. You may have been unable to access the HMRC online system due to lost passwords, etc. If you tried to file, though, and the system failed, you should be able to claim reasonable excuse;
  • Pressure of work. Normally this is not acceptable, but if for example you had a sudden unexpected and significant increase in work, this may be a reasonable excuse;
  • You have an agent and they failed to lodge the return on time due to unforeseen circumstances. Normally this would not be a reasonable excuse, but if the agent’s partner, say, had died then HMRC might accept that. Of course, if an agent had all the information in good time and failed to provide a good service, then it may be possible to claim any penalty back from them;
  • Physical or mental disabilities. Whether permanent or temporary, this could be viewed as a reasonable excuse if it affects your capacity to deal with your tax affairs;
  • You did not understand the system and needed help from, for example, Tax Aid, Tax Help for Older People or from HMRC. In this case, the tax tribunal on hearing an appeal will usually expect you to have taken reasonable steps to get help with your tax affairs. They might also look at how difficult your tax affairs are and why, in your particular circumstances, you have found them too difficult to deal with. 

Note that relying on someone else, for example, an employee or an agent does not normally enable you to claim reasonable excuse.  If, however, you have relied on someone else to deal with some or all of your tax affairs because you are yourself seriously ill and the other person fails to meet the obligation or gets it wrong, the tax tribunal has found that you can have a reasonable excuse.

HMRC do not have the final word on whether or not an excuse is reasonable; that question is ultimately for the courts to decide. If you are unable to agree with HMRC, you can appeal to the First-tier Tribunal.

Back to the top

What does ‘reasonable care’ mean?

The law defines careless, the first step in the penalty scale, as a failure to take reasonable care. If your error is careless, it basically means that you meant to give correct information to HMRC, but made a mistake.

HMRC recognise that reasonable care can differ from person to person – it has to take into account a particular person’s abilities and circumstances. They expect each person to keep the records that enable them to provide a complete and accurate return. They also expect people to check with HMRC or an adviser if they are not sure about something to do with their tax.

If you do get someone to help you with your tax, you should keep a note of it. For example, if you telephone HMRC, keep a note of the date and time, who you spoke to and what was said. This could help later if a penalty arises.

You also cannot simply get someone else to help with your tax and let them get on with it, without checking – as best as you possibly can – what they have done. This does not mean that you have to understand everything about tax! But if, for example, you had given details of self-employment income to be included on a tax return and your helper had filled in your return without including that income, it would be reasonable for you to ask why it was not included.

Estimated figures or provisional figures

Sometimes, you might not have the right information to be able to complete your tax return accurately.

For example, you might have lost some important documents that you needed for your tax return and can never get them back (though you should try your best to get copies, if this is possible). If you really cannot retrieve your records, you will have to make a best guess (or estimate) at the figures you should include on your return.

If you have estimated any of the figures on your tax return, you should always tell HMRC (or ‘disclose’) what they are and why, and how you have worked out the figures you have used. Give as much information as possible – usually in the additional information text box provided on the return. This could help to protect you from HMRC later suggesting you owe more tax or trying to charge you an inaccuracy penalty.

The above is different to giving HMRC ‘provisional’ figures. This would happen where you know you have something to include on your tax return but do not yet know the correct amount.

For example, Jean knows that she has some bank interest to include in her tax return. She thinks it was around £200, but cannot find a statement or interest certificate showing the exact amount for the tax year. It is approaching the deadline for submitting her tax return. She contacts the bank and they tell her it will take two weeks to send her the information she needs.  

What should Jean do?

She should enter the £200 provisional figure on her tax return and tick the box that says the return includes provisional information. She should explain in the additional information box that she has contacted her bank to confirm the figures and that she expects to be able to provide the exact sum in two weeks’ time, when the statement has arrived. She should submit the return with the provisional figure, so that she does not incur a late filing penalty.

When the statement from the bank arrives, Jean will need to amend her tax return for the correct interest figure. She can either do this by writing to HMRC with the information, or – if she filed online – she can go into her Personal Tax Account and amend the form and re-submit it.

Back to the top

Suspended penalties

If HMRC give you a penalty for a careless error, you can ask them to suspend the penalty. They can suspend a penalty for up to two years. This means they do not collect the penalty now, but if you do not keep to the terms of the suspension (for example, if HMRC find errors during the suspension period), the suspended penalty becomes payable immediately. In addition, you may have to pay any other penalty due in relation to the new error, if that is what has caused the suspension agreement to have been broken.

If you satisfy HMRC at the end of the suspension period that you have met all of the conditions, the suspended penalty is cancelled and you do not have to pay it. 

HMRC do not have to agree to suspend a penalty. The penalty must relate to a careless error (not a deliberate error) and HMRC must be able to set specific conditions attaching to the suspension and believe that your behaviour will change. This means that if another error cannot be avoided through, for example, an improved record keeping system, HMRC may not suspend the penalty.

You can appeal against:

  • any penalty notice and ask for it to be suspended,
  • HMRC’s refusal to suspend a penalty,

  • the conditions HMRC have set relating to a suspension

Back to the top

When can HMRC reduce my penalty (‘special reduction’)?

HMRC are allowed to reduce a penalty, or not enforce it, 'if they think it right because of special circumstances'. This is known as ‘special reduction’.

Special reduction can apply to various types of penalty, including those for errors in returns, failure to notify and failure to make a return. It may apply where behaviour is careless, but it is unlikely to apply where there has been deliberate behaviour.

There is no specific definition of 'special circumstances'. There are, however, two things that cannot be special circumstances, according to the law:

  • simply being unable to pay, and
  • the fact that the tax you owe is balanced by someone else having paid too much tax.

Broadly, special circumstances are described by HMRC as either 'uncommon or exceptional' or 'where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law'.

Even if HMRC do not offer special reduction, you may still ask for them to consider it. HMRC officers are supposed to consider special reduction before deciding on the amount of a penalty, but there may be circumstances of which they are unaware. There is more information in the HMRC guidance on GOV.UK.

If HMRC do not consider whether special circumstances exist, you may be able to apply to the tribunal for a special reduction on appeal – this will depend on the facts of the case.

Back to the top

How do I appeal against a penalty?

You can appeal against any penalty.

If the penalty is included as part of a contract settlement, it needs to be negotiated with the final settlement figure.

If the penalty is raised by way of an assessment, and it may be included in the same assessment as an actual tax charge, it can be appealed within 30 days of date of issue of the assessment.

In most cases, you have 30 days from the date of issue of the penalty notice to lodge your appeal. You will receive a leaflet with the assessment explaining how it may be appealed. You can use form SA370, available on GOV.UK. You can use an online form to appeal against a £100 penalty for late submission of a tax return.

There is more information about how to appeal against an HMRC decision (this includes penalties) with which you disagree on the page on tax appeals.

Back to the top

I have previously had a penalty and now I have another one, which is much higher. Why?

The penalty regime is based on your behaviour. If you had previously been found to not record things properly, HMRC might view your behaviour now as deliberate rather than merely careless.

Back to the top

Offshore penalties

HMRC can charge increased penalties for inaccuracy or failure to notify penalties that relate to offshore income and gains. The level of penalty depends on which country the offshore income or gains relate to. Countries are placed in different categories and penalty levels attaching to those categories are as follows:

Category 1: Same penalties as the UK
Category 2: 150% of the UK penalty
Category 3: 200% of the UK penalty

 

Back to the top

Where can I find more information?

If you are self-employed, we suggest you also look at our pages on enquiries, penalties and debt.

HMRC’s guide on penalties is available on GOV.UK – this is intended for agents and advisers, but you may find it helpful.

Back to the top