In this section, 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.
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.
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. The GOV.UK website 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 a Time to Pay arrangement with HMRC. You can find out more about Time to Pay on the GOV.UK website. 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.
If you are charged penalties you will receive a letter from HMRC like this:
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 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.
There is a tool on GOV.UK which estimates your penalty for late submissions under Self Assessment.
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 and concealed||Unprompted||30%-100%|
|Deliberate and concealed||Prompted||50%-100%|
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.
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"|
|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.
Note that HMRC have 12 months from the date they establish the amount of tax lost to issue a penalty notice.
What is a reasonable excuse?
If an unforeseeable event has 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 the GOV.UK website – 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;
- Unforeseen pressure of work. Normally this is not acceptable, but if 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.
Note that relying on someone else, for example, an employee or an agent does not normally enable you to claim 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.
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.
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 they find any more errors during the suspension period, the suspended penalty becomes payable immediately. In addition, you will have to pay any other penalty due in relation to the new error.
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.
You can appeal against any penalty notice and ask for it to be suspended.
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.
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”. Rather, HMRC indicate that they do not include simply being unable to pay, or the fact that the tax you owe is balanced by a possible overpayment of tax due to be repaid to you.
Broadly, special circumstances are described 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.
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’.
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, you should expect that HMRC might view your behaviour now as deliberate rather than merely careless.
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|
If you are self-employed, we suggest you also look at the section on ‘enquiries, penalties and debt’ on this website.
HMRC’s guide on penalties is available on GOV.UK – this is intended for agents and advisers, but you may find it helpful.