Tax penalties and interest

Overview

There are four main categories of penalty which might be charged under self assessment.

  The government is reforming penalties for late submission and late payment. Taxpayers joining Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will be subject to the new regime from April 2024. For more information, see GOV.UK.

All these penalties can be appealed, for example if you have a reasonable excuse, special circumstances apply, or you took reasonable care to get your tax right. If you make an appeal, you must usually do so within 30 days of the date of the penalty notice.

Note that HMRC may also charge other types of penalties, such as for failure to keep records.

Interest will also be charged for late paid tax (see the heading Late payment interest, 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 should help 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.

Late submission penalties

Late submission penalties are also known as late filing penalties. There are standard penalties for sending in most 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
• 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.

Late submission penalties are different for VAT.

Late payment penalties

If you pay tax late, HMRC will usually charge you a penalty. Late payment penalties for income tax are as follows:

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

You will not be charged additional penalties if you have entered and stick to a time to pay arrangement with HMRC. You can also find out more about time to pay on GOV.UK.

Late payment penalties are different forVAT.

Late payment interest

HMRC charge interest on late tax payments (and late paid penalties) 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.

The current rate of late payment interest can be found on GOV.UK.

Failure to notify penalties

In certain cases, you have a legal obligation to notify HMRC of your liability to tax (including income tax, capital gains tax, Class 2 National Insurance contributions and Class 4 National Insurance contributions). 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 it.

If you do not do so by the relevant deadline, you may be charged a penalty, known as a ‘failure to notify’ penalty.

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 by the relevant payment deadline 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 in bringing your tax affairs up to date.

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

We understand that, in practice, HMRC would not generally charge failure to notify penalties in addition to late payment penalties – though both types of penalty might be applicable.

If you have a reasonable excuse or there are special circumstances (see headings below) you can appeal a failure to notify penalty. Unfortunately, the law does not allow HMRC to suspend this type of penalty.

Higher penalties can apply in matters involving tax on offshore income and gains (see the heading below on Offshore penalties).

HMRC’s factsheet CC/FS11 covers these failure to notify penalties in more detail.

Coronavirus support payments

If you incorrectly claimed a coronavirus support payment, then in most cases the law requires you to notify HMRC within 90 days. If you knew you were not entitled to the support payment when you received it, this is automatically treated as a ‘deliberate and concealed’ failure to notify and you will be liable to a penalty based on the amount you have not repaid by the end of the 90-day period.

Penalties for errors

Penalties for errors are also known as inaccuracy penalties. 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.

These penalties are tax-based, which means it is calculated using the amount of tax you potentially did not pay because of the error.

You can appeal this penalty if you have a reasonable excuse or if the error arose despite you taking reasonable care. See the relevant headings below for more information.

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.

See factsheets CC/FS7a and CC/FS7b for details on how HMRC calculate penalties for errors in returns or documents.

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.

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.

Amount of penalty

The amount of an inaccuracy penalty is a percentage of the potential lost revenue which depends partly on:

• the type of behaviour (careless, deliberate, deliberate and concealed),
• whether your disclosure is prompted or unprompted, and
• the quality of the disclosure.

This quality of the disclosure means the penalty can be reduced if you:

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

The following table sets out the scale of penalty charges.

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

Higher penalties can apply in matters involving tax on offshore income and gains (see the heading below on Offshore penalties)

Careless and deliberate behaviour

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.

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

Reasonable excuse

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

If you wish to claim that 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. The reason behind your reasonable excuse must also have existed at the time you failed to meet the tax obligation – it cannot be something that occurred after the deadline (although in some circumstances, a series of events could amount to a reasonable excuse overall).

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 a reasonable excuse.

HMRC publish a list of examples which may count as a reasonable excuse on GOV.UK. These are 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, the charities TaxAid, 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.

Ignorance of the law

If you did not comply with a tax obligation because you were not aware you had to do so, this is not automatically considered a reasonable excuse. Claims to this effect may be resisted by HMRC, but HMRC should follow their internal guidance in these cases.

Ignorance of the law can be a reasonable excuse, depending on the facts and circumstances. You will need to consider whether it was objectively reasonable for you not to have been aware of the relevant obligation, after taking everything into account.

If you think this applies to you but HMRC do not agree, then you could ask for an internal review or appeal to the tribunal, or both. See our page on Appealing a tax decision for more information.

Coronavirus

In 2020, HMRC confirmed that the coronavirus pandemic could be taken into account in evaluating whether you have a reasonable excuse for failing to meet a tax obligation. However, you must explain how the situation affected you and meant that you could not fulfil your obligation. This is not, therefore, a ‘blanket’ excuse for people not to meet their tax obligations for the duration of the pandemic.

However, it might be that coronavirus social distancing or shielding measures prevented you from accessing information you needed to fulfil your tax obligations, for example. Falling ill with the virus itself might also be a reasonable excuse if it meant that you were unable to fulfil your obligations but then did so as soon as you were able to.

Reasonable care

The law defines careless 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.

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 of the following:

• 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

HMRC’s factsheet CC/FS10 covers suspension of penalties in more detail.

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.

Appeals

You can appeal against any penalty – for example, if you think that:

• HMRC should not have charged you a penalty at all, or
• they have charged you too much.

For example, HMRC may have charged you a penalty on the basis that an error in a document or tax return was deliberate. You may think that it was only careless, in which case your penalty should be lower. Or you may think that you made the error despite having taken reasonable care to get things right, in which case no penalty would be due.

Alternatively, you may think that you deserve more credit for having told HMRC about the error, and helping them to correct it, than they have given you.

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.

  If you appeal against a penalty on the basis of having a reasonable excuse, as explained above you will need to demonstrate that you have complied with the relevant obligation within a reasonable time after that excuse has ended. Accordingly, HMRC may not be able to progress any appeal on these grounds until you have complied with the relevant obligation (for example, filing the return or paying the tax).

There is a tool on GOV.UK which tells you when and how to appeal against late filing or late payment penalties for self assessment.

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.

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

Offshore penalties

HMRC can charge increased penalties for inaccuracy or failure to notify penalties that relate to offshore income and gains in certain countries. Countries are placed in different categories depending on that country’s information exchange arrangement with the UK. The corresponding penalty ranges, assuming failure to correct penalties do not apply (see below), are as follows:

Category 1 includes EU member states and the United States of America (but you should double-check regarding overseas territories of these countries). For the detail, please see HMRC’s factsheet on Higher penalties for offshore matters.

Requirement to Correct

If, at 5 April 2017, a taxpayer had been non-compliant in respect of their offshore income and gains, they were required to bring their tax affairs up to date by 30 September 2018 under the requirement to correct rules. If they failed to do so, ‘failure to correct’ (FTC) penalties would apply, being between 100% and 200% of the unpaid tax (irrespective of which category country is involved). HMRC say that penalties under FTC for a prompted disclosure will not be less than 150% (unless there is a reasonable excuse or special circumstances).

Such penalties can only apply to tax years 2015/16 and earlier (depending on which tax years were assessable at 5 April 2017). FTC penalties cannot apply to the 2016/17 tax year, because a taxpayer cannot be said to have been non-compliant in respect of their offshore income and gains for this year at 5 April 2017. For example, the requirement to notify chargeability for 2016/17 was not until 5 October 2017 and the typical filing deadline for the 2016/17 tax return was not until 31 January 2018.

If you are making a disclosure to HMRC under the Worldwide Disclosure Facility and you do not have a reasonable excuse (see heading above) for your failure or inaccuracy (if you have a reasonable excuse, this usually means HMRC will not charge any penalties), you will be asked to calculate the applicable penalties for each tax year based on HMRC’s guidelines and a self-assessment of your culpability and behaviour.

As part of doing this, you will need to consider whether the requirement to correct regime applies to any of the tax years involved.

For more information on the requirement to correct regime, see GOV.UK.

More information

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

HMRC’s compliance factsheets are published on GOV.UK.

See also the HMRC Charter.