HMRC tax penalties can arise from late filings, late payments, errors in tax returns, and failing to notify HMRC of taxable events. As a UK director, it’s important to understand how these penalties work because they can carry significant financial consequences and, in certain circumstances, wider legal implications. Ignoring penalties can increase costs and may lead to enforcement action against the company. In limited cases involving deliberate or fraudulent behaviour, HMRC may also pursue individuals personally using specific statutory powers.
This information provides general guidance based on official HMRC rules and is not a substitute for professional advice. Addressing issues with HM Revenue & Customs promptly can often reduce penalties and prevent escalation.
HMRC issues tax penalties to encourage compliance with UK tax law. Penalties are designed to deter late filing, late payment, inaccurate returns, and failures to notify HMRC of chargeable events. They apply across a wide range of taxes, including Corporation Tax, VAT, PAYE, and Self Assessment, although the exact rules and amounts differ depending on the tax involved.
Penalties can apply even where mistakes are unintentional. For this reason, HMRC places strong emphasis on taking reasonable care, keeping accurate records, and meeting statutory deadlines.
While companies are usually responsible for their own tax liabilities, directors are expected to ensure that appropriate systems and oversight are in place. Using an accountant or agent does not transfer responsibility for accuracy or timeliness away from the taxpayer. Directors therefore need to actively monitor compliance to reduce the risk of penalties arising.
Risks and Consequences of Non-Compliance
Failing to deal with HMRC penalties can lead to escalating financial pressure on a business. Initial penalties may be modest, but additional penalties and interest can accrue over time, affecting cash flow and increasing overall liabilities. Continued non-payment can result in HMRC debt collection action.
In cases involving deliberate inaccuracies, deliberate failures to notify, or tax fraud, HMRC has stronger enforcement powers. These may include higher penalties, public naming under the deliberate defaulters regime, or—where specific legal conditions are met—action against individuals rather than the company alone.
Early engagement with HMRC is often critical. Many penalties can be reduced through timely disclosure, appeals based on reasonable excuse, or by arranging a Time to Pay agreement before enforcement action begins.
Main Categories of HMRC Tax Penalties
Understanding the main categories of HMRC tax penalties helps directors manage compliance and avoid unnecessary costs. Each category operates under tax-specific legislation and guidance.
Late Filing
Late filing penalties apply when returns or required documents are submitted after the statutory deadline.
For Self Assessment, the standard structure is:
£100 fixed penalty immediately after the deadline
Daily penalties of £10 per day after 3 months, up to a maximum of £900
After 6 months, an additional penalty of 5% of the tax due (or £300 if greater)
After 12 months, a further 5% of the tax due (or £300 if greater)
Other taxes, such as Corporation Tax and VAT, have different late filing regimes, so penalties should always be assessed by reference to the specific tax involved.
Late Payment
Late payment penalties apply when tax is not paid by the due date.
For VAT accounting periods starting on or after 1 January 2023, the rules are:
If VAT remains unpaid after 15 days, a first penalty of 3% of the amount outstanding at day 15 applies
If still unpaid after 30 days, a further 3% is charged on the amount outstanding at day 30
From day 31 onwards, a second penalty accrues daily at an annualised rate of 10% on the outstanding balance
Separate interest is also charged on late-paid tax.
Errors and Inaccuracies
Penalties for inaccuracies in tax returns are based on behaviour and the amount of tax understated, known as Potential Lost Revenue (PLR):
Careless errors: up to 30% of PLR
Deliberate but not concealed errors: up to 70% of PLR
Deliberate and concealed errors: up to 100% of PLR
The final penalty depends on disclosure quality and cooperation with HMRC.
Failure to Notify
If a taxpayer fails to notify HMRC of a liability when required, penalties are also charged as a percentage of PLR:
Non-deliberate failure: up to 30%
Deliberate failure: up to 70%
Deliberate and concealed failure: up to 100%
How HMRC Calculates Penalties
HMRC calculates many penalties by reference to Potential Lost Revenue, which represents the tax that was unpaid or underpaid because of the failure or error. Behaviour is a key factor, with higher penalties applying where conduct is deliberate or concealed.
Disclosures significantly affect penalty outcomes. Unprompted disclosures—made before HMRC starts an enquiry—can substantially reduce penalties and may reduce them to zero for careless errors. Prompted disclosures, made after HMRC intervention, usually result in higher minimum penalties.
Interest on late-paid tax is charged separately from penalties and continues to accrue until the tax is paid in full.
Reducing or Cancelling Penalties
Several mechanisms exist to reduce or cancel HMRC penalties.
Unprompted disclosures can lead to significant penalty reductions. Reasonable excuse claims may succeed where exceptional circumstances beyond the taxpayer’s control prevented compliance, provided the taxpayer acted promptly once the excuse ended.
For careless inaccuracies, HMRC may suspend penalties for up to two years if the taxpayer agrees to specific compliance conditions. If those conditions are met, the penalty is cancelled.
HMRC also has limited discretion to apply special reduction where the standard penalty outcome would be unjust, although this does not apply to deliberate behaviour.
Time to Pay arrangements can help manage cash flow and may prevent further late payment penalties, provided the agreement is set up promptly and adhered to in full. Interest, however, continues to accrue.
Common Misunderstandings to Avoid
A common misconception is that small penalties will be ignored by HMRC. In practice, unpaid penalties can escalate and trigger further action. Another misunderstanding is assuming that paying interest alone resolves a late payment—penalties and interest are separate and both must be addressed.
Some directors believe penalties cannot be appealed. In fact, HMRC penalties can usually be appealed on statutory grounds, including reasonable excuse. Proactive disclosure and early engagement often result in better outcomes than waiting for HMRC intervention.
How to Appeal an HMRC Penalty
Most HMRC penalties must be appealed within 30 days of the penalty notice. Appeals can usually be made online or in writing and must clearly explain why the penalty is incorrect or why a reasonable excuse applies.
In many cases, HMRC will not require payment of a disputed penalty while an appeal is being considered. If the appeal is unsuccessful, an internal review by a different HMRC officer can be requested.
If disagreement remains, the appeal can be taken to the First-tier Tribunal (Tax Chamber). Tribunal procedures and payment requirements vary by tax, so the appeal route should be considered carefully.
FAQs
1) Are HMRC tax penalties the same across all UK taxes?
No. While HMRC uses broadly consistent principles, each tax has its own legislation and penalty regime. Late filing and payment rules differ between taxes such as Self Assessment, VAT, and Corporation Tax.
2) Can a reasonable excuse apply more than once?
Yes, provided each instance meets HMRC’s criteria. Each claim is assessed on its own facts, and repeated claims may attract closer scrutiny.
3) Do I still pay interest if I set up a Time to Pay arrangement?
Yes. Interest continues to accrue on unpaid tax until the balance is cleared, even where a Time to Pay agreement is in place.
4) How do I make an unprompted disclosure?
An unprompted disclosure is made by informing HMRC of errors or omissions before they start an enquiry. The method depends on the tax involved and may include amending returns or using HMRC disclosure facilities.
5) What if my accountant caused the error?
Using an accountant does not remove responsibility for accuracy. However, penalties may be reduced or cancelled if you can show that you took reasonable care and acted promptly once the issue was identified.
6) Can HMRC penalties still be enforced after my company is liquidated?
Company penalties remain company liabilities in liquidation. In cases involving deliberate or fraudulent conduct, HMRC may pursue individuals using specific statutory powers where legal conditions are met.
7) Do first-time penalty offenders get leniency?
Some penalty regimes allow lower penalties where behaviour is non-deliberate and compliance is prompt, but there is no universal “first offence” exemption.
8) Can penalty payments be spread over several months?
Yes. Penalties can often be included in a Time to Pay arrangement, subject to HMRC agreement.
9) Is a tribunal appeal possible without an HMRC internal review first?
Yes. An internal review is optional, and appeals can be made directly to the First-tier Tribunal within the statutory time limits.
10) Can directors be personally liable for company penalties?
Personal liability arises only in specific circumstances, typically involving deliberate wrongdoing or statutory personal liability provisions.
11) Will HMRC publicly name deliberate defaulters?
HMRC may publish details of deliberate defaulters where statutory thresholds are met, as part of its naming policy.
12) Does a Time to Pay arrangement stop interest from accruing?
No. Interest continues until the tax debt is fully paid.
One Clear Next Step
If you are facing HMRC tax penalties, acting quickly is essential. Reviewing the penalty notice, considering disclosure or appeal options, and contacting HMRC early can significantly reduce costs and prevent escalation. Early engagement remains one of the most effective ways to manage penalties and maintain compliance.
