A guide to tax penalties

Man holding a red card

Tax penalties can be substantial if you fail to file tax returns and make tax payments on time. Tax penalties can also be incurred if you make careless errors, while deliberate tax evasion or fraud can be treated severely.

Avoiding tax penalties

Tax penalties are incurred if you fail to complete the right tax returns and pay tax when it is due. This is your responsibility - even if HM Revenue & Customs (HMRC) have not asked you to complete a tax return or reminded you when payment is due.

As well as late payment penalties and penalties for missing tax return deadlines, common causes of tax penalties include:

  • failing to register a new business
  • failing to register for VAT when your turnover reaches the threshold
  • not keeping adequate records - particularly if you fail to implement HMRC recommendations for improvements
  • deliberate fraud or tax evasion

You can avoid most tax penalties - and minimise any penalties that you do incur - by taking reasonable care, keeping proper records and getting advice if you need it from either HMRC or your accountant.

Late payment penalties and late returns

Late payment penalties and tax penalties for filing returns after the deadline apply to all the taxes dealt with by HMRC. In addition, interest is charged on overdue tax payments. The fixed penalties and interest charges ramp up at 3,6 and 12 month intervals after the deadline has passed.

For income tax self-assessment, penalties start at £100 for missing the filing deadline and increase significantly after three months. Late payment penalties start from 5% once a payment is 30 days overdue.

For corporation tax, late filing also leads to an initial £100 penalty, with a further £100 charge after three months. Repeat offenders filing late returns 3 times in a row are charged £500 rather than £100. After 6 months, HMRC will estimate your tax bill and charge a 10% penalty of the unpaid tax and another 10% after 12 months.

For VAT, late payment or late filing of a return counts as a default. Surcharges calculated as a percentage of outstanding VAT gradually increase, the more times you default in a 12-month period. A similar system applies with PAYE, with the late payment tax penalty increasing the more late payments there are in a tax year.

If you know you will be unable to pay a tax bill, you may be able to avoid tax penalties (but not interest) by negotiating time to pay with HMRC.

Penalties for errors

Other tax penalties can be charged for failing to notify HMRC that you are liable to tax, for inaccuracies in your returns, for wrongdoing relating to VAT invoices or dealing with excise goods. Penalties are charged on a sliding scale, based on the amount of tax potentially lost:

  • no penalty if you take reasonable care - which includes telling HMRC if you discover a mistake
  • up to 30% if you have been careless or failed to send in a return
  • up to 70% if the error was deliberate
  • up to 100% if the error was deliberate and you tried to conceal it

You can reduce penalties by disclosing any errors before HMRC spots them, helping to work out what extra tax is due and providing HMRC with access to your records. If an error was not deliberate, HMRC may suspend the penalty for up to two years and advise you on what to do - for example, to improve your tax recordkeeping.

More serious cases of tax fraud or tax evasion can lead to criminal prosecution.

Appealing tax penalties

You can appeal if you think a tax penalty is wrong. As a first step, you or your accountant should normally write to HMRC explaining why. After this, you can ask for an independent HMRC officer to review the case if you want to. You also have the option to appeal a tax penalty to a tax tribunal.

Normally you have 30 days from being informed of a tax penalty or a review decision to take action.

Payment of disputed tax and tax penalties can usually be partly or completely postponed during a review or an initial appeal to the tax tribunal - but interest will be charged on any amounts due after the case is settled.

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