A guide to tax penalties

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.

Penalties apply if you understate the amount payable in:

• Betting and Gaming duties
• Capital Gains Tax
• the Construction Industry Scheme
• Corporation Tax
• Environmental taxes
• Excise Duties
• Income Tax
• Inheritance Tax
• Insurance Premium Tax
• National Insurance contributions
• PAYE
• Petroleum Revenue Tax
• Stamp Duties
• VAT

The level of penalty will depend on the reason for the error.

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, you can be fined by failure to tell HMRC that you are liable for corporation tax. The amount of the penalty is calculated by applying a percentage to the amount of corporation tax that you owe. The amount will depend on whether the failure was careless or deliberate. The maximum penalties are:

• 30% of potential lost revenue for non-deliberate failure
• 70% of potential lost revenue for deliberate but not concealed failure
• 100% of potential lost revenue for deliberate and concealed failure

If you took reasonable care but made a genuine mistake, HMRC will not charge a penalty.

From January 2023, a points system applies to late VAT returns, with one penalty point for each late return. Once the business hits the penalty threshold (which depends on whether the business files returns annually, quarterly or monthly) an automatic £200 fine applies. Points can be reset to zero if the business stays up to date with VAT returns for a set period. Late payment interest is charged as soon as a payment is overdue, with extra penalties starting at 2% for payments which are more than 15 days overdue.

For PAYE late filing penalties start at £100, depending on how many employees you have. Interest is charged on late payments, with additional penalties depending on how many times you pay late during the tax year and if payment is more than six months overdue.

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.