HMRC Tax Penalties: Categories, Disclosure, and Appeals

HMRC tax penalties fall into four main regimes: inaccuracies in returns, failure to notify a new tax liability, late filing, and late payment. Within the first two regimes the size of the charge turns on how HMRC classifies your behaviour, on a scale from reasonable care through careless, deliberate, and deliberate with concealment. The last two work on fixed sums and escalating percentages, though a new points-based system is now replacing them for VAT and income tax. Disclosure, cooperation, a reasonable excuse, and in some cases suspension can all bring the final figure down, sometimes to zero.

Penalties for Inaccuracies in Returns

Schedule 24 of the Finance Act 2007 is the main regime for errors in tax documents. A penalty arises when a return or other document you send to HMRC contains an inaccuracy that understates tax, overstates a loss, or inflates a repayment claim.¹ Self Assessment, Corporation Tax, VAT and many other filings are covered.

The penalty is a percentage of the “potential lost revenue” — the extra tax HMRC would have collected had the return been correct. That percentage depends on your behaviour.

Reasonable care: no penalty. If you made a genuine effort to get things right, kept proper records, and followed professional advice where appropriate, HMRC should not charge you for the mistake.
Careless: up to 30% of the potential lost revenue. This covers errors a reasonably careful person would have avoided, such as not cross-checking a figure against a bank statement.
Deliberate but not concealed: up to 70%. You knowingly submitted incorrect information but did not actively hide the evidence.
Deliberate and concealed: up to 100%. You lied and took steps to cover your tracks, such as fabricating invoices or destroying records.¹

Those are maximums. How far HMRC reduces them depends on disclosure and cooperation, covered further down.

Higher Penalties for Offshore Income

Inaccuracies involving offshore income or assets attract steeper penalties. Schedule 24 sorts them into three categories based on where the income or gain arose and how readily HMRC can obtain information from that territory.

Category 2 covers territories with some information exchange. Category 3 covers territories where exchange is most restricted. The standard percentages are:¹

Category 2: careless 45%, deliberate 105%, deliberate and concealed 150%.
Category 3: careless 60%, deliberate 140%, deliberate and concealed 200%.

A deliberate and concealed inaccuracy in a category 3 territory carries a penalty of double the tax owed, compared with 100% for a purely domestic case. If any part of your affairs sits offshore, the cost of a mistake climbs sharply.

Failure to Notify a Tax Liability

Schedule 41 of the Finance Act 2008 applies where you fail to tell HMRC about a new liability within the required time. Common triggers include starting a business without registering for income tax, or realising a capital gain and not notifying HMRC.²

The structure mirrors Schedule 24: 30%, 70% and 100% for non-deliberate, deliberate, and deliberate and concealed failures, with the same higher offshore rates. One quirk sits at the non-deliberate tier. If HMRC discovers the failure within 12 months of the tax first becoming unpaid, the minimum penalty after disclosure is 10% for a prompted disclosure and 0% for an unprompted one. If the failure runs longer, those minimums rise to 20% and 10%.²

Late Filing Penalties

Missing a filing deadline triggers a separate regime under Schedule 55 of the Finance Act 2009. For Self Assessment returns, the charges escalate:

Day one: an immediate £100 fixed penalty, regardless of whether any tax is owed.
Three months late: after HMRC issues a notice, £10 per day for up to 90 days, capped at £900.
Six months late: a further 5% of the tax due or £300, whichever is greater.
Twelve months late: another penalty on the same basis.³

These charges stack, and they run independently of any inaccuracy penalty. A return filed over a year late with a real tax liability can attract the £100 initial charge, £900 in daily penalties, and two percentage-based charges on top.

Late Payment Penalties

Schedule 56 of the Finance Act 2009 handles missed payment deadlines. For most taxes the pattern is:

30 days after the payment deadline: 5% of the unpaid tax.
Six months after: a further 5% of any amount still outstanding.
Twelve months after: another 5% of any remaining balance.⁴

Leave a £10,000 bill unpaid for over a year and the surcharges alone reach £1,500, before interest. Late payment charges run alongside late filing and inaccuracy penalties, so a compound problem produces compound costs.

The New Points-Based Regime

HMRC is phasing in a new system under Making Tax Digital that replaces the fixed late filing and late payment charges above. It already applies to VAT and extends to income tax self assessment for tax years from 2026–27 onwards.⁵

Late submissions work on points rather than immediate cash penalties. Each missed quarterly update or return adds a point. At four points you receive a £200 penalty, and each further miss triggers another £200. You can only pick up one point per deadline, even if you run several businesses and miss multiple updates at once.

Late payment under the new regime gives you 15 days after the due date before any penalty applies. At day 15 the charge is 3% of the outstanding amount, with another 3% at day 30. From day 31 interest accrues at an annualised 10%, charged daily for up to two years. In your first year under the new system the grace period extends to 30 days.⁵

The older Schedule 55 and 56 charges continue for partnership, trust, and non-resident company returns, so both systems run in parallel for some time.

How Disclosure Reduces a Penalty

The percentages above are starting points. HMRC is required by law to reduce the figure when you disclose, and the size of the reduction depends on the type of disclosure and its quality.

Unprompted or Prompted

An unprompted disclosure means you told HMRC about the problem before you had any reason to think they were about to find it. A prompted disclosure means HMRC was already looking, or you had reason to expect they were about to. The difference matters. For a domestic careless inaccuracy, an unprompted disclosure can wipe the penalty out entirely, while a prompted one can only bring it down to 15%.¹

The full minimums for domestic inaccuracies after disclosure are:

Careless (30% standard): minimum 15% prompted, 0% unprompted.
Deliberate (70% standard): minimum 35% prompted, 20% unprompted.
Deliberate and concealed (100% standard): minimum 50% prompted, 30% unprompted.¹

Offshore floors are proportionally higher. A category 3 deliberate and concealed inaccuracy can only be reduced to 110% of potential lost revenue with a prompted disclosure, or 70% with an unprompted one. Even with full cooperation the penalty on the most serious offshore cases exceeds the tax itself.

Quality of Disclosure

Where inside the range your penalty actually lands depends on three factors HMRC weighs together: whether you told them about the error, whether you helped them work out how much tax was underpaid, and whether you gave access to your records so the correction could be verified.¹ Active cooperation with clear documentation pushes the penalty toward the floor. Withholding records keeps it near the ceiling.

Reasonable Excuse

If you had a genuine reason for missing a deadline or making an error, HMRC may accept a reasonable excuse and cancel the penalty. There is no fixed legal definition; each case turns on its facts. HMRC’s internal guidance gives examples that may qualify:⁶

Bereavement of a partner or close relative that directly affected your ability to comply.
Unexpected hospital stays or serious illness.
Loss of tax records through fire, flood, theft, or computer failure where the information could not be reconstructed in time.
Disruptions to the postal service or failures with HMRC’s online system.
Serving in the armed forces overseas.

HMRC is equally clear about what will not do. A bounced payment because of insufficient funds, finding the online system difficult, not receiving a reminder, or simply making a mistake on your return: none of these count.⁷ Documentary evidence such as a doctor’s letter or a fire report strengthens the claim. HMRC will want to see that the event happened as described and that it actually prevented you from meeting the deadline.

Special Reduction

Even where no reasonable excuse applies, HMRC has a separate power to reduce or stay a penalty for “special circumstances”. This is distinct from the disclosure reductions and works as a safety valve where the standard penalty produces a result at odds with the regime’s purpose.¹

The bar is high. The legislation states that inability to pay, by itself, is not a special circumstance, nor is the fact that another taxpayer has overpaid a similar amount. The circumstances must be genuinely uncommon or exceptional. HMRC officers are expected to consider a special reduction before finalising any penalty, and if they fail to do so a tribunal can consider the question on appeal.

Suspension of Careless Penalties

If your penalty is for a careless inaccuracy under Schedule 24, HMRC can suspend all or part of it for up to two years. Meet the conditions and the penalty is cancelled outright.¹

Suspension is only available if HMRC can set at least one meaningful condition that would help you avoid similar mistakes. Typical conditions include implementing new accounting software, hiring a professional to review future returns, or keeping specific records. They should follow a SMART format: specific, measurable, achievable, realistic, and time-bound.⁸

During the suspension you must file all returns on time and avoid any further inaccurate returns. Breach a condition or attract another inaccuracy penalty in the period, and the suspended penalty becomes payable immediately.¹ Suspension is not available for deliberate inaccuracies, which is one reason the culpability classification matters so much.

Interest on Late Payment

On top of penalties, HMRC charges interest on any tax paid late. The rate is linked to the Bank of England base rate plus 4% and stands at 7.75% from 9 January 2026.⁹ It applies across income tax, capital gains tax, VAT, Corporation Tax, and most other taxes.

Interest runs from the date the tax was due until it is paid and compounds on top of any penalties. When HMRC owes you money, the repayment rate is considerably lower at 2.75% from the same date.⁹ The gap between the two rates is a strong incentive to clear any outstanding liability quickly.

Appealing an HMRC Penalty

You normally have 30 days from the date on your penalty notice to challenge it.¹⁰ A late appeal is still possible, but you will need to explain why, and acceptance is not guaranteed.

There are two routes. The first is to appeal to HMRC directly. If the case officer does not change the decision, HMRC will offer an internal review by a separate officer not involved in the original decision. Reviews tend to be quicker than a tribunal and are worth pursuing where the facts support you.¹¹

The second route is the First-tier Tribunal (Tax Chamber). You can go straight there without a review, or appeal after receiving a review outcome.¹² Where a case turns on reasonable excuse or a disputed culpability classification, the tribunal can substitute its own view for HMRC’s.

Time Limit on HMRC Charging a Penalty

HMRC cannot keep a penalty threat hanging indefinitely. For inaccuracy penalties under Schedule 24, the assessment must be made within 12 months of the end of the appeal period for the decision that corrected the inaccuracy. If the correction did not come from a formal assessment, the 12 months runs from the date the inaccuracy was corrected.¹ Miss that window and the penalty cannot be charged, which is worth checking if a notice arrives long after the underlying tax issue was settled.

1
Legislation.gov.uk. Finance Act 2007 – Schedule 24
2
legislation.gov.uk. Finance Act 2008 – Schedule 41
3
Legislation.gov.uk. Finance Act 2009 – Schedule 55
4
Legislation.gov.uk. Finance Act 2009 – Schedule 56
5
GOV.UK. Penalties for Making Tax Digital for Income Tax
6
HMRC Internal Manuals. Compliance Handbook – Reasonable Excuse: Examples of Reasonable Excuse
7
GOV.UK. Disagree with a Tax Decision or Penalty – Reasonable Excuses
8
GOV.UK. Compliance Checks – Suspending Penalties for Careless Inaccuracies in Returns or Documents
9
GOV.UK. HMRC Interest Rates for Late and Early Payments
10
GOV.UK. Disagree with a Tax Decision or Penalty
11
GOV.UK. Disagree with a Tax Decision or Penalty
12
GOV.UK. Appeal to the Tax Tribunal