HMRC Penalties Explained: What You've Been Charged And What You Can Do

You've received a penalty notice from HMRC. Before you pay it or ignore it, you need to understand exactly what you've been charged and why—because the answer determines what you can do about it.

Two things to note upfront. First, penalties are separate from the underlying tax you owe—they're charged on top. You may also owe interest on any unpaid tax, which accrues daily from the original due date. Second, ignoring a penalty notice doesn't make it go away. If you don't pay or appeal, HMRC can pursue enforcement action including debt collection, county court proceedings, and (for larger amounts) distraint—seizing goods to sell.

HMRC operates several different penalty regimes. Each has its own rules, its own calculation method, and its own defences. A late filing penalty works differently from an inaccuracy penalty, and a failure-to-notify penalty is not the same as a late payment penalty.

The first step is identifying which regime applies to you.

What Kind Of Penalty Have You Received?

Your penalty notice will reference specific legislation—usually a Schedule and a Finance Act. That reference tells you which regime you're dealing with.

If you're not sure which legislation applies, look at the "Your rights" section of the penalty notice. It will explain the basis for the penalty and how to challenge it.

Late Filing Penalties

Self Assessment (Schedule 55, Finance Act 2009)

This is the most common penalty. If you were required to file a Self Assessment tax return and didn't file it on time, Schedule 55 of the Finance Act 2009 sets out the penalties.

The penalties escalate the later you are:

The £100 penalty applies even if you owe no tax. This catches many people by surprise. The penalty is for filing late, not for owing money. If HMRC required you to file a return and you missed the deadline, the £100 is automatic—regardless of your tax position. For a detailed walkthrough with worked examples, how to check HMRC's calculation, and step-by-step appeal instructions, see our Self Assessment penalties guide.

The 12-month penalty can increase dramatically if HMRC believes you deliberately withheld information. Where the withholding is deliberate and concealed, the penalty can reach 100% of the tax liability (minimum £300). Where it is deliberate but not concealed, the maximum is 70% (paragraph 6, Schedule 55).

VAT And The New Points-Based Regime (Schedule 24, Finance Act 2021)

From 1 January 2023, VAT late filing penalties moved to a new points-based system under Schedule 24 of the Finance Act 2021. Instead of an immediate financial penalty for a single late return, you accumulate penalty points.

How it works:

• You receive one penalty point each time you submit a VAT return late.
• Points accumulate until you reach a threshold based on your filing frequency: 2 points for annual returns, 4 points for quarterly, 5 points for monthly.
• When you hit the threshold, you receive a £200 financial penalty.
• Each subsequent late submission while you're at the threshold also triggers a £200 penalty.

How points expire:

Points don't last forever—but you have to earn their removal. Individual points expire after 24 months if you're below the threshold. To reset all your points to zero, you need a clean filing record: 24 months of on-time filing for annual returns, 12 months for quarterly, or 6 months for monthly.

If you had a reasonable excuse for a late submission, you can appeal to have the penalty point removed.

Coming to Income Tax Self Assessment. This points-based regime is being extended to ITSA as part of Making Tax Digital. From April 2026, taxpayers with business or property income over £50,000 move to the new system. From April 2027, those with income over £30,000 follow. There will be a first-year grace period for late quarterly updates, though the annual return deadline counts from the start.

For a full guide to the new regime—including worked examples, the May 2025 rate increases, and what the tribunal has already decided—see our new penalty regime guide.

Late Payment Penalties

Self Assessment And Other Direct Taxes (Schedule 56, Finance Act 2009)

If you filed your return on time but didn't pay the tax you owe, Schedule 56 of the Finance Act 2009 applies. These penalties are separate from late filing penalties—you can be hit with both if you filed late and paid late.

The maximum cumulative penalty is 15% of the unpaid amount. These penalties only apply to tax that remains unpaid at each trigger point—if you pay part of the bill, the penalty is calculated on whatever is still outstanding.

VAT And The New Late Payment Regime (Schedule 26, Finance Act 2021)

From 1 January 2023, VAT late payment penalties moved to a new regime under Schedule 26 of the Finance Act 2021. The rates were increased by SI 2025/589 from 31 May 2025.

Time to Pay agreements matter here. If you contact HMRC to propose a Time to Pay arrangement before day 15, you can avoid the first penalty entirely. Proposing between days 15 and 30 reduces it. But if you break the arrangement, penalty liability is reinstated. HMRC's Payment Support Service is the first point of contact for anyone struggling to pay.

This regime will also apply to ITSA from April 2026 on the same phased schedule as the points-based filing penalties. For worked examples comparing the old and new regimes, and the full case law on challenging these penalties, see our new penalty regime guide.

Inaccuracy Penalties

Schedule 24 of the Finance Act 2007 applies when a person gives HMRC a document—typically a tax return—containing an inaccuracy that leads to an understatement of tax, a false loss claim, or an inflated repayment claim.

The Culpability Spectrum

Not all mistakes attract the same penalty. Schedule 24 distinguishes three levels of culpability:

• Careless — you failed to take reasonable care in preparing your return (paragraph 3(1)(a))
• Deliberate but not concealed — you intentionally included an inaccuracy but didn't try to hide it (paragraph 3(1)(b))
• Deliberate and concealed — you intentionally included an inaccuracy and took steps to conceal it, such as submitting false supporting evidence (paragraph 3(1)(c))

The penalty is a percentage of the "potential lost revenue" (PLR)—essentially the additional tax that would have been due if the inaccuracy were corrected. The ranges for domestic (Category 1) cases are:

Higher penalties apply where the inaccuracy involves offshore matters (Categories 2 and 3). If you've received an offshore-related penalty, this is specialist territory where professional advice is particularly important.

The Burden Is On HMRC

This is critical: HMRC must prove the level of culpability. If HMRC alleges your inaccuracy was deliberate, HMRC has to demonstrate that.

In HMRC v Tooth [2021] UKSC 17, the Supreme Court defined "deliberate inaccuracy" as one that the taxpayer intended to be inaccurate, with the intention that HMRC would rely on it as accurate. The whole return must be examined—not individual entries read in isolation. For a full analysis of what Tooth means in practice, see our case analysis of HMRC v Tooth.

In Rodriguez-Issa v HMRC [2021] UKFTT 154 (TC), HMRC alleged the taxpayer had deliberately omitted over £176,000 of income and a £143,000 loan write-off. But the tribunal found HMRC had not proved the inaccuracy was deliberate. Because HMRC had chosen not to advance a fallback case based on carelessness, the penalty fell entirely. The appeal was allowed.

Disclosure Quality

The penalty percentage within the ranges above depends on the quality of your disclosure—how forthcoming you were in telling HMRC about the inaccuracy, helping to quantify it, and providing access to your records (paragraph 9, Schedule 24).

An unprompted disclosure—one made before you have reason to believe HMRC has discovered or is about to discover the inaccuracy—attracts lower minimums than a prompted disclosure made after HMRC is already investigating.

Reasonable Care: The Built-In Defence

Schedule 24 does not have a standalone "reasonable excuse" defence like the other penalty regimes. Instead, the defence is built into the culpability test itself: if you took reasonable care in preparing your return but still made an error, the inaccuracy is not "careless" and no penalty arises at all.

What counts as reasonable care? HMRC's factsheet CC/FS7a says it includes keeping enough records, keeping them safe, asking HMRC or a tax adviser when you're unsure, and following the advice given. This is distinct from reasonable excuse, which applies to late filing and late payment penalties—though in practice the two concepts overlap.

Suspension Of Careless Penalties

HMRC can suspend a careless inaccuracy penalty for up to two years under paragraph 14 of Schedule 24. Suspension comes with conditions—typically things you must do to improve your record-keeping or tax compliance. If you meet the conditions, the penalty is cancelled. If you breach them or incur a further penalty during the suspension period, the suspended penalty becomes payable.

Suspension is only available for careless penalties, not deliberate ones. And it is discretionary—HMRC can refuse to suspend. You can appeal HMRC's refusal to suspend, or the conditions they set.

Failure To Notify Penalties

Schedule 41 of the Finance Act 2008 applies when you fail to comply with an obligation to tell HMRC about a tax liability—for example, the obligation to notify chargeability to income tax under section 7 of the Taxes Management Act 1970, or the obligation to register for VAT.

How It Works

The structure mirrors the inaccuracy penalty regime: the same three levels of culpability (non-deliberate, deliberate but not concealed, deliberate and concealed), the same percentage ranges, and the same prompted/unprompted disclosure distinction. The penalty is calculated as a percentage of the potential lost revenue.

For domestic (Category 1) cases, the non-deliberate maximum is 30% of PLR. The deliberate-and-concealed maximum is 100%. Disclosure quality and timing reduce the penalty within those ranges.

The High Income Child Benefit Charge Scenario

Failure-to-notify penalties have become particularly common in connection with the High Income Child Benefit Charge (HICBC). If you or your partner earns over £60,000 and claims Child Benefit, the higher earner must register for Self Assessment and file a return. Many people in this situation—particularly PAYE employees who have never needed to file a tax return—simply don't know about the requirement.

In Belloul v HMRC [2020] UKFTT 312 (TC), the tribunal found that ignorance of the law can constitute a reasonable excuse for a failure-to-notify penalty. Mr Belloul was a PAYE employee who didn't know about the HICBC. The tribunal held it was objectively reasonable for him to be unaware of the requirement. The penalties were quashed.

Belloul was part of a cluster of similar decisions in 2020, including Hill v HMRC [2020] UKFTT 316 (TC). These cases established that, at least for the HICBC, not knowing about an obligation can be a legitimate defence—though the tribunal will assess whether it was objectively reasonable for you not to know. For a full guide to the charge itself—how it's calculated, how to challenge it, and the key case law—see our guide to the High Income Child Benefit Charge.

How Penalties Are Reduced

Whatever penalty regime applies to you, there are common threads in how penalties can be reduced or eliminated.

Reasonable excuse. For late filing penalties (Schedule 55), late payment penalties (Schedule 56), and failure-to-notify penalties (Schedule 41), if you had a reasonable excuse for the failure, the penalty does not arise. The excuse must cover the entire period, and once it ends, you must act without unreasonable delay. We cover this defence in detail in our guide to reasonable excuse.

Reasonable care. For inaccuracy penalties (Schedule 24), the equivalent concept is reasonable care. If you took reasonable care despite making an error, the inaccuracy is not "careless" and no penalty arises. This is a different test from reasonable excuse—it asks what steps you took to get things right, not whether something prevented you from meeting a deadline.

Special reduction. HMRC has a discretionary power to reduce any penalty if they consider it right because of "special circumstances." This appears in paragraph 16 of Schedule 55, paragraph 9 of Schedule 56, paragraph 11 of Schedule 24 FA 2007, and equivalent provisions in the other schedules.

Ability to pay is explicitly excluded from "special circumstances." If the tribunal reviews HMRC's decision on special reduction, it applies judicial review principles—asking whether HMRC's decision was flawed, not substituting its own view.

Disclosure quality. For inaccuracy and failure-to-notify penalties, the quality and timing of your disclosure directly affects the penalty percentage. Telling HMRC about the problem voluntarily, helping to quantify it, and giving access to records will reduce the penalty toward the minimum end of the range.

Suspension. Available only for careless inaccuracy penalties under Schedule 24. If conditions are met, the penalty is cancelled entirely after the suspension period.

Challenging Your Penalty

If you think your penalty is wrong—or if you might have a defence—here are the steps.

Check the notice carefully. Your penalty notice should explain what you've been charged, how the amount was calculated, and your right to appeal. Look for the legislation reference and the "Your rights" section.

Note the deadline. You have 30 days from the date of the penalty notice to appeal. This deadline is serious—if you miss it, you'll need to apply for permission to make a late appeal, which is harder to obtain.

Consider requesting a review. Before going to tribunal, you can ask HMRC to take a fresh look at the penalty through a statutory review. A different HMRC officer reviews the decision independently. For VAT penalty cases involving reasonable excuse, around 81% of reviewed decisions were cancelled or varied in the taxpayer's favour. A review is free and does not prevent you from going to tribunal afterwards.

Appeal to the tribunal. If you disagree with the review outcome—or prefer to go straight to the tribunal—you can file an appeal. There is no fee to appeal (it costs £0). Most penalty appeals are allocated to the Default Paper or Basic category, which means a straightforward process with limited paperwork. You do not normally have to pay the penalty while an appeal is pending—HMRC will generally not enforce payment until the dispute is resolved.

If your penalty arose from an enquiry into your tax return, the inaccuracy penalties are typically issued alongside or shortly after the closure notice.

Gather your evidence. Whatever defence you're relying on—reasonable excuse, reasonable care, or a challenge to HMRC's calculation—you'll need evidence to support your position. Medical records, correspondence, bank statements, and a clear timeline of events can all be relevant. The more organised your evidence, the better.

A Warning About AI-Generated Case Law

If you're researching your appeal, you may be tempted to use AI tools like ChatGPT to find supporting case law. Be very careful.

In Harber v HMRC [2023] UKFTT 1007 (TC), Mrs Harber relied on case law citations in her penalty appeal that turned out to be entirely fabricated by AI. The tribunal confirmed the citations were "not genuine" and "had instead been generated by artificial intelligence." While the tribunal accepted Mrs Harber didn't know the cases were fake, her appeal was still dismissed.

The lesson is straightforward: only cite cases you have verified on BAILII or the National Archives. If you can't find a case on either site, it may not exist. AI tools can generate plausible-sounding but completely fictitious case names, citations, and holdings.

Key Legislation And Resources

Legislation:

• Schedule 55, Finance Act 2009 — late filing penalties
• Schedule 56, Finance Act 2009 — late payment penalties
• Schedule 24, Finance Act 2007 — inaccuracy penalties
• Schedule 41, Finance Act 2008 — failure to notify penalties
• Schedule 24, Finance Act 2021 — points-based late filing penalties (VAT/ITSA)
• Schedule 26, Finance Act 2021 — new late payment penalties (VAT/ITSA)

GOV.UK guidance:

• Self Assessment penalties — headline penalty amounts
• Estimate your Self Assessment penalties — interactive calculator
• Check when to appeal a Self Assessment penalty — step-by-step appeal guide
• VAT penalty points — the new points regime
• VAT late payment penalties — the new payment regime
• HMRC factsheet CC/FS7a — inaccuracy penalties
• HMRC factsheet CC/FS11 — failure to notify penalties

On this site:

• What is a reasonable excuse? — the key defence for late filing and late payment penalties
• Understanding your HMRC appeal rights — what to do when you first receive a penalty or other appealable decision
• HMRC's internal review — the free step that changes the outcome more often than you'd expect
• How to appeal to the tax tribunal — step-by-step filing guide
• Late appeal to the tax tribunal — what to do if you've missed the deadline
• Tribunal tracks and costs — what to expect once your appeal is filed
• Settling your tax tribunal case — negotiation, ADR, and section 54 agreements

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax adviser, accountant, or solicitor.