HMRC Penalties For Undeclared Income: Failure To Notify, Schedule 41 And How To Appeal

Income came in that HMRC never heard about. Every answer you have found since is a percentage: "up to 100%" in one place, "up to 200%" in another, with nothing to say whether that means £200 or £20,000.

The headline figure is a maximum, applied not to the income you failed to declare but to a base called potential lost revenue, which is often smaller than people expect. Two levers still sit partly in your hands:

• The base is the tax still unpaid on 31 January after the tax year, not the tax HMRC eventually assess. Paid by then, and the base can be nil.
• The percentage turns on who spoke first and how soon. The same £8,000 of tax costs £800 if you come forward before HMRC write, and £2,800 if HMRC come first and allege the failure was deliberate.

If nothing has arrived from HMRC, the cheapest moment is before they write. If a penalty assessment has landed, the grounds of appeal and the 30 days clock are near the end, and you do not have to pay the penalty to appeal it.

Which Penalty Are You Actually Facing?

"Undeclared income" covers three legally different situations with three penalty schedules. This article is about the first row; the overview of HMRC penalties maps the rest.

The switch is section 7(1A) TMA 1970: the duty to notify applies to someone who "has not received a notice under section 8 requiring a return" for the year. A return issued and filed with income missing is a Schedule 24 inaccuracy, and paragraph 15(1) of Schedule 41 stops two penalties being charged on the same tax.

Which Letter Have You Had?

Everything below is the civil penalty system: a percentage of tax, settled in correspondence or before a tribunal. Criminal prosecution is a separate route HMRC reserve for a small number of cases. Three civil letters arrive at three different stages, and only one starts a clock.

• A nudge letter invites you to check your own position. There is nothing to appeal, because nothing has been decided. It usually makes any disclosure you then make prompted.
• A compliance check letter opens a formal check into a year or a tax. Still nothing to appeal on the penalty, though a Schedule 36 information notice sent with it may be appealable in its own right.
• A penalty assessment names a figure and comes with factsheet CC/FS11. This is the one with the 30 days deadline.

The Duty Behind The Penalty: Telling HMRC By 5 October

Section 7 TMA 1970 requires anyone chargeable to income tax or capital gains tax who has not been sent a return to "give notice to an officer of the Board that he is so chargeable" within six months of the end of the tax year: by 5 October (register for Self Assessment).

Most employees never think about this because of section 7(3): no notice is needed if all your income is taxed under PAYE or at source, you have no chargeable gains, and you are not liable to any charge listed in section 30 of the Income Tax Act 2007. That list is the trap. It includes the High Income Child Benefit Charge, pension charges such as the annual allowance, and the gift aid clawback where you have not paid enough tax to cover them. A PAYE employee liable to any of them must notify.

The exemption also goes the moment you have income nobody taxed at source: rent from a let property, self-employment profits, gains on crypto assets. In Locke v HMRC [2025] UKFTT 956 (TC) the duty "does not rely on whether or not a 'profit' is made" ([56]), and a 2007 letter saying no further returns would be sent "cannot absolve" the taxpayer of it for 2020-21 and 2021-22 ([61]).

If Your Failure Is VAT Registration

The VAT duty is different. Under Schedule 1 to VATA 1994, once taxable turnover in any rolling 12 months passes £90,000 you must notify HMRC "within 30 days of the end of the relevant month" (paragraph 5(1)), and the base is the VAT for the whole period until HMRC were told (CH72740). The Digital Disclosure Service below cannot be used for VAT; see VAT penalties and appeals and VAT registration delays and queries.

How The Penalty Is Calculated

Your Behaviour Sets The Maximum

Paragraph 6 of Schedule 41 sets three standard percentages of potential lost revenue for a UK matter: 30% for "any other case", 70% for a deliberate but not concealed failure, and 100% where you also made "arrangements to conceal the situation giving rise to the obligation" (paragraph 5).

Unlike Schedule 24, there is no "careless" tier for HMRC to establish. Everything not deliberate is "any other case", and in Brown v HMRC [2024] UKFTT 245 (TC) the tribunal confirmed that "HMRC do not need to prove that the behaviour of the taxpayer was careless" ([93]). The exits from the 30% band are a reasonable excuse, which cancels the penalty, and the reductions below. Offshore income carries higher percentages: see offshore income and the 200% penalty.

Potential Lost Revenue: The Tax Unpaid On 31 January

For income tax and CGT, paragraph 7(2) defines potential lost revenue as "so much of any income tax or capital gains tax to which P is liable in respect of the tax year as by reason of the failure is unpaid on 31 January following the tax year".

For you: the measure is what was still unpaid on that date, and HMRC's manual, CH72700, works its examples that way. Where the tax was in fact paid by then, say through a PAYE coding adjustment, the base and the penalty are nil even though the notification was late. Check your dates rather than assume.

Against you: the base does not wait for an assessment. In HMRC v Robertson [2019] UKUT 202 (TCC) the Upper Tribunal reinstated HICBC penalties the First-tier Tribunal had cancelled: "In persuading itself instead that PLR was limited to and determined by the tax shown in an assessment, the FTT fell into error" ([19]). Paragraph 16 of the Schedule puts it beyond doubt that potential lost revenue does not depend on an assessment ([24]).

Cutting The Penalty

Paragraph 13 obliges HMRC to reduce the standard percentage for the quality of your disclosure, scored as telling (30%), helping to quantify the tax (40%) and giving access to records (30%) (CH73220).

The reduction stops at a floor. Which floor depends on whether the disclosure was unprompted or prompted and, for a non-deliberate failure, on whether HMRC learned of it within 12 months.

A further restriction is HMRC's own, and it is narrower than it looks. Where someone has taken "a significant period", normally over three years, to come forward, CH73360 cuts the available reduction by 10 percentage points. But the same page limits it to the top two bands: "For failure to notify cases, this only applies to deliberate or deliberate and concealed behaviour." The 12-month rule below already prices in delay, so "no further adjustment is needed for non-deliberate behaviour, even if more than 3 years have elapsed". If HMRC apply a timing restriction to a failure they have not alleged was deliberate, quote that page back to them.

You can check HMRC's arithmetic. CH73520 takes the gap between the maximum and the minimum, multiplies it by your disclosure score, and deducts the result from the maximum. Say your band runs from a 30% maximum down to a 20% floor: the gap is 10 points, so a 70% score removes 7 of them and leaves a penalty of 23%. If the percentage on your notice does not come out of that sum, ask HMRC which of telling, helping and giving they marked down, and why.

Prompted Or Unprompted Is An Objective Test

A disclosure is unprompted if made "at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover" the failure; otherwise it is prompted (paragraph 12(3)). The test is objective: "It is not what the person believed but what the particular facts and circumstances gave him reason to believe, taking into account the person's circumstances and abilities" (CH73140). A national campaign about a type of income does not make you prompted; a letter to you about your income does (CH73160).

In Legg v HMRC [2023] UKFTT 994 (TC) a disclosure made only after HMRC's second HICBC letter was prompted, and the penalties ran at 27% and 24% ([66]). If a letter has arrived, read it: unless it says HMRC will treat a reply as unprompted, the floor has probably moved from 10% to 20%. Our nudge letter guide covers the letter itself.

The 12-Month Line

The lower floor applies to a non-deliberate failure if HMRC become aware of it "less than 12 months after the time when the tax first becomes unpaid by reason of the failure" (paragraph 13(3)). For 2024-25 the tax first became unpaid on 31 January 2026, so the line falls on 31 January 2027, and inside it an unprompted disclosure can be reduced to 0%.

In Ramsdale v HMRC [2020] UKFTT 155 (TC) the latest year carried no penalty because HMRC became aware inside that window and full credit was given for the disclosure; the earlier years took 10% ([6]).

What This Looks Like In Money

A PAYE employee started letting a flat in 2021 and never registered. The rental profit produces income tax of £2,000 for 2021-22 and £3,000 for each of 2022-23 and 2023-24: £8,000. Nothing is alleged to be deliberate, and by 2026 every year is past its 12-month line. Figures are illustrative.

Interest is the same in every row. It runs from each year's original due date at the HMRC rate in force from time to time (currently 7.75%), cannot be appealed, and on this example has added roughly £1,500 by September 2026 and is still running (interest on unpaid tax).

How Far Back HMRC Can Go

An assessment can ordinarily be made up to four years after the end of the tax year (section 34 TMA 1970), six where the loss of tax was brought about carelessly and 20 where it was deliberate (section 36). Failure to notify has its own limb: under section 36(1A)(b), a loss of tax "attributable to a failure by the person to comply with an obligation under section 7" can be assessed up to 20 years later, with no culpability requirement (CH53900).

Herrmann v HMRC [2024] UKFTT 303 (TC) shows it. In February 2020 HMRC assessed undeclared rent back to 2002-03 ([1]), with penalties under the old section 7(8) TMA regime for 2008-09 and earlier and Schedule 41 from 2009-10 (in force from 1 April 2010). The penalty side needs no carelessness: "There is no requirement that the failure to notify be negligent or careless before a penalty can be charged" ([48]). The assessments were a separate question, because for 2008-09 and earlier the extended limit still required negligence (SI 2009/403, article 7). The tribunal found it, so those years were in time too ([24]), and everything was upheld ([69]).

The back years come as discovery assessments under section 29 TMA, with their own appeal: see discovery assessments and, for HICBC, Wilkes v HMRC.

When A Reasonable Excuse Shortens The Window

Section 118(2) TMA 1970 deems a person who had a reasonable excuse for not doing something "not to have failed to do it", provided they did it without unreasonable delay once the excuse ceased. With no failure under section 7, section 36(1A)(b) has nothing to attach to, and HMRC's own table, CH56100, gives the limit as 20 years "or 4 years from the end of the year of assessment where the person has a qualifying reasonable excuse".

The excuse defeats section 36(1A) only. As Brown puts it, HMRC "cannot rely on the extended six-year time limit under s36(1) unless the person had failed to take reasonable care", and cannot use the 20-year limit "if the person had a reasonable excuse for not notifying" ([40]). The window closes at four years only where both fail, which is why the tribunal made two findings, that Mr Brown had a reasonable excuse and "did not fail to take reasonable care", before holding the older assessments, even had they been valid, "were made out of time" ([87]). No penalties arose ([89]). It is a finding made on evidence, not a step you can take, and it is unavailable where the failure is found to be deliberate.

Coming Forward, Or Waiting To Be Found

Whether to disclose, and how, depends on facts an adviser needs to see.

HMRC's route for income tax, CGT, corporation tax and NIC is the Digital Disclosure Service: you notify HMRC, and the clock starts when they acknowledge that notification. You then have 90 days to work out the tax, interest and penalty for every year, submit the disclosure and pay. The same page carries HMRC's tax, interest and penalty calculators, usable where your affairs are straightforward and you are only entitled to basic personal allowances.

It is not an amnesty. Penalties still apply, though "they'll usually be lower if you make a voluntary disclosure", and HMRC check the figures: their guide to making a disclosure warns that "if following our checks, we find that a disclosure is largely wrong we'll seek much higher penalties". If you cannot pay in full, say so before sending it; an online service checks whether you are eligible for a payment plan.

Landlords use the Let Property Campaign, with the same 90 days window; offshore matters go through the Worldwide Disclosure Facility in the offshore guide.

Where HMRC suspect deliberate behaviour they may investigate under Code of Practice 9, which offers a formal contract (the Contractual Disclosure Facility) with a fixed period to respond. Anyone who receives a COP9 letter, or thinks HMRC could allege deliberate behaviour, should take advice before responding at all.

What Happens If You Do Nothing

HMRC hold third-party data: letting agents, deposit schemes, online platforms, banks, Child Benefit records. The first letter about your income makes any later disclosure prompted, lifting the floor from 10% to 20%.

A compliance check follows, with Schedule 36 information notices if you do not answer, then discovery assessments reaching back up to 20 years. In Locke, rent disclosed only after "compliance checks were opened" fed into a finding that the failure was deliberate ([79]), lifting the floor to 35% and closing the reasonable-excuse door.

Challenging A Failure-To-Notify Penalty

What HMRC Must Prove First

In Perrin v HMRC [2018] UKUT 156 (TCC) the Upper Tribunal said "the initial burden lies on HMRC to establish that events have occurred as a result of which a penalty is, prima facie, due. A mere assertion of the occurrence of the relevant events in a statement of case is not sufficient" ([69]).

Here that means proving you were chargeable, that no return was issued, that you did not notify and, if alleged, that the failure was deliberate and the disclosure prompted (Locke [30]). Only then must you show a reasonable excuse (Hill v HMRC [2020] UKFTT 316 (TC) [20]).

Reasonable Excuse

Paragraph 20 of Schedule 41 removes liability for a failure "which is not deliberate" where there was a reasonable excuse. Insufficiency of funds does not count unless caused by events outside your control, reliance on someone else does not count unless you took reasonable care, and the defence disappears once a failure is found to be deliberate (Locke [50]). Paragraph 21(1) runs in parallel where an accountant or agent was meant to handle it: their failure counts as yours, unless you satisfy HMRC or the tribunal "that P took reasonable care to avoid the failure".

The excuse most people in this position have is that they did not know the duty existed. Perrin says that is not automatically fatal: "It will be a matter of judgment for the FTT in each case whether it was objectively reasonable for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long" ([82]). The four-step test is in our Perrin analysis; see also reasonable excuse.

The HICBC cases turn on one evidential question: can HMRC prove they wrote to you? In Belloul v HMRC [2020] UKFTT 312 (TC) HMRC's only evidence was a printout with no address; the judge accepted the letter was never received ([30]) and held that a PAYE employee outside Self Assessment need not "go rummaging through all of HMRC's information on the off chance" ([40]). In Hill the appellant had been "lulled into a false sense of security" by the information he did receive ([40]), and the penalties were discharged ([43]).

HMRC have accepted the point themselves. Their 2019 review went through 35,000 failure-to-notify penalty cases and cancelled the penalties of "over 6,000 customers who had a reasonable excuse", refunding £1.8 million in 4,885 cases. It was narrow, covering only 2013-14 to 2015-16 and only families who had claimed Child Benefit before the charge existed or became liable through a new partnership, and it is closed. It is still evidence that ignorance of this charge can be reasonable.

It cuts the other way too. In Ramsdale the August 2013 letter and the public information meant a genuine belief was not objectively reasonable ([30]); in Legg the nudge letter had been received ([46]) and "there is no obligation on HMRC to notify, specifically, a taxpayer of new legislation" ([62]).

What The Tribunal Can And Cannot Do

The tribunal can affirm or cancel the penalty and, on an appeal about the amount, substitute any decision HMRC could have made (paragraph 19). It cannot reduce a penalty for unfairness: "There is no jurisdiction to set aside or reduce the penalties on the grounds that they are unfair" (Ramsdale [33]; see Hok).

Paragraph 14 lets HMRC reduce a penalty for "special circumstances", but ability to pay is excluded, time to pay is for HMRC rather than the tribunal (Ramsdale [35]), and the tribunal can revisit HMRC's decision only if it was "flawed" in the judicial-review sense (paragraph 19(3)-(4); Locke [84]).

How To Appeal

A Schedule 41 appeal "shall be treated in the same way as an appeal against an assessment to the tax concerned" (paragraph 18(1)): for income tax, a written notice of appeal to HMRC within 30 days of the penalty notice (section 31A TMA 1970), stating your grounds. You can then accept a statutory review (HMRC have 45 days to complete it, then you have 30 days to notify the tribunal) or go straight to the tribunal on form T240.

A missed deadline needs permission for a late appeal.

Check HMRC's own deadline as well. Paragraph 16(4) requires the penalty to be assessed within 12 months of the end of the appeal period for the tax assessment, or, where there is no assessment, of the date the unpaid tax "is ascertained". A penalty raised outside that window is open to challenge on its own.

You do not have to pay the penalty first. Paragraph 16(2) makes it payable within 30 days of the notice, but paragraph 18(2)(a) provides that nothing requires you "to pay a penalty before an appeal against the assessment of the penalty is determined". The tax is separate, with its own appeal and its own postponement application.

Read HMRC's letters against each other. In Brown the statement of case argued for 27% when HMRC's earlier "view of the matter" letter had conceded 20% ([96]), and the tribunal said it was not the taxpayer's fault "that HMRC's systems are not joined-up" ([97]). Check each element for each year; writing grounds of appeal shows how to frame them.

What To Do Now

1. Work out which years and which regime. Were you sent a notice to file? If not, it is Schedule 41. Note the 31 January after each year and whether the tax was paid by then.
2. Keep every letter. A nudge or compliance-check letter fixes the date you became prompted; HMRC's "view of the matter" letter fixes the percentage they have conceded.
3. Reconstruct what you knew and when. Payslips, Child Benefit correspondence, anything HMRC sent or did not send. Reasonable excuse is decided on evidence, and the burden is yours.
4. If HMRC could allege deliberate behaviour, take advice before replying. The reasonable-excuse defence goes with a deliberate finding. TaxAid gives free advice to people on incomes below £30,500; the representation guide sets out the options.

Key Legislation And Resources

Legislation

• Section 7 TMA 1970—the duty to notify chargeability and the section 7(3) exemption
• Schedule 41 FA 2008—the failure-to-notify penalty regime in full
• Section 30 ITA 2007—the "additional tax" list that removes the PAYE exemption (HICBC, pension charges, gift aid)
• Section 34 TMA 1970—the four-year assessment limit
• Section 36 TMA 1970—six-year and 20-year limits; s.36(1A)(b) for failure to notify
• Section 118 TMA 1970—reasonable excuse: deemed not to have failed
• Section 31A TMA 1970—notice of appeal within 30 days
• Section 101 FA 2009—late payment interest
• Schedule 1 VATA 1994—the VAT registration duty
• SI 2009/511—Schedule 41 commencement, 1 April 2010
• SI 2009/403, article 7—negligence required for 2008-09 and earlier

Key Cases

• Perrin v HMRC [2018] UKUT 156 (TCC)—HMRC's initial burden ([69]); no bar on ignorance of the law, but it is judged case by case, and the tribunal must also fix when the excuse ceased ([82])
• HMRC v Robertson [2019] UKUT 202 (TCC)—potential lost revenue is measured on the liability, not on an assessment; penalties upheld at 10%
• Belloul v HMRC [2020] UKFTT 312 (TC)—HMRC could not prove the awareness letter was sent; ignorance was a reasonable excuse
• Hill v HMRC [2020] UKFTT 316 (TC)—"lulled into a false sense of security"; assessments stood, penalties discharged
• Ramsdale v HMRC [2020] UKFTT 155 (TC)—the 12-month rule in action; genuine belief not objectively reasonable; no fairness jurisdiction
• Legg v HMRC [2023] UKFTT 994 (TC)—disclosure after a nudge letter is prompted; no duty on HMRC to notify taxpayers of new law
• Brown v HMRC [2024] UKFTT 245 (TC)—reasonable excuse cancelled the penalties and put the older assessments out of time; HMRC's arithmetic contradicted their own letter
• Herrmann v HMRC [2024] UKFTT 303 (TC)—undeclared rent back to 2002-03; both penalty regimes; 20-year limit applied
• Locke v HMRC [2025] UKFTT 956 (TC)—a 2007 letter did not excuse later years; disclosure only after compliance checks; deliberate finding

HMRC Guidance

• CC/FS11: penalties for failure to notify—the factsheet sent with the penalty letter
• CH71120—when the Schedule 41 regime applies
• CH72700—potential lost revenue for income tax and CGT
• CH72740—potential lost revenue for VAT registration
• CH73140—unprompted or prompted: the objective test
• CH73160—worked examples of prompted and unprompted disclosure
• CH73180—the 12-month rule
• CH73200—maximum and minimum percentages
• CH73220—telling, helping and giving access
• CH73360—the three-year timing restriction, and why it does not bite on non-deliberate failures
• CH73520—calculating the penalty
• CH74560—appeals against a penalty
• CH53900—the 20-year time limit for failure to notify
• CH56100—time-limit table, including the reasonable-excuse row
• Tell HMRC about underpaid tax from previous years—the Digital Disclosure Service
• Your guide to making a disclosure—years, penalties and HMRC's warning on incomplete disclosures
• Let Property Campaign—the landlords' disclosure route
• Code of Practice 9—where HMRC suspect fraud
• HICBC penalty review, June 2019—35,000 cases reviewed; penalties cancelled for over 6,000 people
• Register for Self Assessment—the 5 October deadline
• HMRC interest rates—current late payment and repayment rates

On This Site

• HMRC penalties explained—the wider penalty landscape
• Reducing HMRC penalties—Schedule 24 inaccuracy penalties and the 30/40/30 quality score
• Self Assessment penalties—Schedules 55 and 56: late filing and late payment
• High Income Child Benefit Charge—the biggest single source of failure-to-notify penalties
• Online platform income and nudge letters—the letter that makes you prompted
• Offshore income and the 200% penalty—territory uplifts and the Worldwide Disclosure Facility
• Property income appeals—undeclared rent and the Let Property Campaign
• Crypto tax appeals—gains nobody taxed at source
• Discovery assessments—how the back years are assessed
• Wilkes v HMRC—the HICBC "income" point and the FA 2022 fix
• What is a reasonable excuse?—the defence in general
• Perrin v HMRC—the four-step test
• Hok v HMRC—why the tribunal cannot cut a penalty for unfairness
• Interest on unpaid tax—no appeal against interest
• Postponing payment during an appeal—the tax, as opposed to the penalty
• How to appeal to the tax tribunal—the filing process
• Form T240—the notice of appeal, box by box
• Tribunal tracks and costs—which track your appeal goes on, and the costs risk
• Tax tribunal representation—free and paid help

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.