Guidance and worked examples on when HMRC can issue a tax penalty.
HMRC can charge you a penalty for various reasons, if you do not comply with the tax rules. For example, if you:
submit a tax return late
pay tax late
fail to notify HMRC about changes that may affect tax liability
make an error that understates your tax liability unless you took reasonable care.
The penalty regime is very much a behaviour-based system under which the level of penalties is determined based on three behavioural concepts. These are:
whether the misdemeanour was deliberate
whether the parties then try to conceal it.
Establishing the deliberate and concealment motives is more of a problem for HMRC but establishing whether somebody has taken reasonable care is far more subjective. However, both taxpayers and agents alike are expected to take 'reasonable care' when dealing with their tax affairs.
What is reasonable care?
Exactly how to define reasonable care is subjective but HMRC has issued its own view on this in the Compliance Manual Handbook at CH81120.
Special rules apply when considering what is reasonable care for inaccuracies relating to avoidance arrangements in a document submitted on or after 16 November 2017, which relates to a tax period that began on or after 6 April 2017 and ended after 15 November 2017.
FA07/SCH24 Schedule 24 of the Finance Act 2007 introduced the tax penalty regime and a change of emphasis in how penalties are charged on tax transgressions.
Where a document is submitted to HMRC containing an inaccuracy arising from the use of avoidance arrangements the behaviour will always be presumed to be careless unless:
the inaccuracy was deliberate on the person’s (P’s) part, or
the person (P) satisfies HMRC or the tribunal that they took reasonable care to avoid the inaccuracy.
This means that when these rules apply and where a person has used an avoidance arrangement the onus is on them to show that they took reasonable care.
The burden of proof to demonstrate that a person’s behaviour is deliberate is on HMRC.
A taxpayer who can demonstrate that he acted on professional advice from a person with the appropriate expertise, which takes account of their personal circumstances, will normally be able to demonstrate they took reasonable care.
HMRC guidance gives some specific examples:
a reasonably argued view of situations that is not upheld
an arithmetical or transposition inaccuracy that is not so large, either in absolute terms or relative to the overall liability, as to produce an odd result or be picked up by the quality check
following advice from HMRC that later proves to be wrong, provided that all the details and circumstances were given when the advice was sought
acting on advice from a competent adviser which proved to be wrong, despite the fact that the adviser was given a full set of accurate facts.
Additionally, HMRC acknowledges some of the following practical hindrances in filing the tax return on time as a reasonable excuse (when you have taken reasonable care to meet the deadline):
your partner or another close relative died shortly before the tax return or payment deadline
you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
you had a serious or life-threatening illness
your computer or software failed just before, or while you were preparing your online return
service issues with HM Revenue and Customs (HMRC) Online Services
a fire, flood or theft prevented you from completing your tax return
postal delays that you could not have predicted
delays related to a disability you have.
You must send your return or payment as soon as possible after your reasonable excuse is resolved.
How much is the late filing penalty for self-assessment?
There are filing penalties for submitting tax returns late. These penalties apply even if you do not have a tax liability. The penalty dates for 2019/20 tax return late filings are as follows:
Late penalty date
Miss filing deadline
31 January 2021
3 months late
30 April 2021
daily penalty £10 per day for up to 90 days (max £900)
6 months late
31 July 2021
the higher of £300 or 5% of the tax due
12 months late
31 January 2022
a further £300 or 5% of the tax due (whichever is higher)
There may also be penalties for failure to notify chargeability and for error if there is a mistake in a return.
The amount of the penalty depends on:
the behaviour type involved
whether the error was prompted or not
the potential lost revenue.
All partners can be charged a penalty if a partnership tax return is late.
How much is the late payment penalty for self-assessment?
The late payment of tax will generally attract a late payment penalty. Since 18 November 2015, HMRC has had the ability to instruct banks and building societies to deduct amounts to settle taxpayers' tax debts directly from their bank accounts, often referred to as the ‘direct recovery of debt’ (DRD) provisions. As a result of these, it is less likely that more than one late payment penalty will be issued by HMRC, as the tax can be directly recovered from the debtor’s bank account.
Section 107 of FA 2009, Schedule 56 provides a schedule for a guidance to determine which provisions are in force for the late payment of tax. The late payment penalties for unpaid tax due on 31 January 2021 would be:
Delay in making payment after due date
Late penalty charge date
After 30 days
3 March 2021
5% of tax outstanding at that date
After 6 months
1 August 2021
a further 5% of the tax outstanding at that date
After 12 months
1 February 2021
a further 5% of the tax outstanding at that date
The ‘penalty date’ is the day after a period of 30 days have expired after the original due date. This means that the penalty date is 31 days (30 days plus one day) after the original deadline. For online returns due by 31 January this means that the first penalty will be levied if the tax is paid on 3 March (2 March in a leap year) the same year or later. HMRC tool on GOV.UK can be used to estimate the late payment penalties under Self-Assessment.
The subsequent penalty dates occur six months and 12 months after the original due date.
Mark files his return online by the deadline of 31 January, with a liability of £15,000 tax to pay. He makes a payment of £9,000, leaving £6,000 unpaid. If the amount is still outstanding on 3 March, then he is liable to a penalty of £300 (£6,000 x 5%).
If it remains outstanding on 3 August, then a further penalty of £300 is due.
The rules apply to balancing payments of tax due by 31 January after the end of the tax year. They also apply to late paid payments on account, but only where an amount is still outstanding following 31 January after the end of the tax year.
The penalty must be paid within 30 days of the issue date of that notice. There is interest payable on unpaid penalties after the due date.
However, no penalty will be chargeable if HMRC agree there is a reasonable excuse for the failure to pay on time – for full details refer to CH155550.
Can HMRC suspend penalties?
Yes, it is possible. Finance Act 2007 Schedule 24 paragraph 14 allows HMRC to suspend all or part of a penalty for a careless inaccuracy by notice in writing.
The penalty provisions in Finance Act 2007 seek to influence behaviour by encouraging and supporting those who try to meet their obligations and penalising those who do not.
If HMRC charge you a penalty for a careless error, you can ask them to suspend the penalty for up to two years. In those circumstances, HMRC will be only collecting the penalties if you do not keep to the terms of the suspension. Additionally, you may have to pay any other penalty due in relation to the new error as well.
Once HMRC is satisfied at the end of the suspension period that you have met all the conditions, the suspended penalty is cancelled, and you do not have to pay it.
You can review this flowchart to assess whether HMRC is able to suspend the penalty due to failure to take reasonable care.