Guide to the HMRC tax penalties regime

A new, tough, HMRC penalty regime came into play from 1st April 2009. Individuals and business owners can now face penalties of up to 100% for deliberately underpaying tax.

The new HMRC penalty system has been drawn up to encourage people to take more care when submitting tax returns and other documents, as well as to deter deliberate under-assessment of tax liabilities.

The new rules apply to returns and documents submitted on or after 1st April 2009, but penalties can apply from April 2008.

Initially, the new rules apply to income tax, corporation tax, capital gains tax, VAT, PAYE, national insurance contributions and the Construction Industry Scheme (CIS).

Reasonable care

HMRC states; “We have always charged financial penalties for incorrect returns or documents. However the way that penalties will be calculated in the future will be linked to the behaviour that gives rise to the error.

Put simply, you will be fined more if HMRC deem any under-calculation of tax to be ‘deliberate’. Worse still if you have deliberately underestimated your tax liabilities AND have taken “active steps to hide the error”.

Although seemingly reminiscent of something out of “1984”, HMRC are keen to make clear that they will not charge penalties when “reasonable care” has been made to get things right and and error has still been made.

HMRC states that “every person is expected to make and keep sufficient records for them to provide a complete and accurate return.”

If individuals or businesses are unsure about any aspect of the taxation system, they must be able to show that they have sought specialist advice.


Penalties are charged as a percentage of the extra tax due. The rate increases according to how “bad” a taxpayers’ behaviour as been, according to HMRC:

  • No penalties apply if “reasonable care” has been taken

  • Up to 30% for “careless behaviour”

  • Up to 70% for “deliberate mistakes”

  • Up to 100% for “deliberate and concealed mistakes”

Penalties can be suspended for up to two years in cases where “reasonable care” has been taken, if certain conditions are met.

You can find out more about self assessment tax penalties on the HMRC website here.

Bytestart Limited

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