Winning on penalties

It’s reasonably well-known that if it’s found that your self-assessment understates your tax liability, HMRC will routinely consider the question of penalties.

Sometimes it’s possible to persuade HMRC that although your self-assessment was wrong, you had nonetheless taken all reasonable care to get it right: this is ‘innocent error’ and no penalties will normally be charged (we say ‘normally’ because in some limited circumstances you can be treated as having been careless even though in fact you weren’t).

Absent ‘innocent error’, the range of possible penalties will depend on how the understatement arose (was it ‘careless’, ‘deliberate’ or ‘deliberate and concealed’?) and on whether it came to light from your spontaneous disclosure or from HMRC’s investigations.

Where in that range the penalty falls depends on, broadly, how helpful you have been in correcting it – what HMRC call ‘quality of disclosure’.

So much is set out by legislation.

One factor considered relevant by HMRC (but not set out in legislation) is the ‘timing’ of the disclosure.  If more than three years have elapsed between the occurrence of the error (typically, the date on which the offending tax return was filed) and your engagement with HMRC (the date on which you make an unprompted disclosure or respond to HMRC’s challenge), the penalty levied will normally be increased by 10 percentage points.

You might think that’s a bit odd.  Surely, delay in remedying errors in your tax affairs is already penalised by the levying of interest (currently 6.5% per year – and, since you ask, yes: that is indeed more than double the rate at which HMRC pay interest on repayments)?  Fair point: we don’t make the rules – we just warn about them.  And, happily, HMRC do tell their officers that ‘there may be circumstances where you consider that it is not appropriate to apply the restriction, for example a one-off error that the person would never have had reason to reconsider’ and authorise managers (but not case-workers) to waive the uplift where appropriate.

In some situations, uplifting the penalty by ten percentage points doesn’t much affect the outcome.  For example, if HMRC discover you have deliberately concealed income from investments in Albania, the effect of the three-year rule is to increase the absolute minimum penalty (assuming full co-operation) from 110% of the tax lost to 120%.

In others, it can have a much greater effect.  In particular, imagine that HMRC discover that you have made a careless error on your tax return (affecting a UK tax matter) more than three years ago.  If you are as difficult and un-cooperative as you know how to be, leaving HMRC to make all the running, you will be charged a penalty of 30% of the tax lost.  If you are completely helpful and cooperative the penalty will be 25%.

You might be tempted to conclude that such a modest reward is hardly worth having and scarcely warrants your investing time, effort and cost in smoothing HMRC’s way.  You might just as well have the pleasure of telling HMRC to [insert your colourful phrase of choice here].

Tempting though that may be, we couldn’t recommend it.  For one thing, it’s not how professionals behave.  For another, remember that a penalty for a careless inaccuracy (but not for a deliberate one) may be suspended – meaning that provided you comply with conditions set by HMRC for a period of up to two years, the penalty will fall away.

In principle, the quantum of the penalty should have no effect on the decision to suspend it.  In practice, HMRC officers are human and may be more willing to cut some slack on suspension if you have helped in quantifying and resolving the understatement.

For more information, please get in touch with your usual BKL contact or use our enquiry form.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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