In this post, we look specifically at the tax penalties HMRC can impose after a dispute.

Late tax submission and payment

We recently wrote a blog about the new system of late tax penalties. This gives you details about late payment penalties and interest charges. In this article, we will focus on the penalties HMRC can levy if you fail to win a tax dispute.

UK tax penalties

HMRC determines the size of any tax penalty by assessing intent and co-operation. In a dispute, the taxman will decide which of the following four categories apply to you:

  • You made a genuine mistake. If you made an innocent error and were taking reasonable care to make accurate tax payments, you will not face a penalty.
  • You didn’t take reasonable care. HMRC guidance on what constitutes reasonable care can be found here. Essentially, the taxman will gauge a taxpayer’s abilities and circumstances. So it would expect a higher standard from a large company when compared to a self-employed individual. If you have not taken reasonable care, the penalty can be between 0% and 30% of the extra tax due. If you don’t report the error yourself, the minimum penalty is 15%.
  • You made a deliberate error. If you deliberately underreport your taxes, you face a penalty of between 20% and 70% of the extra tax due. If you don’t self-disclose the error, the minimum penalty is 35%.
  • You made a deliberate error and concealed it. If you deliberately make a tax error and attempt to conceal it – such as by falsifying financial documents – you face a penalty of between 30% and 100%. The minimum penalty is 50% unless you report the error yourself.

As you can see, if you report an error to HMRC yourself, the penalty will be lower than if HMRC approaches you first.

Offshore tax penalties

It’s worth knowing that penalties relating to offshore funds are different. HMRC has created three different categories of overseas countries. The tax penalties you could pay will depend where funds are held.

  • Category 1 territories. These include most European states and the USA. These have the same penalties as funds held in the UK.
  • Category 2 penalties. Most other countries are in this category. Penalties can be up to 45% for carelessness and up to 150% for deliberate and concealed error.
  • Category 3 penalties. This include countries considered by HMRC to be high risk. They include locations such as Monaco, Panama, Uruguay and the United Arab Emirates. There’s a maximum penalty of 60% for carelessness, which rises to 200% for deliberate and concealed error.

You can find a full list of countries by category on this page.

How can I avoid penalties?

The best way to avoid penalties is to use a professional accountant like THP. We’ll help make sure your tax returns are accurate. This will minimise the chances of HMRC opening an investigation against you. However, for additional peace of mind we recommend our Tax Investigation Fee Protection Service. If the taxman comes knocking, it can cover you for up to £100,000 in accountancy fees, meaning we can handle the investigation without you having to worry about racking up costs as it progresses. Get in touch today to learn more.

Need further advice on any of the topics being discussed? Get in touch and see how we can help.

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    Avatar for Karen Jones
    About Karen Jones

    Having worked for one of the world’s largest accountancy firms, Karen Jones uses her tax knowledge and skills to help clients obtain substantial reductions to their tax liabilities.

    With an expanding portfolio of tax clients, Karen enjoys the variety her work brings her and particularly likes working with new businesses and people. With a growing number of tax clients, she frequently faces a variety of challenges and relishes the experience she gains as she solves them.

    Karen likes the THP ethos: “I like the way the team has a professional, but friendly and down-to-earth approach – it creates a productive atmosphere that benefits everyone.”

    Karen’s specialist skills:

    • Personal Taxation
    • Tax Efficient Planning
    • Trust Administration
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