HMRC Tax Penalties and how to avoid them

Doing your taxes is rarely considered fun – but it should always be considered essential. Whether you’re a sole trader filing a Self Assessment tax return for the first time or an experienced business owner handling Corporation Tax, Pay As You Earn (PAYE) and Value Added Tax (VAT), it’s crucial you pay your taxes on time and in full. 

As you’ll learn in this article covering HMRC penalties, not staying on top of your taxes can cause serious problems. It can also damage your reputation with HMRC and impede your business’s ability to function in the longer term. 

Read on to learn how HMRC handles different types of late payments and non-payments. We’ve also included a section on how to appeal against penalties you think have been handed out unfairly and one on how our online accounting software can help you avoid fines in the first place.

What are the penalties for not filing a tax return?

The UK tax system isn’t exactly simple, and the same can be said for  HMRC’s penalties, which include different rules for different types of tax. 

In general, though, you can expect to be charged if your tax has been: 

• understated

• overclaimed

• underassessed

• underpaid

Businesses are liable for errors made by their agents, and penalties apply even to honest mistakes (though they are usually lower). 

What are the penalties for tax evasion in the UK?

Before we get to the specific penalties you could face in different circumstances, a quick note on tax evasion. 

In these instances, fines can reach up to 200% of the tax due, plus interest. You will also be named and shamed on Gov.uk website. Even more seriously, tax evasion is a criminal offence, which means perpetrators can face up to seven years in prison in the worst cases.

What are the penalties for filing your tax return late?

When your Self Assessment tax return is late

If you’re paying Self Assessment tax, there’s a simple set of deadlines to remember. 

For the tax year 2020-21, the deadlines are as follows:

• You must register for Self Assessment by 5 October 2021.

• Paper tax returns must be submitted by midnight on 31 October 2021.

• Online tax returns must be submitted by midnight on 31 January 2022.

• Regardless of how you submit your tax returns, you must pay your tax by 31 January 2022.

The government’s Making Tax Digital initiative aims to encourage people to pay their taxes online. As a result, most of those who submit Self Assessment tax returns will only need to worry about the January deadlines. 

Note: Those who spread out their bill with payments on account will also have a second payment deadline – usually 31 July. 

If you miss these deadlines, HMRC charges a late filing penalty of £100 for any delays of up to three months. These penalties increase significantly the longer you leave your tax unpaid, and you’ll also be charged if you miss the payment deadline. 

When your PAYE or National Insurance is late 

If your business employs people, you’ve probably had to set up PAYE and National Insurance for your workers already. We won’t go through the details of how to set up payroll here, but it’s worth considering the potential penalties for late payment. 

Because PAYE is run monthly, you’ll need to complete each of the following tasks in each tax month (from the 6th of one month to the 5th of the next). 

On or before your workers’ payday, you must: 

• record their pay

• calculate deductions, including tax and National Insurance

• calculate the employer’s National Insurance contribution you’ll need to pay on their earnings

• produce payslips for each employee

• report pay and deductions to HMRC in a Full Payment Submission (FPS)

In the next tax month, starting on the 12th, you can view what you owe in your FPS. 

After this, your deadlines are as follows: 

• claim any reductions on what you owe by the 19th. Submit the Employer Payment Submission (EPS) to reclaim statutory payments made to employees, Employment Allowance etc.

• pay HMRC by the 22nd (if you pay by cheque the deadline is the 19th) 

Failure to meet any of these deadlines can land you with a penalty. PAYE penalties are scaled based on how many employees you have.  

HMRC can also add more to your fine, depending on how much you owe.

When your VAT return is late

You must submit a VAT return at the end of each accounting period – usually every three months. The final deadline to do this is one calendar month and seven days after the end of each accounting period. Payment for the VAT return is also due the same day

The return will include your total sales and purchases, the amount of VAT you owe, the amount you can reclaim and what your VAT refund from HMRC is. 

Note: If you’re subject to VAT, you must submit a VAT return even if you have no VAT to pay or reclaim. 

If you don’t pay your VAT by the deadline, HMRC will record it as a ‘default’. This puts you in a 12-month ‘surcharge period’, in which you’re charged a percentage of the unpaid VAT. 

HMRC has the full details, but the basics are as follows:

• The surcharge is lower if your annual turnover is less than £150,000. 

• The percentage you’re charged increases each time you default within the surcharge period.

• The surcharge maxes out at 15% of the VAT you owe or £30, whichever is greater, on the sixth default in the period. 

Even if your return is late, you can avoid surcharge fees if you pay your VAT in full by the deadline, have no tax to pay or are due a VAT repayment. 

On top of these surcharge fees, you may also be charged additional penalties, including up to 100% of any tax understated or over claimed if your return contains a ‘careless or deliberate’ inaccuracy.

When your Corporation Tax is late

Corporation Tax late filing penalties begin with a flat fine of £100. This is levied if your return is even a day late, so it’s crucial you keep on top of things and prepare ahead of time. 

You’re charged a further £100 after three months, and the fees increase significantly from then on. At six months, you’re charged 10% of your unpaid tax amount as estimated by HMRC, and a further 10% is charged after one year. 

Repeat offenders are punished more severely. If you miss the deadline three times in a row, the one-day and three-month penalties increase to £500 each. 

Remember, unlike Self Assessment tax returns, there is no set date by which every company must file its Corporation Tax return. Instead, each company must submit its return 12 months after the end of its accounting period. 

When your CIS tax is late

If you take part in the government’s Construction Industry Scheme (CIS), you must send a monthly return to HMRC by the 19th of the following month. 

Again, the tax month runs from the 6th to the 5th, so if you were sending a return for the period 6 June to 5 July, your deadline would be 19 July. 

If you miss this deadline, you’ll get a penalty, which increases over time: 

• one day late: £100 

• two months late: £200 

• six months late: £300 or 5% of the CIS deductions on the return – whichever is higher

The rate is the same if your return is up to 12 months late. Past this, you may be charged a maximum of £3,000 or 100% of the CIS deductions on the return – again, whichever is higher. 

When your Capital Gains Tax is late

Finally, if you profited by disposing of any assets, you must pay capital gains tax on the profit you made. 

Note: Capital gains tax is charged only on the profit, not on the full amount you received for your assets.

However, Capital Gains Tax also applies to gifts, swaps and compensation in addition to sales, so be careful to report even if you’re not directly selling your assets. 

As always, HMRC has details on what you pay capital gains tax on. 

You must report and pay capital gains tax on UK residential property within 30 days of selling (or otherwise transferring) it. 

For other gains, you can report and pay the tax immediately, or as part of your next Self Assessment tax return. Any errors here will be dealt with according to the penalty rates for Self Assessment, which we’ve covered above. 

For capital gains on property, you will be charged as follows, with the charges again increasing the longer after your 30-day deadline you report and pay: 

• up to six months after: a flat penalty of £100 

• more than six months after: a further £300 or 5% of any tax due – whichever is greater

• more than 12 months after: the same as the six-month rate 

Penalties for errors in your tax return

As well as the specific penalties listed above, HMRC can charge you for errors in any tax return. 

HMRC charges for errors that are: 

• due to a lack of ‘reasonable care’

• deliberate

• deliberate and concealed

Each of these is more serious than the last, and HMRC treats deliberate misreporting and attempts to hide it very harshly. 

Inaccuracy penalties are calculated as follows: 

• lack of reasonable care: between 0% and 30% of the extra tax due

• deliberate: between 20% and 70% of the extra tax due

• deliberate and concealed: between 30% and 100% of the extra tax due

The standard for ‘reasonable care’ differs based on the nature of your business. For those who only pay Self Assessment Income Tax, keeping basic records might be enough, while it wouldn’t be for larger businesses with more complex tax affairs. 

How to appeal against an HMRC penalty online

In many cases, you can reduce penalties by telling HMRC about any errors on your tax return as soon as you notice them. This will also help show that the error was not deliberate and that you are not attempting to conceal it, which will keep your penalty lower. 

You can also stay in the government’s good books by helping them work out how much you owe and giving them access to your records. 

There is also a formal appeals process, which you can use to challenge any type of penalty you face. You can appeal by post or online, and must provide a ‘reasonable excuse’ for any errors in your return. 

Note: Penalties for indirect taxes such as VAT are exempt from this process. To appeal these, you need to request a review from HMRC or the tax tribunal directly. 

Usually, your appeals deadline is 30 days after you receive the penalty notice. After this, you must explain why you missed the deadline before HMRC will consider your appeal. 

The tax tribunal provides a final step for those who want to challenge HMRC’s rejection of an appeal. You must ask them to hear your appeal within 30 days of receiving HMRC’s review decision on your original appeal. 

Avoid tax penalties with QuickBooks

As we’ve seen, tax penalties can be quite severe. Even lower ones can be damaging, especially to smaller businesses, and can harm your relationship with HMRC going forwards.

With software like QuickBooks, you can avoid any nasty surprises. QuickBooks lets you keep all your accounts in one place, integrates with many card payment systems and can even send you automated reminders when your tax is due to make sure you never miss a deadline. 

We hope that this article has helped give you a general understanding of the deadlines for different types of tax and the penalties you could be liable to pay if you miss those deadlines.

Remember, prevention is better than cure. Keep strong records and work with a trusted accountant to avoid a potentially hefty fine.