How HMRC Calculates Your Tax Penalty

Calculating your tax bill can be a complicated affair – that’s why you turn to your friendly accountant with all of their expertise – but what if there is also a penalty to be paid? When it comes to tax penalties, there are four main reasons why HMRC might charge you:

  1. If you pay tax late;
  2. If you submit your tax return or paperwork late;
  3. If you fail to tell HMRC of any changes that would affect your tax;
  4. If you make an error on a tax return, payment or paperwork.

Let’s focus on this last one in particular as it has come up recently in the news.

HMRC charges a penalty if there are errors in a tax return which understate the tax to be paid or misrepresent the liability. The amount of the penalty will depend on why the error occurred in the first place.

How is the “Failure To Notify” penalty calculated?

First, HMRC need to know the additional amount of tax that is due as a result of correcting the error. Then, they apply an extra amount on top of that, depending on how serious the reason for failing to pay the correct amount in the first place:

  • If it is due to a lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due;
  • If it was deliberate, such as sending incorrect information, the penalty will be between 20% and 70% of the extra tax due;
  • If it was both deliberate and concealed, for example sending incorrect information and then trying to hide the error, the penalty will be between 30% and 100% of the additional tax due;

As you can see, in the most egregious example where someone has deliberately concealed how much tax they have to pay, they could end up paying double the amount of tax in the end once the truth is revealed. That’s the tax due, and then 100% of that amount on top.

There is a sliding scale before reaching that point. HMRC point out that penalties can be reduced by being as transparent and helpful as possible. Telling them about the errors, helping them to calculate the extra amount due, and giving them access to the figures can all contribute to reducing the size of the penalty.

The penalty can also be reduced by making the disclosure before HMRC forces the issue, as we can see from the table of penalties in the HMRC Compliance Manual:

How can you avoid this kind of penalty in the first place?

Here are 5 tips:

  • Paperwork – keep copies.
    • This sounds a painful task but if you can scan copies then at least it won’t take up too much space in your house. There are even apps for your phone that will enable you to scan a document simply by using the camera on your smartphone.
  • Transparency – be honest.
    • Always disclose as much as possible to your accountant so that they are in possession of all the facts. They have the expertise to determine what’s relevant but they need all the information to be able to do so.
  • Ask questions – there are no stupid questions.
    • Ask your accountant anything. It might take time for them to reply but it’s better to raise the issue rather than worry about it later.
  • Timely – don’t be late.
    • Try to meet deadlines as best you can so that there is enough time to find extra paperwork or answer further questions.
  • Be ethical.
    • The rules are there for a reason and apply to everyone, even those at the highest level in the land.

Your accountant will help you to navigate your tax return but they need your help first to ensure they have all the relevant information.


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