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If HMRC is able to show that you have under-declared your tax liability, over-claimed tax repayments or failed to tell them that you are liable to pay tax, you may have to pay a penalty in addition to any further tax you owe.

However, it is worth pointing out at the outset that the law does not require perfection – just that you always take “reasonable care” to get your tax right. If you make a mistake despite taking “reasonable care”, no penalty is due.

You can make considerable savings in the penalty “loading” by promptly disclosing and actively co-operating in bringing matters up to date. Conversely, if something is amiss, “playing games” with HMRC and burying your head in the sand can turn out to be a very expensive luxury.

The penalty regime changed in 2008. HMRC will use the regime appropriate to the year when you submitted the return that is being investigated.

“Old” regime – up to 2007/08

For tax years up to and including 2007/08, the penalty starts at 100% of the unpaid tax.  This is then “abated” by reference to the perceived seriousness of the matter, the extent to which the matter is disclosed to HMRC, and the cooperation you give to HMRC.

  • disclosure – The maximum abatement factor is 20%, but an additional 10% can be awarded in circumstances where an entirely voluntary disclosure has been made, unprompted by any fear of imminent discovery.
  • cooperation – The maximum abatement factor is 40% and is given where information is provided without undue delay, questions are answered fully and correctly, sensible payments on account are made etc.
  • seriousness – The maximum abatement factor is 40%; the size of the abatement is dependent on the overall seriousness of the matter, which can range from muddle through to outright fraud.

“New” regime – from 2008/09 onwards

The “new” regime for penalties from the 2008/09 tax year does not repeal the “old” regime.  If there are underpayments for a period spanning 2008, separate penalties will be calculated for each part of the period.

The current regime starts by specifying a maximum penalty according to the “behaviour” leading to the understatement of tax (ranging from failing to take reasonable care through to deliberately understating tax and taking steps to hide the understatement from HMRC).  It also provides for a possible reduction according to whether the disclosure of the understatement was voluntary or was prompted by actual or imminent HMRC intervention.


 Starting-point penalty Reduction in penalty
potentially available
Enquiry initiated by HMRC Voluntary unprompted disclosure
Negligence (failure to take “reasonable care”)  30% 15% 30%
Deliberate understatement  70% 35% 50%
Concealed deliberate understatement  100% 50% 70%


If offshore tax havens are concerned, penalties can be higher still (up to a maximum of 200%).

The amount of the potential reduction achieved in a particular case depends on the extent to which you are considered to have assisted in regularising the position:

  • up to 40% of the maximum potential reduction is available for promptly admitting, disclosing and explaining the irregularity
  • up to 30% is available for assisting in quantifying it
  • up to 30% for giving access to records and documents reasonably requested by HMRC to check the position.

When we act on behalf of those under investigation, we aim to secure the full reduction wherever possible.

Under the newer regime, HMRC can often be persuaded to suspend a penalty for negligence (but not for deliberate understatement) for up to two years if certain undertakings appropriate to the case are given.  The penalty can fall away if there are no further tax errors in the suspension period. Where a penalty has to be conceded, we will always seek to negotiate suspension if at all possible.

In all cases (under both the old and new regimes), any penalty which HMRC seeks to impose is subject to the normal appeal process.

Why you should contact us

Our experienced team of former tax inspectors is able to advise on all aspects of penalties including:

  • whether a penalty has been incurred at all
  • whether the penalty sought is excessive
  • whether suspension should be available
  • whether an appeal against the penalty is advisable

For more information or help from one of our tax investigation specialists, please contact us using our enquiry form.