HMRC penalties – a guide for the self-employed

We all do our best to avoid it, but sometimes small businesses and the self-employed can end up with a penalty from HMRC.

HMRC penalties can be expensive and stressful – but, thankfully, sometimes they can be appealed. If you have a reasonable excuse, your penalty may be amended or waived after an appeal.

• Self Assessment and tax resource
• When is the Self Assessment deadline?
• Bookkeeping tips for small businesses and the self-employed
• How to use HMRC Time to Pay if you can’t pay your Self Assessment tax bill
• A guide to income tax for the self-employed
• What type of business insurance do I need?

Why might I get an HMRC tax penalty?

It’s important to understand the common mistakes that can lead to a penalty. Reasons HMRC might issue a penalty include:

• inaccuracies or errors on your return
• filing a late tax return
• late payment
• failing to keep adequate records

Avoiding HMRC penalties – dates to stay on top of

You need to register for Self Assessment by 5 October – read our guide on how to register and complete your Self Assessment if you’re unsure of what you need to do.

The deadline for filing your tax return is 31 October for paper forms and 31 January for online returns. You must pay your tax bill by 31 January. Check out our full list of tax year dates you need to know when running a business.

You can set up a payment plan if you need more time to pay. You'll be charged interest though, so only use this service if you’re struggling to pay your bill.

HMRC Self Assessment penalties for late filing

The way that HMRC applies penalties is changing to a points-based system from April 2022.

Self Assessment – HMRC late payment penalties

You’ll have to pay a penalty, plus interest, if you pay your tax bill late. If you miss a deadline you must contact HMRC as soon as possible. The UK government website has a tool that helps you estimate your penalty for late payment.

Company Tax Return – HMRC late filing penalties

If you’re a limited company, your corporation tax return is due 12 months after the end of the accounting period it covers, and the deadline to pay your corporation tax bill is usually nine months and one day after the end of your accounting period.

HMRC penalties for undeclared income

If you’ve failed to declare income that you owe tax on, HMRC can issue penalties and charge interest on the amount you owe. This is called a ‘failure to notify’ penalty.

For example, this could be related to a new source of taxable income or you sell an asset and fail to declare the capital gain that you’ll owe tax on.

The penalty will depend on the amount of unpaid tax as a result of failure to notify. You may be able to reduce a penalty if you tell HMRC about the failure.

HMRC penalties for inaccuracies

If you make a mistake on your tax return, it's possible to amend it after filing (within a certain time frame). However HMRC does issue penalties for inaccuracies as a result of carelessness, or if you try to conceal your tax liability deliberately.

Read our guide to how to amend your tax return for more information.

Reasonable excuses for filing your tax return late

We all know that sometimes the unexpected happens and life events can send us off course. That’s why HMRC details what it deems a ‘reasonable excuse’ for late filing or payment.

If you receive a penalty, there’s a chance you'll be able to appeal if there were extenuating circumstances that prevented you from filing your tax return on time.

Examples of reasonable excuses include:

• your partner or another close relative died shortly before the deadline for submitting a tax return or payment
• you had an unexpected hospital stay that meant you couldn’t meet your obligations
• you suffered from a serious or life-threatening illness
• the software you use to complete your returns failed just before the deadline, despite you taking reasonable care to maintain it
• HMRC experienced technical problems – for example, the Self Assessment portal went down
• fire, flood, or theft stopped you from completing your return on time
• your delay was in relation to a disability

Your case will be considered on an individual basis, and HMRC will still want to see that you took reasonable care to meet your tax obligations.

Reasonable excuse and coronavirus

The government has cancelled late payment and filing penalties in February to support taxpayers struggling to meet the 31 January 2022 deadline.

This goes further than the government's previous statement that it would consider the coronavirus pandemic as a reasonable excuse for late filing, but you'd need to go through an appeal process.

You can also set up a payment plan if you need more time to pay.

Interest will be charged from 1 February though, so it's always best to pay on time if you can.

How to appeal HMRC penalty charges

The appeal process varies depending on the penalty you’ve received. You should usually appeal within 30 days of the date on your penalty notice. However, if you were affected by coronavirus and your penalty was issued before 1 October 2021, then HMRC will allow an additional three months for you to send an appeal.

To appeal a Self Assessment penalty…

To appeal against the £100 fine for filing your Self Assessment tax return late, you first need to have either filed your return or told HMRC you don’t need to complete one.

You can use the Self Assessment online portal to appeal any penalties from 2016-17 tax year or later. If you have an earlier penalty, or prefer to use a postal form, you can download form SA370 and send the completed form to HMRC.

To appeal a corporation tax or VAT late filing penalty…

You can use your HMRC online account if you’re a business appealing against a penalty for filing a VAT or corporation tax return late.

There are also specific online forms for certain types of appeal, which you’ll need to complete online and print before posting to HMRC. Examples of claim forms include:

• reasonable excuse for filing a VAT return late
• IT problems stopped you from filing your tax return on time

To appeal HMRC fines relating to PAYE…

If you’re an employer appealing against a penalty relating to PAYE, you should use your account at HMRC’s online PAYE for employers portal.

Who handles an HMRC penalty appeal?

Your appeal will be investigated by an HMRC tax officer who wasn't involved in the original penalty decision.

Alternatively, if you’re appealing a penalty related to an indirect tax such as VAT or excise duty, you might choose to appeal directly to the tax tribunal. You can also request a review from HMRC if you’d prefer.

What if I disagree with HMRC’s decision?

If you disagree with HMRC’s review of your penalty, you can make a further appeal to the tax tribunal. This is an independent body that’ll take evidence from both parties and then make its own decision.

If you want to take your case to tribunal, you must do so within 30 days of the review decision.

Alternatively, you might consider applying for alternative dispute resolution (ADR) to avoid a court hearing. You can apply for ADR if you're trying to resolve a dispute with your personal tax and haven’t been successful through HRMC’s appeal process.

During ADR, an impartial third party will act as a mediator between you and HMRC. The idea is that they'll help you identify the areas that need attention and, where relevant, help to re-establish contact between the two parties.

ADR is particularly useful if you disagree with HMRC over the facts of your case, or if communication between you and HMRC has broken down.

However, you should note that ADR isn’t an option if you’re appealing a fixed penalty, or if you’re disputing your payment deadline.

Do you have any unanswered questions about the HMRC penalty appeal, reasonable excuse, and fines process? Let us know in the comments.

This article was updated on 6 January 2022 following the government's announcement to give Self Assessment taxpayers more time to file their tax return.

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