Mistakes in tax returns happen. Sometimes they’re genuine errors, sometimes it’s carelessness and sometimes HMRC believes the behaviour goes further. Whatever the cause, HMRC can apply penalties if inaccurate information leads to underpaid tax.
This HMRC Penalties Guide explains how penalties work, what counts as an inaccuracy, the penalty ranges, how HMRC decides the penalty level, how disclosures reduce penalties, and what to do if HMRC contacts you. It also includes examples, FAQs and links to official HMRC resources so you can get accurate, up-to-date information.
What Counts as an Inaccuracy?
HMRC treats an inaccuracy as anything that:
- reduces tax that should have been paid
- increases tax relief or repayment
- or results in a loss of tax
Common examples include:
- incorrect tax codes
- unreported benefits in kind
- payroll figures entered incorrectly
- ignoring an HMRC coding notice
- mistakes in CIS deductions
- missing income or deductions
- incorrect VAT or PAYE entries
HMRC’s definition of inaccuracies:
https://www.gov.uk/guidance/penalties-for-inaccuracies-in-return-and-documents
How HMRC Decides the Penalty Level
HMRC looks at behaviour, not the size of the mistake. There are three categories:
1. Careless
A lack of reasonable care.
Example: Not checking figures before submitting a return; forgetting to action a coding notice.
Penalty range: 0%–30%
2. Deliberate
You knew the information was wrong but submitted it anyway.
Example: Intentionally under-reporting income.
Penalty range: 20%–70%
3. Deliberate and Concealed
You knew it was wrong and took steps to hide it.
Example: falsified payslips or payroll records.
Penalty range: 30%–100%
How HMRC Reduces Penalties (Telling, Helping and Giving)
HMRC reduces penalties based on how much you cooperate when an error is found. This is called “telling, helping and giving”.
Telling HMRC
Being open about:
- what the inaccuracy is
- how it happened
- who was involved
- when you discovered it
This increases reductions for disclosure.
Helping HMRC
This includes:
- answering questions quickly
- providing records promptly
- explaining your processes
- helping HMRC understand the full position
The more help provided, the bigger the reduction.
Giving HMRC access
Allowing HMRC to check:
- working papers
- payroll records
- software reports
- internal notes
Full access = higher penalty reductions.
These three behaviours determine whether a penalty is reduced to the bottom or top of the range.
How Penalties Are Calculated (8-Step HMRC Process)
HMRC uses an eight-step calculation:
- Identify the inaccuracy
- Work out the potential lost revenue
- Decide behaviour (careless/deliberate/concealed)
- Set the penalty range
- Consider disclosure (prompted/unprompted)
- Apply reductions for telling, helping and giving
- Review special circumstances
- Finalise penalty decision
This ensures consistency across all tax types, not just payroll
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Special Circumstances (Rare, but Possible)
HMRC may reduce a penalty further if there are exceptional circumstances. Examples include:
- severe illness during the period of error
- a natural disaster affecting records
These cases are rare and HMRC applies them sparingly.
Can Penalties Be Suspended? (Careless Errors Only)
HMRC can suspend penalties for careless errors for up to 2 years, if future compliance can prevent the same mistake recurring.
Suspension conditions may include:
- keeping better records
- improving your payroll process
- using professional software
- staff training
- regular internal checks
If all conditions are met, the penalty is cancelled.
Company Director Liability
HMRC may hold company officers personally liable for penalties where:
- the company is insolvent
- the error was deliberate
- the officer knew about the behaviour
- the officer gained personally
This applies only in more serious cases.
Criminal Investigation and Serious Defaulters
HMRC may escalate behaviour to criminal investigation where:
- fraud is suspected
- records have been falsified
- concealment was deliberate and sophisticated
- the amounts involved are significant
HMRC may also publish the names of deliberate defaulters if certain thresholds are met.
Your Rights if HMRC Is Considering Penalties
You have rights under the Human Rights Act, including:
- the right to be told why HMRC thinks a penalty applies
- the right to representation
- the right to remain silent
- the right to appeal
You can request:
- a statutory review
- alternative dispute resolution
- or appeal to the tax tribunal
What Taxes the Penalty Rules Apply To
The rules apply across multiple taxes, including:
- PAYE
- NICs
- VAT
- CIS
- Corporation Tax
- Income Tax Self-Assessment
- Stamp Duty taxes
Full list in the HMRC factsheet.
Penalty Ranges at a Glance
| Behaviour Type | Penalty Range | Notes |
|---|---|---|
| Careless | 0%–30% | Can reduce to 0% with full disclosure |
| Deliberate | 20%–70% | Higher if HMRC discovers the error |
| Deliberate & Concealed | 30%–100% | Most serious category |
Examples of How HMRC Penalties Work
These simple examples mirror real HMRC behaviour.
Example 1 – Ignored Coding Notice (Careless)
A tax code change was issued by HMRC. Payroll didn’t update it.
→ Underpaid tax → careless error → penalty reduced to 0% after early disclosure.
Example 2 – Repeated Benefit in Kind Errors (Careless → Deliberate)
Year 1: Forgot P11D entries → careless.
Year 2: Same mistake again → treated as deliberate.
Example 3 – False CIS Deduction Statement (Deliberate & Concealed)
Subcontractor knowingly falsifies CIS paperwork.
→ Penalty may reach 100%.
How to Avoid HMRC Penalties
- Keep accurate payroll and tax records
- Action HMRC notices immediately
- Review RTI submissions
- Use reliable payroll software
- Train staff or outsource payroll
- Perform regular internal audits
- Make voluntary disclosures early
Voluntary disclosure service:
https://www.gov.uk/guidance/tell-hmrc-about-an-unpaid-tax-liability
Frequently Asked Questions
Do HMRC always charge a penalty for mistakes?
No. If you took reasonable care, HMRC may charge no penalty.
How far back can HMRC look?
Up to 6 years for careless behaviour, 20 years for deliberate conduct.
Can penalties really be reduced to zero?
Yes — with full, early disclosure.
Can a director be personally liable?
Yes, in cases involving deliberate behaviour.
Useful Resources
- HMRC Compliance Factsheet
Need Help Avoiding HMRC Penalties?
We support employers and tax agents by providing:
- payroll audits
- compliance reviews
- error correction
- HMRC enquiry support
- full outsourced payroll
Book a free call with our team to discuss your situation.
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