What Penalties Can HMRC Charge After an Enquiry?

A penalty letter usually arrives once HMRC has concluded that a return, claim or notification was inaccurate, and it sets out the additional tax, the behaviour category applied, and the proposed penalty percentage. It is a formal decision, not an opening negotiating position, though it can still be discussed and challenged.

The letter should reference the legislation used, most commonly Schedule 24 to the Finance Act 2007 for inaccurate returns, or Schedule 41 for a failure to notify a liability. Knowing which schedule applies tells you what evidence is relevant to any challenge.

Receiving this letter does not mean the figure quoted is final. HMRC's proposed penalty can be discussed, reduced through disclosure credit, or appealed if the behaviour finding itself is disputed.

A penalty generally follows because HMRC's enquiry found an inaccuracy that understated tax, and it has concluded the inaccuracy was not simply an innocent, unavoidable mistake. Not every correction leads to a penalty; genuine errors made despite taking reasonable care can attract no penalty at all.

HMRC forms a behaviour judgement based on the facts uncovered during the enquiry: how the error arose, whether professional advice was sought and followed, and whether records were adequate. This judgement is not automatic and can be wrong, particularly where HMRC has limited visibility of the full context.

If you believe HMRC has misjudged the behaviour, for example labelling a genuine oversight as careless, you can put forward evidence such as advice received, systems used, or the circumstances of the error before the penalty is finalised.

HMRC can ask for evidence relevant to the behaviour finding, such as how figures were calculated, what advice was taken, and when you became aware of the inaccuracy. This is usually requested during the underlying enquiry rather than after the penalty letter arrives.

You are entitled to see how HMRC has calculated the proposed penalty, including the tax figure used, the behaviour band, and any reduction already applied for telling, helping and giving access. If this breakdown is missing, you can ask HMRC to provide it before responding.

HMRC cannot charge a penalty simply because it disagrees with a judgement call that was reasonably made on the facts available at the time. The legislation requires an inaccuracy, not merely a difference of interpretation.

Diarise the 30-day appeal deadline immediately, since it runs from the date of the decision, not from when you open the letter. Missing it removes your right to a straightforward appeal, though late appeals are occasionally accepted with a good reason.

Use the first fortnight to gather evidence about your behaviour and cooperation: correspondence showing when you told HMRC, records you provided, and any advice taken at the time of the original return. This evidence supports both a behaviour challenge and a request for maximum disclosure credit.

Do not pay the penalty automatically if you intend to dispute the behaviour finding, but do not ignore the payment deadline either. Ask HMRC to hold collection, or consider Time to Pay, while a genuine dispute is resolved.

Once the underlying enquiry concludes, the penalty decision is usually issued within a few weeks, though disputed behaviour findings can extend this while further evidence is exchanged. A statutory review, if requested, typically takes a number of weeks and is conducted by an HMRC officer not previously involved in the case.

If the dispute is not resolved through review, it proceeds to the First-tier Tribunal, which can take considerably longer and involves a formal hearing process. Many penalty disputes settle before reaching this stage once the evidence is properly presented.

The process ends either with HMRC confirming, reducing or withdrawing the penalty, or with a tribunal decision. Keep the final written outcome with your tax records, since it may be relevant if a similar issue arises in future.

Schedule 24 sets a penalty range for each behaviour category: no penalty is due for an inaccuracy despite reasonable care; a lower range applies to careless errors; and materially higher ranges apply to deliberate, and deliberate and concealed, inaccuracies. Within each range, HMRC then applies a reduction for the quality of disclosure.

Disclosure quality is assessed by telling HMRC what is wrong, helping HMRC quantify it, and giving reasonable access to records. An unprompted disclosure, made before you had reason to believe HMRC was about to discover the issue, attracts a larger potential reduction than a prompted disclosure made only after HMRC raised it.

Separately, HMRC charges interest on unpaid tax from the date it was originally due until payment, calculated under the Finance Act 2009 regime. Interest is not a penalty; it compensates HMRC for tax paid late and applies even where no penalty is charged at all.

Disputing a penalty properly, gathering evidence, negotiating the behaviour category and, if necessary, preparing for a statutory review or tribunal, takes professional time. These costs are on top of any tax and interest genuinely due, and they can accumulate quickly in a contested case.

Tax investigation insurance is designed to meet these professional fees so that challenging an incorrect penalty finding does not become financially self-defeating. Growth plan clients receive free tax investigation insurance as standard, covered in full on our /fees page, which is worth checking before you decide how far to pursue a dispute.

Where a penalty is correctly charged, insurance does not reduce the amount owed, but it does mean the cost of getting the figure right, and negotiating the best available reduction, does not fall entirely on you as a separate bill.

Ignoring the penalty letter, or the 30-day appeal deadline, is the most common and costly mistake, since it can convert a genuinely disputable behaviour finding into a final, binding decision.

Paying immediately without checking the calculation can also work against you if the behaviour category was wrongly applied, since HMRC has less incentive to revisit a matter once payment has been accepted without challenge.

Some taxpayers also overstate their cooperation in correspondence without evidence to support it, which can undermine credibility during a review. Stick to what you can demonstrate: dates, documents and records actually provided.

Consider a Shopify seller who discovers, while preparing this year's accounts, that a prior year's turnover was understated because a payment processor's fees were netted off sales incorrectly. No HMRC letter has arrived yet.

Because the seller identifies and reports the error to HMRC before any compliance check begins, the disclosure is unprompted. HMRC's enquiry into the correction accepts the behaviour as careless, since the error arose from a bookkeeping misunderstanding rather than any attempt to conceal income, and full records are provided promptly.

The resulting penalty sits towards the lower end of the careless range, reflecting the unprompted disclosure and full cooperation, alongside interest on the late-paid tax. Correcting the position before HMRC asked the question made the largest single difference to the outcome.