Open consultation

Reform of behavioural penalties

Published 26 March 2025

Summary

Subject of this consultation

The reform of inaccuracy and failure to notify penalties.

Scope of this consultation

The consultation seeks views on options to improve the financial penalties that apply when inaccuracies are found in returns and documents submitted to HMRC and where taxpayers do not meet their obligations to notify HMRC of circumstances that affect their tax liability.

Who should read this

Any individual, business, or organisation with views on improving tax administration and compliance. The consultation is likely to be of particular interest to tax agents, representative bodies, charities, and other voluntary organisations that help people with their tax affairs.

Duration

The consultation will run for 12 weeks from 26 March to 18 June 2025.

Lead official

The lead officials for this consultation are C. Warwick, A. Willis, and G. D’Cunha of HMRC.

How to respond or enquire about this consultation

Any responses or queries about this consultation should be sent to tafrcompliance@hmrc.gov.uk.

Respondents do not have to respond to all the questions in this document. HMRC welcomes partial responses focused on the individual aspects that are most relevant to the respondent.

Additional ways to be involved

HMRC welcomes engagement with a wide range of stakeholders and will organise discussions to support input from taxpayers, intermediaries, and representative bodies.

Please contact HMRC using the email address above if you would like to discuss the issues covered by this consultation.

After the consultation

HMRC will publish a summary of responses as soon as possible after the consultation period closes. Responses to the consultation will be used to inform future policy proposals and draft legislation for further consultation.

Getting to this stage

Schedule 24 of Finance Act 2007 and Schedule 41 of Finance Act 2008 provide for financial penalties where errors are found in returns and other documents provided to HMRC and where taxpayers fail to meet their obligations to notify HMRC of circumstances that concern their tax liability.

The government published an initial call for evidence, The Tax Administration Framework: Supporting a 21st Century tax system, on 23 March 2021, followed by a summary of responses on 30 November 2021. The call for evidence drew significant support for HMRC to review the areas of the administration framework relating to HMRC’s powers, penalties, and safeguards.

In response to stakeholder feedback, HMRC conducted further analysis and engagement with stakeholders to explore potential reforms, particularly in relation to penalty simplification and the alignment of penalties across different tax regimes. This was included in a second call for evidence ‘The Tax Administration Framework Review – enquiry and assessment powers, penalties, safeguards’, which was published on 15 February 2024, followed by a summary of responses on 30 October 2024. Stakeholders continued to support for penalty simplification, greater alignment of penalties across tax regimes, and modernisation of penalty administration.

Previous engagement

HMRC held discussions with tax professional bodies and taxpayer representative groups during the 2021 and 2024 calls for evidence and continues to engage with external stakeholders and other tax authorities.

1. Introduction

The majority of taxpayers meet their tax obligations in full and on time. However, a small minority of people and businesses do not and may receive a penalty from HMRC.

Penalties serve multiple purposes: they encourage taxpayers to comply with their obligations, act as a sanction for those who do not, and support fairness by ensuring those who do break the rules run the risk of being worse off. This consultation explores options for simplifying and strengthening penalties for inaccuracies and failures to notify.

In 2024, the government published a call for evidence: The Tax Administration Framework Review – enquiry and assessment powers, penalties, safeguards. This sought views on aspects of the penalty regime that created challenges for taxpayers, agents and HMRC. These challenges were centred on:

• proportionality: making sure penalties are set high enough to encourage compliance but not so high that they produce unfair outcomes
• complexity: for example, the number of different penalties and processes can make it difficult for some people to navigate the system and understand what they need to do
• establishing behaviour: many penalties are varied depending on the taxpayer’s behaviour, and this can be costly and time-consuming for taxpayers and HMRC to assess

Respondents agreed there was potential for fewer, simpler penalties, as captured in the summary of responses. This could reduce complexity, making penalties easier to understand and strengthening the incentive to get things right first time. Respondents broadly felt penalties should continue to distinguish between genuine mistakes and conscious attempts to ‘cheat’ the tax system but believed there was scope to simplify the way in which those behaviours were assessed.

Building on this feedback, this consultation proposes 2 different approaches to reforming penalties for inaccuracies and failure to notify:

1. Reforming the existing framework: this approach would retain key aspects of the existing penalty system but simplify how penalties are calculated and applied. This could involve reducing the number of penalty categories, standardising how behaviour is assessed, and making the rules clearer and easier to follow.
2. Exploring an alternative model: this approach considers a more fundamental redesign of penalties to improve clarity and consistency. It looks at whether a different structure could better achieve fairness, compliance, and deterrence while reducing complexity for taxpayers, agents, and HMRC.

The government is seeking stakeholder views on which approach is preferable and whether a combination of elements from both might offer the most effective and coherent way forward. For example, some aspects of the existing framework may work well with targeted improvements, while others may benefit from a fresh design. Input from stakeholders will be crucial in determining the best path to create a penalty system that is fairer, simpler, and more effective.

Both approaches aim to ensure penalties remain proportionate, effective, and easy to administer, while also strengthening deterrents for deliberate non-compliance and maintaining fairness for those who make genuine mistakes.

The outcome of this consultation will directly inform the next stage of policy development. The government will use this feedback to consider how reforms to create simpler, easier-to-understand inaccuracy and failure to notify penalties could be applied to other tax penalties, simplifying and reducing complexity on a wider scale.

As they are subject to separate consultations, it does not consider penalties contained within HMRC’s data-gathering powers under Schedule 23, Finance Act 2011 or penalties that may apply to Dishonest Tax Agents.

Chapter 2 provides more detail of the scope of this consultation and further background on inaccuracy and failure to notify penalties.

Chapter 3 explores options to reform those existing penalties, including ways to simplify the behavioural considerations that HMRC, taxpayers and agents must take into account.

Chapter 4 sets out a different model and seeks feedback on an alternative approach which could reduce complexity.

2. The existing penalties

HMRC’s existing penalties for inaccuracies and failures to notify are set out in:

• Schedule 24 of the Finance Act 2007: inaccuracy penalties
• Schedule 41 of the Finance Act 2008: failure to notify penalties

Taxpayers may receive reductions to inaccuracy and failure to notify penalties based on the timing and quality of their disclosure. This means that if they identified an inaccuracy or failure to notify and have told HMRC about it, assisted HMRC in calculating the size of the inaccuracy and provided relevant information to correct it. This is sometimes referred to as ‘telling, helping and giving access’.

HMRC typically follows the following steps to work out the penalty amount:

1. Calculating the potential lost revenue (the additional amount of tax that becomes due or payable as a result of correcting an inaccuracy).
2. Forming a view of the behaviour involved.
3. Evaluating the nature of the disclosure – determining whether the taxpayer voluntarily disclosed the issue (unprompted disclosure) or only did so after HMRC began an investigation (prompted disclosure), as this affects the penalty level. 
4. Working out the reductions for the quality of disclosure (how well a taxpayer tells, helps, and gives access to HMRC during the disclosure process).
5. Working out the penalty percentage rate (as a percentage of potential lost revenue).
6. Working out the penalty amount.
7. Considering if any other reductions are necessary.

Depending on the penalty and behaviour involved, additional steps may include:

• considering if a reasonable excuse applies, in the case of a failure to notify
• looking at when the disclosure was made
• suspension of a careless inaccuracy penalty
• considering if additional offshore penalties apply
• publishing details of deliberate tax defaulters

Inaccuracy penalties

Penalties apply where an inaccuracy arising from careless (also referred to as ‘failure to take reasonable care’) or deliberate behaviour in a taxpayer’s return or documents results in tax being understated. If the taxpayer took reasonable care to avoid an inaccuracy, there is usually no penalty. However, if a taxpayer discovers an inaccuracy that is neither careless nor deliberate after submitting a return or document and does not take reasonable steps to inform HMRC, the inaccuracy will be treated as careless.

A disclosure is unprompted when a taxpayer tells HMRC about an inaccuracy before HMRC has made an enquiry or before HMRC determines that the taxpayer had reason to believe discovery was imminent. If they tell HMRC at any other time, it will be a prompted disclosure.

For most taxes, the penalty rate will fall within one of 6 ranges depending on the behaviour involved and whether the disclosure is prompted or unprompted. For example, the penalty for a careless inaccuracy corrected through an unprompted disclosure will be between 0% and 30% of the potential lost revenue. For income tax, capital gains tax, and inheritance tax the penalty rate will fall within one of 18 ranges depending on the behaviour, the type of disclosure, and whether offshore non-compliance was involved. The penalty ranges are set out in Annex A.

The final penalty rate depends on any reduction given based on how much assistance the taxpayer provides to HMRC. This is referred to as the quality of disclosure or as ‘telling, helping, and giving access’. Since September 2016, the maximum reduction that taxpayers can receive is normally restricted by 10 percent when they have taken a significant period (normally considered to be 3 years or more) to correct their non-compliance.

Careless inaccuracy penalties may be suspended for up to 2 years if HMRC sets conditions to help the taxpayer avoid similar penalties in future tax returns. If the taxpayer meets these conditions by the end of the suspension period, the penalty is cancelled; otherwise, it becomes payable.

Failure to notify penalties

Penalties apply where taxpayers fail to notify HMRC on time of circumstances concerning their tax liability, including when they first become liable to pay certain taxes and if they intend to carry out a taxable activity that must be registered with HMRC. A full list of the circumstances in which a failure to notify penalty applies is available in HMRC’s Compliance handbook.

There are 3 types of behaviour associated with failures to notify: non deliberate, deliberate but not concealed, and deliberate and concealed. Penalties for non-deliberate failures do not apply where the taxpayer has a reasonable excuse for failing to notify HMRC on time and acts without unreasonable delay after the reasonable excuse ends. What constitutes a reasonable excuse depends upon the taxpayer’s particular circumstances and abilities.

For most taxes, the penalty rate will fall within one of 8 ranges depending on the behaviour, the type of disclosure, and the timing of the disclosure in relation to when the tax became due. For example, an unprompted disclosure concerning a non-deliberate failure to notify liability to tax after 12 months of the tax being due will attract a penalty between 10% and 30% of the potential lost revenue.

For income tax and capital gains tax the penalty rate will fall within one of 24 ranges depending on the behaviour, the type and timing of disclosure, and whether offshore non-compliance is involved. The penalty ranges are set out in Annex A.

As with inaccuracy penalties, the final penalty rate will reflect any reduction given for the quality of disclosure.

3. Improving existing penalties

HMRC’s penalties for inaccuracies and failures to notify are calculated with reference to the taxpayer’s behaviour, as detailed in Chapter 2. This means that these financial penalties are graduated, with the final penalty based on the taxpayer’s actions and cooperation with HMRC.

A common theme in the 2024 call for evidence was that behavioural penalties ensured fairness and proportionality (with the penalty range adjusted, depending on the severity of the taxpayer’s failure and how they acted upon it), but there was a desire from respondents to make them simpler and provide stronger incentives for taxpayers to make disclosures and cooperate with HMRC’s enquiries.

This chapter suggests options to simplify and strengthen HMRC’s behavioural penalties, examining ways to reform existing inaccuracy and failure to notify penalties based upon these core features:

• simplifying the decision-making process to determine the quality of disclosure, by changing how HMRC assesses:
  • timing of disclosure
  • type of disclosure
  • cooperation
• strengthening how penalties apply to the most serious failure and inaccuracies and repeated instance of these, by changing:
  • the penalty rates for deliberate and repeated instances of deliberate behaviour
• simplifying offshore penalties, considering:
  • the original rationale for these penalties, and how this applies now
  • the case for higher rates for these penalties
• simplifying and strengthening penalty suspension, considering:
  • ways in which the approach to suspension could be reformed to make it more effective and administratively simpler

The government is keen to receive views on all of these elements of the decision-making process. This will help to determine what a package of potential reforms to existing legislation could consist of.

Timing of disclosure

The timing of disclosure affects the penalty a taxpayer might receive. HMRC will not reduce the penalty beyond a certain point (setting a ‘minimum’ penalty amount) if the disclosure happens after a certain period of time. There are different rules depending on whether the taxpayer faces an inaccuracy or failure to notify penalty. These are as follows:

• for inaccuracy penalties – if a taxpayer takes a long time (usually 3 years or more) to correct or disclose an inaccuracy, HMRC will normally set a minimum penalty of 10%
• for failure to notify penalties (non-deliberate cases) – if HMRC finds out about the issue within 12 months of the tax becoming due, the penalty can be reduced to:
  • 0% (no penalty) if the taxpayer voluntarily reports the issue (unprompted disclosure)
  • 10% penalty if the taxpayer only reports it after HMRC starts looking into it (prompted disclosure)
• for failure to notify penalties (deliberate cases) – if the failure to notify was ‘deliberate’ or ‘deliberate and concealed’, the penalty reduction is capped, meaning the penalty can only be reduced by a maximum of 10 percentage points

This approach is meant to encourage taxpayers to come forward promptly, as soon as they identify an issue. However, determining when a disclosure was made often requires HMRC staff to apply subjective judgement, particularly in relation to when the obligation was missed and which penalty reduction (or restriction) applies. This makes the system more complex for both HMRC and taxpayers, leading to uncertainty about what the penalty may be.

HMRC’s aim is to collect the right tax and ensure everyone plays by the same rules. It wants to encourage taxpayers to disclose past mistakes and put things right as soon as possible, helping them to understand what went wrong so they don’t make the same mistake again. Its aim is to prioritise interactions that change future behaviours and prevent repeat offending.

Some respondents to the 2024 call for evidence suggested that restricting the penalty reduction for disclosures beyond a certain time period (such as after 3 years) may discourage taxpayers who identify mistakes from coming forward and telling HMRC about them. In such circumstances, irrespective of how helpful and cooperative a taxpayer might be after making a disclosure, if it occurs after a certain time period they will still face a minimum penalty of 10%. Additionally, even where penalties are reduced or avoided, interest will still apply on any unpaid tax, meaning disclosures made later are not without financial consequences for the taxpayer.

This could be addressed by:

• removing the minimum 10% inaccuracy penalty for disclosures made after 3 years
• removing the minimum 10% failure to notify penalty for disclosures made after 12 months, for non-deliberate behaviour

For failure to notify penalties, a minimum penalty of 30% would only apply to disclosures made after 3 years by those who had been deliberately non-compliant.

This could encourage more taxpayers to come forward at a later date, when previously they might have been discouraged from doing so by the prospect of a higher penalty. This could have a positive effect on disclosures and support better cooperation from taxpayers who might have otherwise remained silent.

Question 1: What are your views on removing the minimum 10% penalties for:

1. inaccuracies disclosed after 3 years
2. failures to notify disclosed after 12 months for non-deliberate behaviour?

Reductions for type and quality of disclosure

Penalties may be reduced depending on how a disclosure is made to HMRC. This includes:

• the type of disclosure – whether the taxpayer voluntarily disclosed the issue (unprompted) or it was found, or was expected to be discovered, by HMRC (prompted). This is a factor in determining the appropriate penalty range (the minimum and maximum penalty)
• the quality of disclosure – how cooperative the taxpayer was in assisting HMRC. This is considered across 3 elements and given a weighting. The final weight (out of 100%) is then applied to the penalty range to apply the reduction. The 3 elements are:
  • ‘telling’: admitting and explaining the issue – this is given a weight of 0% to 30%
  • ‘helping’: assisting HMRC in quantifying the size of the discrepancy or unpaid tax – this is given a weight of 0% to 40%
  • ‘giving access’: providing relevant records and documents – this is given a weight of 0% to 30%

These factors lead to multiple penalty ranges (as shown in tables 3.1 and 3.2) and the final penalty issued will fall somewhere within the appropriate range. This can make the system complex for taxpayers to understand and for HMRC to administer.

Table 3.1: Inaccuracy penalty ranges (excluding income tax, capital gains tax, and inheritance tax)

Type of behaviour	Unprompted disclosure	Prompted disclosure
Careless	0% to 30%	15% to 30%
Deliberate but not concealed	20% to 70%	35% to 70%
Deliberate and concealed	30% to 100%	50% to 100%

Table 3.2: Failure to notify penalty range

Type of behaviour	Unprompted disclosure	Prompted disclosure
Non-deliberate	0% to 30%	10% to 30%
Deliberate but not concealed	20% to 70%	35% to 70%
Deliberate and concealed	30% to 100%	50% to 100%

The following proposals could help to simplify the ways in which the type and quality of disclosure is considered by HMRC and used to calculate the penalty.

First, a set reduction could be applied to the maximum penalty, based on whether the disclosure was prompted or unprompted. This could be used as a way to make the penalty ranges easier to understand, with the notion that a set percentage reduction would be applied for taxpayers who come forward, unprompted, to make a disclosure.

Second, the quality of disclosure factors could be merged to make them simpler. Currently, ‘telling’ and ‘helping’ are calculated as separate elements of the quality of disclosure, even though they incorporate some similar aspects of taxpayer assistance and cooperation. These could be combined into one decision. The weighting could also include some consideration of the type of disclosure so that less of the final weight is subjective.

As an example, the framework for deciding the reduction to the penalty range for the type and quality of disclosure (out of a 100% weighting) could look like the following:

• the type of disclosure – given a weight of either 0% (prompted) or 30% (unprompted)
• ‘telling’ and ‘helping’ – covering the taxpayer’s admission and extent of the disclosure, explanation of why it occurred, and the help, assistance and information given to quantify the size of discrepancy or quantity of unpaid tax. This could be given a weight of 0% to 40%.
• ‘giving access’ – covering how positively the taxpayer responds to requests for information and allows access to relevant documents. This could be given a weight of 0% to 30%

HMRC would need to consider how its processes and guidance should reflect any consolidation of the categories, such as those in the example above, to make its calculations clear and easy to understand for taxpayers. This framework could be kept simpler if HMRC assessed the weightings for cooperation in 10% increments (for example, only applying a 0%, 10%, 20% or 30% weighting for ‘giving access’ to HMRC).

Question 2: What are your views on the ways in which HMRC could:

1. simplify penalty reductions for unprompted disclosure
2. simplify penalty reductions for the quality of disclosure?

Deliberate and repeated inaccuracies/failures to notify

HMRC’s aim is for everyone to pay the tax that is legally due, no matter who they are. It supports them to get their taxes right and ensures everyone plays by the same rules. It is HMRC’s view that tax obligations should be adjusted to reflect taxpayer behaviour, with less compliant taxpayers facing increasing obligations.

Some respondents to the 2024 call for evidence supported the principle that sanctions for deliberate failures could be strengthened. In particular, some noted that there were few additional consequences for those who repeatedly broke the rules. At present, the legislation treats each inaccuracy or failure to notify in isolation and doesn’t consider any previous compliance history, either positive or negative.

Some respondents noted that any tougher penalties would need to be balanced with taxpayer safeguards, such as ensuring taxpayers were fully aware they were ‘on notice’ before applying penalties for repeated behaviours. It was also important for HMRC to recognise that several related mistakes might be uncovered by a taxpayer at the same time, covering different taxes and time periods, and some respondents believed this should be treated as one ‘instance’ of non-compliance rather than a sequence of repeated non-compliance.

The government proposes introducing higher inaccuracy and failure to notify penalties for those who intentionally conceal or underreport to HMRC. This would maintain an active deterrent and appropriate sanction for deliberate behaviour, and ensure that these individuals and businesses did not gain an unfair advantage over the compliant majority of taxpayers. These could be applied in conjunction with the simplifications and potential reforms outlined in the rest of Chapter 3.

The sanction for deliberate behaviour could be strengthened by raising the penalty minimum and maximum for a first inaccuracy or failure to notify penalty, covering both ‘deliberate but not concealed’ and ‘deliberate and concealed’ behaviours. There could be a case for reviewing whether these 2 distinct categories continue to serve a useful purpose, or whether a single ‘deliberate’ category of behaviour could cover both situations. Careless and non-deliberate inaccuracy and failure to notify penalty ranges would be left unchanged, recognising that those who make genuine mistakes should have an opportunity to put things right without being unduly penalised.

These penalty ranges for deliberate behaviours would then be raised even higher for a second, repeated inaccuracy or failure to notify penalty, and any that occurred after this. This would need careful consideration so that these higher penalties were only applied to those who could be clearly shown to have a history of such behaviour by HMRC.

It would also be important to consider when, or if, the higher rates for repeated, deliberate inaccuracies or failures to notify should be ‘reset’, such that the next would be treated as a ‘new’ occurrence (and not part of a previous pattern) of behaviour.

Question 3: With reference to the existing inaccuracy and failure to notify penalty ranges, what would you consider to be proportionate and appropriate penalty rates for both deliberate behaviour and repeated instances of deliberate behaviour? Which factors should be considered when applying these?

Offshore penalty rates

Inaccuracy and failure to notify penalties for offshore tax liabilities, such as when taxpayers underreport assets or income held abroad, can be higher than those for domestic, UK tax liabilities. Higher offshore penalties were introduced as it was often harder for HMRC to obtain information that was needed to detect and tackle tax offshore non-compliance. The introduction of higher penalties aimed to strengthen the deterrent against non-compliance where information was harder for HMRC to obtain. HMRC often relies on foreign jurisdictions providing it with the information it needs to tackle offshore non-compliance, therefore, the penalty rates are linked to how readily the foreign territory shares information and co-operates with the UK (for example, inaccuracy penalty rates are shown in Table 3.3).

Table 3.3: Offshore inaccuracy penalty ranges for income tax, capital gains tax, and inheritance tax from 2016 to 2017 (Note 1)

Category (Note 2)	Behaviour	Unprompted disclosure	Prompted disclosure
1	Careless	0% to 30%	15% to 30%
1	Deliberate but not concealed	20% to 70%	45% to 70%
1	Deliberate and concealed	40% to 100%	60% to 100%
2	Careless	0% to 45%	22.5% to 45%
2	Deliberate but not concealed	40% to 105%	62.5% to 105%
2	Deliberate and concealed	85% to 150%	85% to 150%
3	Careless	0% to 60%	30% to 60%
3	Deliberate but not concealed	50% to 140%	80% to 140%
3	Deliberate and concealed	70% to 200%	110% to 200%

Note 1: The minimum penalty for ‘Deliberate’ and ‘Deliberate and Concealed’ behaviours were all increased by 10% for years 2016-17 onwards by Schedule 21, Finance Act 2016 Note 2: Foreign territories are divided into 3 categories, based on how readily the foreign territory shares information and cooperates with the UK in the area of taxation.

Some respondents to the 2024 call for evidence felt there was scope to simplify and reform offshore penalties. In particular:

• the current offshore penalty rates were seen by some as unduly punitive and disproportionate – this may deter those who have made errors from contacting HMRC to correct that as (for some territories) the penalty for making an error is double that for a domestic matter of similar seriousness
• it was considered unfair, by some, that the higher offshore rates only applied to income tax, inheritance tax and capital gains tax
• further complexity was added by offshore asset moves penalties (Schedule 21, Finance Act 2015) and asset-based penalties (Schedule 22, Finance Act 2016) – although respondents felt these were rarely charged in practice, they could, cumulatively, lead to much higher penalty rates – they were also considered to be complicated for taxpayers and agents to understand

Many respondents noted that when these offshore rates were initially created, the sharing of information between tax jurisdictions was much less sophisticated and common than it is now. Since then, for example, the introduction of the Common Reporting Standard (CRS) has led to the regular exchange of financial account information between over 100 jurisdictions. This improved cross-border sharing of data was felt to provide a better deterrent than higher penalties.

It is vital that the tax system maintains an effective sanction for those who seek to hide their income and assets to evade tax.

The government is interested in views on how the current offshore penalties regime could be simplified whilst still acting as an effective deterrent.

Question 4: How could penalties for offshore non-compliance be simplified whilst still acting as an effective deterrent?

Penalty suspension

Taxpayers who make a careless inaccuracy may have their penalty suspended. If the taxpayer agrees to a series of conditions set by HMRC and meets those conditions over a specified period (up to 2 years), the penalty will no longer be due. Penalty suspension aims to turn a sanction into an incentive to comply voluntarily.

HMRC considers penalty suspension where it could support compliance, encouraging the taxpayer to make changes to avoid making a similar mistake again. Conditions for penalty suspension might include, for example, filing tax returns on time and introducing processes or software to help ensure deadlines are not missed in future. Each taxpayer will be assessed on a case-by-case basis, but HMRC may consider how likely the taxpayer is to comply with the conditions of suspension, whether the current inaccuracy might be repeated if the underlying cause of it is not addressed, and if a suitable condition to address it can be identified.

HMRC has previously received views from stakeholders on the operation and effectiveness of penalty suspension, through feedback to the 2021 and 2024 calls for evidence. The following themes were commonly reflected in this feedback:

• there was a lack of awareness about the process – some suggested that the majority of taxpayers were not aware of penalty suspension as an approach, until the point at which it was offered to them
• agreeing to and complying with penalty suspension conditions could be time and resource consuming – some felt the process of agreeing to and complying with the conditions took too long. It also lengthened the time period during which the individual or business were uncertain as to whether they would be liable for a penalty or not
• there was a perceived lack of consistency in the application of penalty suspension – some believed it was odd that penalty suspension only applied to inaccuracies, and others felt that there was often little or no follow-up or feedback from HMRC as to whether the conditions had been successfully met

HMRC dedicates significant time and resources to administering cases of penalty suspension. It can take time to set conditions that are tailored to and appropriate for each taxpayer inaccuracy. It can also be challenging to verify that the taxpayer has put in place all of the mitigations and met the conditions set as part of the penalty suspension. HMRC often relies on the taxpayer self-certifying that they have met the conditions.

Any changes to the current approach to penalty suspension should consider:

• how effectively it encourages taxpayers to be more compliant in future – one of the aims of penalty suspension is to address patterns of behaviour that have led to the inaccuracy arising, or remedy technical factors that have created the environment in which inaccuracies can more readily occur
• how it impacts on the administrative costs of taxpayers, businesses and HMRC, in terms of time, staff costs and the financial impact of any changes
• how HMRC can best use its resources to provide value for money to the wider public

Approaches to make penalty suspension simpler could include:

1. Automatically suspending penalties for careless inaccuracies, without conditions – This could reduce administrative costs for HMRC and the taxpayer. It could place greater responsibility on the taxpayer to identify the source of the inaccuracy and put in place their own mitigations to address it, though HMRC could provide some standard advice on measures to reduce the likelihood of making similar mistakes in future. The suspended penalty would become due if the taxpayer incurred another, new penalty during the period of suspension.

2. Replacing penalty suspension with a ‘caution’ – This would operate in a similar way but without HMRC applying a penalty and then suspending it. The simplicity of the message for the taxpayer, and the notion that they are being treated more leniently for a first inaccuracy, could help to strengthen trust in HMRC and encourage taxpayers to take greater care. Alternatively, the lack of an immediate consequence could increase the risk of similar mistakes in future.

Question 5: How could HMRC simplify penalty suspension while retaining an effective prompt to taxpayers to address the source of the inaccuracy?

4. Alternative approaches

A different model for behavioural penalties

An alternative approach to reforming current legislation and processes could be to unify inaccuracy and failure to notify penalties through a single model and further strip back behavioural considerations. This chapter builds on the reform opportunities in Chapter 3 but considers how these design features could be reflected through a different legislative approach.

This model could combine aspects of simpler, historic penalty regimes that applied prior to the introduction of Schedule 24 Finance Act 2007, with some newer considerations of taxpayer circumstances, proportionality and fairness.

The government acknowledges that designing a new penalty regime from the ground-up could bring additional challenges compared to modifying existing legislation and processes. Any merits of such an approach would need to be considered against any transitional costs of introducing new legislation, moving to new processes for administering and dealing with penalties, and educating taxpayers on any new sanctions or safeguards.

However, it presents an opportunity to consider what a different penalty regime might look like, how it could be optimised to promote compliance and ensure fairness in the tax system, and potentially provide a model that could be introduced to a greater range of existing penalties over time.

This proposed model consists of 2 features: a misdeclaration/failure to notify penalty and a civil evasion penalty. This would aim to provide a clear division between the penalty charged for the inaccuracy or failure to notify itself (the misdeclaration penalty, which would form the majority of cases), and a tougher sanction reserved for the more serious cases of deliberate non-compliance (the civil evasion penalty).

Misdeclaration/failure to notify penalty

A misdeclaration/failure to notify penalty would replace the majority of existing inaccuracy and failure to notify penalties. The misdeclaration penalty could work in the following way:

• as with the current approach, it would be a tax-geared penalty (calculated as a percentage of the understated liability, or overstated repayment or losses) – the penalty would be set at a low percentage
• it would be applied to all cases of non-compliance, regardless of the taxpayer’s behaviour (subject to specific mitigations, detailed below) – one option could be to remove the category of ‘careless’ behaviour to replace it with the ability for taxpayers to claim a ‘reasonable excuse’ for making the mistake
• the penalty would be reduced, as it is as present, depending on the quality of disclosure by the taxpayer or the degree to which they cooperate with HMRC – the way in which this is assessed and calculated could be informed by some of the proposed simplifications outlined in Chapter 3

This penalty would contain similar taxpayer safeguards to those under the current approach. For example, the taxpayer would be able to appeal against the imposition of the penalty and its amount.

There are other principles, some of which are embedded within existing inaccuracy and failure to notify penalties, that could be reproduced in this new model. These include:

• the principle that taxpayers may receive a penalty reduction if they come forward proactively to tell HMRC that they have made a mistake – this is included in current penalties through reductions for unprompted disclosure
• the principle that a mistake may not result in a penalty automatically being applied, if it is the first time it has happened and the taxpayer has made the mistake innocently – this is included in current penalties through penalty suspension
• the principle that where a taxpayer is amending or correcting a tax return and the mistake is ‘careless’ or ‘non-deliberate’ a penalty may not apply, providing an incentive to correct

This would need to consider the balance between simplicity and ensuring fair outcomes for taxpayers. If these features were replicated in the new model, it could come at the cost of added administrative complexity and reduced ease of clarity for taxpayers and agents. It could also increase the number of subjective judgements and widen the scope for disagreement between HMRC, taxpayers and agents. Chapter 3 considers options to simplify these existing features in ways that might better fit with a new approach.

Civil evasion penalty

The second component of this new model would be a civil evasion penalty. This would be reserved for the smaller number of cases where the taxpayer has consciously tried to reduce their tax liability or avoid paying tax altogether.

The civil evasion penalty could work in the following way:

• it would also be a tax-geared penalty, set at a higher rate than the misdeclaration penalty – it would be aimed at a different population of taxpayers: those who deliberately break the rules
• HMRC would only apply this penalty to the most serious cases of non-compliance
• in cases where taxpayers repeatedly incurred a civil evasion penalty, HMRC could consider imposing even higher rates to create a stronger incentive for the taxpayer to comply with their obligations in future and match the severity of the behaviour

The intention behind creating this second type of penalty would be to distinguish it from the misdeclaration penalty. This could make the penalties easier to understand and easier for HMRC to administer.

The task of designing and introducing new legislation, along with the processes and guidance that support it, could lead to significant transitional costs. Taxpayers and agents would need to understand the relevance of any new sanctions to their circumstances, as well as their rights under any new safeguards. Organisations that support taxpayers, such as taxpayers who need additional support, would also need to understand any new legislation and guidance. HMRC would also need to make changes to its own systems and educate staff on any new approach. The government is interested in views on whether the potential longer-term benefits of a new legislative approach could justify these transitional costs (as opposed to making amendments to existing behavioural penalties as discussed in Chapter 3). and, if so, how those costs could be minimised.

Question 6: What do you see as the opportunities and challenges of this approach? Do you think that a new legislative model would be preferable to simplifying existing penalties, as outlined in Chapter 3? If so, how could any potential transitional costs be minimised?

Non-financial penalties and sanctions

HMRC believes that taxpayers who make genuine mistakes should be supported so that they can get things right in future. Meanwhile, those who repeatedly and deliberately seek to underreport their taxes and deprive the Exchequer of much-needed funds for public services should face tougher sanctions.

Financial penalties represent only one aspect of HMRC’s approach to tackling non-compliance. Some respondents to the 2024 call for evidence emphasised that it was important for HMRC to consider the broader objective of influencing a change in taxpayer behaviour to encourage and support future compliance. HMRC’s experience with tax conditionality in the Hidden Economy has demonstrated that non-financial levers can address part of the tax gap by helping applicants for certain public sector licences better understand their tax obligations and by making access to the licences they need to trade conditional on completing a tax check.

HMRC is already exploring the expansion of non-financial levers to promote tax compliance through the recent consultation Tackling the hidden economy: expanding tax conditionality to new sectors which sets out options for extending tax conditionality to new public sector licensing or registration schemes.

In the most serious cases where deliberate and repeated non-compliance has already occurred, HMRC will consider tougher non-financial sanctions drawing on experiences from across the public sector such as recent proposals from the Department for Work and Pensions to refer benefits fraudsters for disqualification from driving. Tougher non-financial sanctions could also include alignment with the existing Child Maintenance Service power to ask the courts to order the cancellation of a person’s passport where they are deliberately non-compliant. In these circumstances, non-financial sanctions would be actions of last resort and intended to have a deterrence effect.

Question 7: What is your view on HMRC’s use of tougher non-financial sanctions to deter and respond to deliberate and repeated non-compliance and to promote future compliance?

5. Assessment of impacts

Summary of impacts

Year	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
Exchequer impact (£m)	Nil	Nil	Nil	Nil	Nil	Nil

Exchequer Impact Assessment

Impacts	Comment
Economic impact	Publication of this consultation is not expected to have any significant macroeconomic impact. Any economic impact of these proposals will be estimated following consultation, final scope and design, and will be subject to scrutiny by the Office for Budget Responsibility.
Impact on individuals, households and families	There are expected to be no impacts for individuals at present by publishing this consultation. Any future impacts of reforms, if taken forward by the government after consultation, will be fully examined and detailed.
Equalities impacts	It is not anticipated that there will be impacts on those in groups sharing protected characteristics. Any future impacts will be fully examined and detailed following any developments after the consultation.
Impact on businesses and Civil Society Organisations	There are expected to be no impacts for businesses and civil society organisations at present by publishing this consultation. Any future impacts will be fully examined and detailed.
Impact on HMRC or other public sector delivery organisations	Publication of this consultation is not expected to have any operational and delivery impacts or costs at this stage. Any future funding requirements will be assessed following the consultation.
Other impacts	Other impacts have been considered and none have been identified.

6. Summary of consultation questions

Question 1: What are your views on removing the minimum 10% penalties for:

1. inaccuracies disclosed after 3 years
2. failures to notify disclosed after 12 months for non-deliberate behaviour?

Question 2: What are your views on the ways in which HMRC could:

1. simplify penalty reductions for unprompted disclosure
2. simplify penalty reductions for the quality of disclosure?

Question 3: With reference to the existing inaccuracy and failure to notify penalty ranges, what would you consider to be proportionate and appropriate penalty rates for both deliberate behaviour and repeated instances of deliberate behaviour? Which factors should be considered when applying these?

Question 4: How could penalties for offshore non-compliance be simplified whilst still acting as an effective deterrent?

Question 5: How could HMRC simplify penalty suspension while retaining an effective prompt to taxpayers to address the source of the inaccuracy?

Question 6: What do you see as the opportunities and challenges of this approach? How does it compare with potential simplification to existing penalties, as outlined in Chapter 3?

Question 7: What is your view on HMRC’s use of tougher non-financial sanctions to deter and respond to deliberate and repeated non-compliance and to promote future compliance?

7. The consultation process

This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:

Stage 1: Setting out objectives and identifying options.

Stage 2: Determining the best option and developing a framework for implementation including detailed policy design.

Stage 3: Drafting legislation to effect the proposed change.

Stage 4: Implementing and monitoring the change.

Stage 5: Reviewing and evaluating the change.

This consultation is taking place during stage 1 of the process. The purpose of the consultation is to seek views on the policy design and any suitable possible alternatives, before consulting later on a specific proposal for reform.

How to respond

A summary of the questions in this consultation is included at chapter 6.

Responses should be sent by 18 June 2025, by email to tafrcompliance@hmrc.gov.uk or by post to:

Please do not send consultation responses to the Consultation Coordinator.

Paper copies of this document in Welsh may be obtained free of charge from the above address.

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

Confidentiality

HMRC is committed to protecting the privacy and security of your personal information. This privacy notice describes how we collect and use personal information about you in accordance with data protection law, including the UK GDPR and the Data Protection Act (DPA) 2018.

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the DPA 2018, UK GDPR and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the Freedom of Information Act 2000, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs.

Consultation Privacy Notice

This notice sets out how we will use your personal data, and your rights. It is made under Articles 13 and/or 14 of the UK GDPR.

Your data

We will process the following personal data:

Name
Email address
Postal address
Phone number
Job title

Purpose

The purposes for which we are processing your personal data is: Reform of Behavioural Penalties

Legal basis of processing

The legal basis for processing your personal data is that the processing is necessary for the exercise of a function of a government department.

Recipients

Your personal data will be shared by us with HM Treasury.

Retention

Your personal data will be kept by us for 6 years and will then be deleted.

Your rights

You have the right to request information about how your personal data are processed, and to request a copy of that personal data.

You have the right to request that any inaccuracies in your personal data are rectified without delay.

You have the right to request that any incomplete personal data are completed, including by means of a supplementary statement.

You have the right to request that your personal data are erased if there is no longer a justification for them to be processed.

You have the right in certain circumstances (for example, where accuracy is contested) to request that the processing of your personal data is restricted.

Complaints

If you consider that your personal data has been misused or mishandled, you may make a complaint to the Information Commissioner, who is an independent regulator. The Information Commissioner can be contacted at:

Information Commissioner’s Office
Wycliffe House
Water Lane
Wilmslow
Cheshire
SK9 5AF

0303 123 1113 casework@ico.org.uk

Any complaint to the Information Commissioner is without prejudice to your right to seek redress through the courts.

Contact details

The data controller for your personal data is HMRC. The contact details for the data controller are:

HMRC
100 Parliament Street
Westminster
London
SW1A 2BQ

The contact details for HMRC’s Data Protection Officer are:

The Data Protection Officer
HMRC
14 Westfield Avenue
Stratford
London
E20 1HZ

advice.dpa@hmrc.gov.uk

Consultation principles

This call for evidence is being run in accordance with the government’s Consultation Principles.

The Consultation Principles are available on the Cabinet Office website.

If you have any comments or complaints about the consultation process, please contact the Consultation Coordinator.

Please do not send responses to the consultation to this link.

Annex: Penalty ranges

Table 1: Inaccuracy penalty ranges for all taxes, excluding income tax, capital gains tax, and inheritance tax

Behaviour	Unprompted disclosure	Prompted disclosure
Careless	0% to 30%	15% to 30%
Deliberate but not concealed	20% to 70%	35% to 70%
Deliberate and concealed	30% to 100%	50% to 100%

Table 2: Inaccuracy penalty ranges for income tax, capital gains tax, and inheritance tax from 2016 to 2017

Category	Behaviour	Unprompted disclosure	Prompted disclosure
1	Careless	0% to 30%	15% to 30%
1	Deliberate but not concealed	20% to 70%	45% to 70%
1	Deliberate and concealed	40% to 100%	60% to 100%
2	Careless	0% to 45%	22.5% to 45%
2	Deliberate but not concealed	40% to 105%	62.5% to 105%
2	Deliberate and concealed	85% to 150%	85% to 150%
3	Careless	0% to 60%	30% to 60%
3	Deliberate but not concealed	50% to 140%	80% to 140%
3	Deliberate and concealed	70% to 200%	110% to 200%

Notes:

An inaccuracy is in:

• category 1 if (a) it involves a domestic matter, or (b) it involves an offshore matter and (1) the territory in question is a category 1 territory, or (2) the tax at stake is a tax other than income tax or capital gains tax
• category 2 it involves an offshore matter or an offshore transfer, (b) the territory in question is a category 2 territory, and (c) the tax at stake is income tax, capital gains tax or inheritance tax
• category 3 it involves an offshore matter or an offshore transfer, (b) the territory in question is a category 3 territory, and (c) the tax at stake is income tax, capital gains tax or inheritance tax

The amount of a penalty for offshore matters is determined by the territory where the income or gains arose. For Inheritance Tax, it’s the territory where the asset was located or transferred to. For offshore transfers, the penalties are based on the highest category of territory involved in the transfer regardless of where the income or gain arose.

Territories are divided into 3 categories, based on how willing the territory is to share information with the UK.

The minimum penalty for ‘Deliberate’ and ‘Deliberate and Concealed’ behaviours were all increased by 10% for years 2016-17 onwards by Schedule 21 FA 2016.

Table 3: Failure to notify penalty ranges for all taxes, excluding income tax and capital gains tax

Behaviour	Timing vs. tax being due	Unprompted disclosure	Prompted disclosure
Non-deliberate	Within 12 months	0% to 30%	10% to 30%
Non-deliberate	After 12 months	10% to 30%	20% to 30%
Deliberate but not concealed	Not applicable	30% to 70%	45% to 70%
Deliberate and concealed	Not applicable	40% to 100%	60% to 100%

Table 4: Failure to notify penalty ranges for income tax and capital gains tax

Category	Behaviour	Timing vs. tax being due	Unprompted disclosure	Prompted disclosure
1	Non-deliberate	Within 12 months	0% to 30%	10% to 30%
1	Non-deliberate	After 12 months	10% to 30%	20% to 30%
1	Deliberate but not concealed	Not applicable	30% to 70%	45% to 70%
1	Deliberate and concealed	Not applicable	40% to 100%	60% to 100%
2	Non-deliberate	Within 12 months	0% to 45%	15% to 45%
2	Non-deliberate	After 12 months	15% to 45%	30% to 45%
2	Deliberate but not concealed	Not applicable	40% to 105%	62.5% to 105%
2	Deliberate and concealed	Not applicable	55% to 150%	85% to 150%
3	Non-deliberate	Within 12 months	0% to 60%	20% to 60%
3	Non-deliberate	After 12 months	20% to 60%	40% to 60%
3	Deliberate but not concealed	Not applicable	50% to 140%	80% to 140%
3	Deliberate and concealed	Not applicable	70% to 200%	110% to 200%