The government has published a response to its consultation 'Reform of behavioural penalties'. The responses highlighted a need to simplify and modernise the current penalty regime for inaccuracies in returns and the failure to notify chargeability to tax.
The government accepts that the responses make a strong case for simplifying and strengthening behavioural penalties, and it intends to focus on improving the current system rather than developing a new model. The penalty regime should distinguish between taxpayers who make genuine errors and those who attempt to cheat the tax system.
In March 2025, the government published its consultation on 'The reform of behavioural penalties', seeking opinions on how to improve the penalty regime for those who have submitted inaccurate returns or failed to notify HMRC of their chargability to tax.
A call for evidence regarding the Tax Administration Framework showed significant support for simplifying and modernising the current penalty regime.
The Outcome of the call for evidence highlighted that people wanted a simpler and easier-to-understand penalty regime that continued to distinguish between those taxpayers who make genuine errors and those who make conscious attempts to cheat the tax system.
The consultation covered:
- The timing of disclosure and the minimum penalty rate.
- The nature and quality of the disclosure, i.e prompted or unprompted.
- Penalty rates for deliberate and repeated behaviour.
- Offshore penalties.
- Suspension of penalties for careless inaccuracies.
- Whether the reform of the penalties regime could be delivered through an alternative legislative model.
- The role of no-financial penalties.
The respondents' consensus was that the penalty regime for inaccurate returns and failure to notify is too complex. Most of the respondents wanted reform of penalties rather than adopting an alternative legislative approach.
When considering the type of disclosure made by taxpayers:
- Some respondents believed the approach should be more 'graduated'.
- Other respondents believed making a disclosure after a 'nudge letter' from HMRC should not be treated as a fully prompted disclosure.
- It was felt that the whole penalty system could better reflect the full range of HMRC's compliance interventions.
There was strong support for removing the timing of a disclosure as a factor when calculating penalty rate, with some individuals noting it was unfair to penalise for inaccuracies which come to light after an arbitrary length of time.
The views were mixed on how or if HMRC needed to simplify the way in which it calculated penalties for the quality of disclosure through the 'telling, helping and giving access' method:
- Respondents were concerned about how these reductions are applied.
- It is thought HMRC needed to balance discretion with consistency.
- By treating taxpayers fairly.
- Recognising genuine errors.
Respondents agreed that there could be the simplification of the suspension for careless inaccuracies, with views split on whether automatic suspension or a warning would be a better approach.
There was very little support for non-financial penalties. The consultation document had given suggestions of what non-financial penalties may look like, including the withdrawal of a passport or driver's licence. While there was support for non-financial interventions, it was felt that these examples were disproportionate.
Responses
Improving existing penalties
Broad support was given to remove the minimum 10% penalty that currently applies to non-deliberate failure to notify, where:
- The taxpayer has disclosed after 12 months.
- There was a careless inaccuracy disclosed after three years.
Respondents felt that applying a minimum penalty may discourage taxpayers from making disclosures. Respondents also suggested that a fixed minimum penalty does not account for taxpayer behaviour, particularly where they have acted promptly and transparently.
Some proposals suggested determining penalties based on how quickly taxpayers acted after becoming aware of the issue.
Reductions for types and quality of disclosure
The majority of respondents supported simplifying penalty reductions for unprompted disclosures and the quality of disclosure.
- The current approach could be simplified by HMRC applying a fixed percentage reduction for unprompted disclosures.
- There could be a nil penalty when a disclosure by the taxpayer was unprompted, completed and non-deliberate.
- The distinction between prompted and unprompted could be clearer, especially where nudge letters or campaigns have been used to encourage taxpayers to disclose.
- Some respondents believe only a formal compliance check should qualify as unprompted.
- There was support for merging the 'telling, helping and giving' categories, with some believing the categories overlapped.
- It was emphasised that HMRC should use their discretion and not focus on rigid or fixed outcomes.
Deliberate and repeated inaccuracies/failure to notify
There were mixed responses on whether penalty ranges were already proportionate and appropriate, or whether they should be modified to address taxpayers who continue to be non-compliant.
Many respondents agreed that deliberate behaviour should be penalised and treated more seriously than careless behaviour.
- Some respondents were concerned that further change could create more complexity in this area.
- There was backing for HMRC to undertake more criminal investigations for serious cases of non-compliance.
- Intentional attempts to understate tax should be treated more severely than they currently are.
- There was broad support for higher penalties for deliberate behaviour, but it was noted that 'repeat' behaviour should be defined.
Offshore penalty rates
There was significant support for simplifying offshore penalties:
- Some respondents believe the offshore penalty regime is poorly understood due to its complexity.
- Some believe that the asset-based offshore penalties should be removed as they are complicated to understand.
- There were suggestions that offshore penalties should be abandoned altogether, and the penalties should be identical to UK penalties.
- Respondents believed that the 12-year time limit for non-deliberate offshore tax non-compliance should be reviewed to improve HMRC's ability to obtain information on offshore matters and transfers.
Penalty suspension
The majority of respondents agreed that penalty suspension needs to be improved, with some suggesting HMRC did not appear to apply it consistently. A more standardised approach was suggested.
The consultation suggested two options:
- An automatically suspended penalty.
- Warning for taxpayers for careless inaccuracy.
Supporters of the first option believed it would create a better incentive for taxpayers to comply.
- Recommendations for the suspension period ranged from 12 to 24 months.
- There were mixed views on whether it should include any conditions for the taxpayer.
- Others felt no conditions should be included. The only relevant factor should be that the taxpayer remained compliant with no further penalties during the suspension period.
Supporters of the warning option:
- Believed it provided an opportunity for taxpayers to put things right before facing any sanction.
- Some respondents believe that making the taxpayer aware of which penalty could have applied, along with additional guidance on how to fix things, would be helpful.
- Suggestions were that the warning should remain in place for one to five years.
Alternative approaches
The majority of respondents said they would prefer an improvement to the existing behavioural penalties rather than introducing a new legislative model.
- Many did not support the proposed model in that it went too far in removing behaviour-based distinctions.
- Transitional costs were also cited as being an issue.
Non-financial penalties
There was support for non-financial sanctions; however, many believed that HMRC should focus on improving its current non-financial penalties before introducing new ones.
- Some believed HMRC need to review their existing powers to counter fraud before introducing new ones.
- There were significant comments about the examples of removing driver's licenses and passports. Most respondents felt these were hugely disproportionate and may cause hardship, making tax recovery more difficult.
- Many suggested that these powers could lead to human rights issues and damage trust in the tax system.
- Some suggested these powers may be a last resort, subject to a tribunal.
Government response
The government have said it is clear there is a strong case for simplifying and strengthening behavioural penalties. It intends to build on the responses given by focusing on improving the current system rather than developing a new model.
- Penalties should encourage early disclosure, voluntary disclosure and corrections. They should not penalise taxpayers for doing the right thing.
- The government will consider replacing HMRC's ability to suspend penalties for careless errors and possibly issue warnings for a first offence.
- The government intends to simplify offshore penalties.
- There will be a strengthening of sanctions for non-compliance, including tougher penalties for repeated deliberate behaviour.
- The government will not bring forward the suggested sanctions but will continue to use non-financial sanctions to deter non-compliance.
Useful guides on this topic
Penalties: Errors in returns and documents
What penalties apply if you make an error or mistake? Is there a penalty if you fail to tell HMRC about an under-assessment? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?
Penalties: Failure to notify
What tax penalties apply if you fail to notify HMRC that you are chargeable to tax? Can they be appealed or reduced?
Penalties: Offshore income, CGT and IHT
What penalties apply for errors and failures relating to offshore Income and Capital Gains Tax (CGT)?
Client guide: Reasonable care and tax penalties
What triggers a tax penalty? What standard of care is expected from a taxpayer? What is reasonable care? When is an error careless?
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