HMRC penalties and investigations: explained 

Posted: 29th September 2026

If HMRC has contacted you about a penalty, you want to know exactly where you stand. The outcome and penalty will depend on the type of case HMRC has opened.

This is your guide for everything you need to know about HMRC penalties and investigations, as well as how to avoid penalties in the future. 

The different types of penalties and charges 

Errors on your tax return

You may be charged a penalty if there are mistakes on your return or other documents. This is called an ‘inaccuracy penalty’. 

These penalties can be given out if the error is as a result of lack of ‘reasonable care’, sending incorrect information on purpose (deliberate action), and trying to hide the fact you’ve sent incorrect information on purpose (deliberate and concealed). 

You’ll be charged an inaccuracy penalty if you:

• Understate the amount of tax
• Downplay your tax liability

For a full list of where these penalties apply (including Capital Gains Tax and Corporation Tax), you can head to HMRC’s website.

Failure to notify penalty 

If there’s been a change to your tax status, you must notify HMRC. Failure to do so will result in what’s known as a ‘failure to notify penalty’. 

These penalties can be issued if you don’t let HMRC know that: 

• Your company is liable for Corporation Tax
• There’s been a change to your tax liability 
• The sale of an asset has made you liable for Capital Gains Tax
• You have started a business that charges excise duty 

To see a full, exhaustive list, check the HMRC website.

Calculating inaccuracy penalties 

A penalty because of lack of reasonable care will be calculated depending on the reasons for the error and ‘potential lost revenue’. 

This potential lost revenue is an additional sum that will be payable as a result of HMRC having to correct the inaccuracy. 

This penalty is usually around 0%-30% of the extra tax due if it’s judged the errors come from lack of reasonable care. If you’ve made a deliberate error, or tried to conceal a deliberate error, your penalty will be higher. Penalties for deliberate action can be anywhere between 20% and 70% of the extra tax due, with concealed deliberate action penalties between 30% and 100%. 

The severity of the penalty will depend on why the error happened, whether you disclose it to HMRC and how cooperative you are with HMRC in resolving the issue.

What does ‘reasonable care’ mean? 

Every business is expected to maintain its records and deliver an accurate return to HMRC. For small businesses, the return is usually pretty straightforward. Larger businesses are expected to have the necessary systems in place to keep on top of everything. 

HMRC expects businesses that are unsure how to do this to speak to an agent or adviser. That’s the responsibility of the business owner. 

HMRC ultimately has the final judgement over whether an inaccuracy penalty is issued because of ‘lack of reasonable care’ as it’s so variable business to business depending on its size and structure. 

VAT and excise wrongdoing penalty

Since April 2010, HMRC has been able to issue a ‘VAT and excise wrongdoing penalty’. This penalty is calculated in a similar way to an inaccuracy penalty.  

You may be issued with a VAT and excise wrongdoing penalty if you:

• Handle goods where excise duty hasn’t been paid 
• Use goods in a way that means more excise duty should have been paid 
• Issue invoices that include VAT that you’re not entitled to charge 

Late filing or payments 

If you’re late in filing or paying your tax, there are penalties that can be issued. However, these penalties vary depending on what kind of tax you’re dealing with. 

You can find the breakdown on the HMRC website, or you can speak to a tax expert who will be able to support you in managing the investigation or penalty. 

Your rights and responsibilities during an investigation

Your responsibilities 

If HMRC contacts you about an error, or you report an error yourself, you’re obligated to produce any documentation requested. You may not destroy any records, and you must answer any questions promptly and truthfully. 

If you’re wondering exactly what happens during an HMRC investigation, read more here. 

Your rights 

Receiving communications from HMRC can be frightening. But remember, you have rights throughout an investigation. 

They include: 

• Professional representation; you can instruct a specialised accountant or tax adviser to act on your behalf throughout the process. 
• Legal privacy; if you need to speak to a lawyer, those communications are protected.
• An extension; if you need more time to get your records together, you’re entitled to ask for an extension. 

Disputing or appealing a penalty

You may receive a penalty or investigation notice that you don’t agree with. In that instance, you may want to dispute or appeal.

Common disputes include: 

• Penalties 
• Tax relief claims 
• Information requests (HMRC wants to investigate your records)
• Your tax bill as a whole

If you need to dispute HMRC penalties or investigations, we’d recommend getting an expert on board to help you. 

When to seek specialist support

No one wants to be worrying about potential HMRC penalties. 

Having a tax dispute expert in your corner that you can trust can take a lot of the stress out of staying on top of any investigations, particularly if: 

• You’ve never had a formal investigation notice from HMRC before. 
• You’re worried you’ve made a mistake during your tax return or you need to make a disclosure. 

Get on top of tax. Don’t let tax get on top of you. 

With the team at NHD Tax solutions, you have a team you can trust to take the stress out of tax investigations. Contact us today to get started.