How to Handle HMRC Tax Penalties: A Guide for UK Small Businesses

Preparing tax returns, estimating payments and managing cash flow to accommodate HMRC's obligations can be a tricky balancing act for small businesses. The threat of penalties for late filing, missed payments or incorrect records looms large.

This HMRC tax penalties guide for UK businesses outlines different charges companies can incur, key deadlines and thresholds to consider and strategies to avoid penalisation. 

HMRC tax penalties explained: Late filing, late payment and evasion

As a business, you’re liable for penalty charges if you submit your tax returns and payments late or are deemed as avoiding your obligations. In January 2025, the UK government released the press release: HMRC warns 5.4 million taxpayers to file their tax returns to avoid penalties. It was a prompt for those still to submit their returns about the penalties they could incur if they missed the Self Assessment deadline.  

Whether it’s Self Assessment returns, Corporation Tax filing or other tax obligations,  it’s important to be proactive ahead of your tax deadlines to avoid penalty charges and other repercussions.

What are the different types of HMRC tax penalties?

• Late filing penalties – charges for submitting tax deadlines after your company’s stipulated deadline 
• Late payment penalties or underpayment – failure to make the required tax payments owed by the deadline showing on your account 
• Penalties for inaccurate tax returns (miscalculations and reporting errors) and other non-compliance, including failure to notify HMRC about changes to your business (its status, accounting period, etc.) 

HMRC can take more severe measures if officers believe a business is guilty of fraud or tax evasion, which can result in a criminal prosecution. 

Common reasons businesses get penalised

• Failing to file tax returns on time
• Missing tax payment deadlines
• Not registering for VAT when required
• Making errors in reporting and corporate tax calculations – HMRC assesses whether the mistakes are intentional or not 
• Not declaring certain income or claiming ineligible tax deductions
• Other compliance missteps, such as not keeping adequate records of expenses

Key tax deadlines and penalty thresholds for businesses

There are various tax deadlines companies need to be aware of for filing returns and making payments, each with thresholds for late or inaccurate tax returns and payments, and non-compliance. 

Here’s an overview of the key HMRC tax return deadlines and penalties businesses should know: 

Corporation Tax

Deadlines for Corporation Tax: Typically, Corporation Tax returns are due 12 months after the end of your accounting period, and if you have taxable profits of up to £1.5 million, your Corporation Tax payment is due 9 months and 1 day after the end of your accounting period. Larger companies with taxable profits of between £1.5 million and £20 million must pay Corporation Tax quarterly. “Very large companies” with profits aroundabout this amount are subject to stricter payment schedules. 

Corporation Tax late filing penalties: 

• 1 day late: £100 fine
• 3 months late: Additional £100
• 6 months late: HMRC estimates the tax due and adds a penalty of 10% of the unpaid tax
• 12 months late: Another 10% of any unpaid tax

Note: If the tax return is late three times in a row, the initial £100 penalties increase to £500 each. See full details for late filing of Corporation Tax on the HMRC website.

Corporation Tax late payment penalties: While there are no fixed late payment penalties, interest accrues daily on unpaid amounts from the day after the tax payment was due. This is currently around 7.5%, which is the Bank of England (BoE) base rate plus 2.5%, but subject to change as the BoE fluctuates.

Penalties for Corporation Tax inaccuracies: 

The penalties are based on HMRC’s assessment of the level of care and suspected deliberate errors or concealment: 

• Lack of reasonable care: 0% to 30% of additional tax due (after error correction)
• Deliberate errors: 20% to 70% of the extra tax that’s due
• Deliberate and concealed errors: 30% to 100% of the remaining tax due

Note: There are reduced percentage rates for businesses that voluntarily disclose any filling/submission errors. See full details of inaccuracy penalty rates.

Self Assessment 

Deadlines for Self Assessment: If you’re a sole trader or in a partnership, you don’t pay Corporation Tax. Instead, you must submit a Self Assessment return, which is due on 31st October, for paper returns, and 31st January, for digital submissions. Payments are made in two annual instalments. By 31st January, you must pay the tax balance due plus your first payment on account for the next year. A second payment on the account is due by 31st July.

Self Assessment late filing penalties: 

• Initial fixed £100 fine for missing the filing deadline
• After 3 months, companies receive additional daily penalties of £10 per day, up to a maximum of £900
• After 6 months, there is a further penalty of 5% of the tax due or £300 (whichever is greater)
• After 12 months, an additional 5% of the tax due or £300 is issued (whichever is greater)

Self Assessment late payment penalties: 

5% of the unpaid tax is charged at 30 days, 6 months and 12 months. Plus, interest is charged on any outstanding tax paid late. Late payment interest is set at the BoE base rate plus 2.5%, repayment interest at the base rate minus 1%, with a lower limit of 0.5% (known as the ‘minimum floor’).

Penalties for Self Assessment inaccuracies: 

See details for Corporation Tax above – the same filing inaccuracies penalty framework applies.

VAT

Deadlines for VAT: VAT returns must be submitted to HMRC every three months* within your accounting period. The usual deadline for each quarterly return is a calendar month and 7 days after each quarter. VAT bill payments are due by your VAT return due dates, with the support of the Government’s Making Tax Digital for VAT regime.

VAT late filing penalties: 

If you miss the deadline for submitting your return, HMRC will send you an assessment telling you how much VAT they think you owe. You’ll get a penalty point for each VAT Return you send late. Once you reach your penalty point threshold (set by your accounting period), you’ll receive a £200 penalty. A further £200 penalty is issued for each subsequent late submission. Filing penalties apply even if you have no VAT to declare and no tax is due.

VAT late payment penalties: 

The UK Government has shifted how late VAT payment penalties are applied, replacing the surcharge system. In this new approach, for VAT accounting periods starting on or after 1 January 2023, the following penalties apply:

• Payments 16 to 30 days overdue: 2% penalty on VAT owed on day 15.
• Payments 31 days or more overdue: A first penalty is calculated at 2% of what was outstanding on day 15, plus 2% of what remains on day 30. A second penalty is calculated at a daily rate of 4% per year on the outstanding balance. This is charged every day from day 31 until the outstanding balance is paid in full or before the end of a two-year assessment time limit.

Note: HMRC will prompt businesses to enter a VAT repayment plan, which helps prevent ongoing penalties. Learn more on HMRC’s dedicated late VAT payment penalties page.

Penalties for VAT inaccuracies: 

See details for Corporation Tax above – the same filing inaccuracies penalty framework applies.

*Businesses using the VAT Annual Accounting Scheme can make advance payments towards their VAT bill or agree with HMRC to pay it once a year.

PAYE 

Deadlines for PAYE: If submitting PAYE to HMRC electronically, you must pay your bill by the 22nd of the next tax month if paying monthly or the 22nd after the end of the quarter if paying quarterly. Any businesses still paying by cheque must do so by the 19th of the next month. PAYE is calculated digitally through Real-Time Information RTI, with employees’ NI and other contributions deducted from pay packets during payroll.

For self-employed sole traders, NI contributions are calculated by HMRC based on Self Assessment returns.

PAYE late filing penalties: 

If your Full Payment Submission (FPS) or Employee Payment Summary (EPS) is sent late, you’ll be charged monthly late PAYE filing penalties based on employee numbers: 

• £100 for 1-9 employees 
• £200 for 10-49 employees
• £300 for 50-249 employees
• £400 for 250 or more employees

PAYE late payment penalties: 

HMRC charges penalties on PAYE amounts not paid in full and on time. Penalties are a percentage of the amount owed, which escalate according to the number of defaults in a tax year* and daily interest will accrue. Here is the rundown of the default penalties:

• 1 to 3 defaults: 1%
• 4 to 6 defaults: 2%
• 7 to 9 defaults: 3%
• 10 or more defaults: 4%

Additional penalties are issued if you pay less than what is due. Here are details of these underpayment penalties:

• 5% penalty on any remaining unpaid amount after it becomes’s 6 months overdue 
• A further 5% penalty on amounts still unpaid when 12 months overdue

Learn more about HMRC’s late PAYE & NI payment penalties.

*The first default is not subject to penalisation. 

Penalties for PAYE inaccuracies: 

See details for Corporation Tax above – the same filing inaccuracies penalty framework applies.

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For full details on HMRC tax penalties, with links to specific penalties for different tax types and offences, check out HMRC Penalties: An Overview for Agents and Advisers.

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How to prevent late corporate tax filing issues and address HMRC tax penalties 

Considering the negative impact of missed deadlines, businesses must be proactive to mitigate the risks. We outline ways companies can ensure they comply with the rules, minimising HMRC penalties for late payment of Corporation Tax, Self Assessment and other tax bills and preventing late filing charges. 

Key steps to comply with HMRC deadlines and reduce tax penalties

Here are some key ways to prevent and address HMRC late filing penalties:

• Define your company’s key tax filing obligations and deadlines
• Create reminders and workflows for completing key preparation tasks, filing dates and payment deadlines
• Review and optimise your expense management processes and invest in modern accounting tools to streamline your approach – automating key steps
• Closely monitor cash flow statements, net working capital and revenue forecasting to predict and preempt issues with making tax bill payments
• Use calculators to estimate tax bills and create pots to set aside funds
• Act promptly if you miss filing deadlines to prevent escalating HMRC late payment penalties, including: 
  
  • Notifying HMRC if you have reasonable excuses and mitigating factors
  • Requesting penalty waivers or reductions (where relevant) – HMRC may grant a waiver in exceptional cases, but more often look to negotiate a payment plan through its Time to Pay (TTP) scheme
  • Consider using other sources of funds (including business loans, invoice financing or emergency funds) to access capital fast to pay off the debts and avoid further HMRC tax arrears penalties

Are HMRC penalties allowable and tax deductible for Corporation Tax?

Fines for late tax filings or payments are treated by HMRC as a disallowable expense and, therefore, not tax deductible, but penalties must still be included on your income statement and CT600 return. However, any interest incurred on HMRC tax penalties is deductible, offering some tax relief. 

Can businesses offset penalties against their tax bill?

While businesses can’t automatically offset penalties against tax bills or other tax liabilities, you can contact HMRC to arrange an agreement to offset any penalties received. If in a TTP arrangement, you can include any penalty charges (and interest accrued) in your overall outstanding debt repayments, to pay everything off over a series of monthly instalments, avoiding further charges.

What counts as an allowable business expense in terms of HMRC tax penalties?

If you’re using a short-term business loan, tax loan or another form of business finance to pay off your tax bill and/or penalties received for late filing or missed payments, interest from the loan/credit counts as an allowable business expense and is tax-deductible.

How to avoid HMRC tax investigation penalties

HMRC penalties for late submission of tax returns or missing payment deadlines are not uncommon. However, HMRC can open tax investigations into companies where officers see red flags or evidence of deliberate tax avoidance and evasion. 

What red flags can trigger a tax investigation by HMRC?

• Regular mistakes on tax returns
• Persistent late filing or payment of tax bills
• Prolonged periods of unprofitability
• Recurring misinformation, hidden income or “cash-in-hand” instances
• Operating in high-risk industries (typically those with higher rates of failure)
• Accounts not matching industry norms
• Tip-offs – someone alerting HMRC to unusual financial activities

How penalties are calculated for HMRC tax evasion

If HMRC officers suspect deliberate dishonesty, such as concealing income, falsifying records or intentionally underreporting taxes, they can investigate for tax evasion. This is a serious offence and HMRC tax evasion penalties can range from 30% to 100% of unpaid tax, depending on the level of concealment. 

Failure to cooperate will increase potential consequences and businesses can face civil or criminal prosecutions for severe evasion, leading to fines, asset seizures or even imprisonment. 

What are reasonable excuses for missing HMRC deadlines?

Reasonable excuses for missing HMRC deadlines include serious illness, unexpected events, bereavements or internal system failures at HMRC. HMRC has listed various reasonable and unreasonable excuses for missing tax deadlines on HMRC’s website. 

Here is a summary below with additional detail:

Reasonable excuses for missing HMRC tax deadlines

• Serious illness or unexpected hospitalisation for key company personnel
• Unexpected events affecting records or operations for submitting returns or payments
• Close family bereavements around key deadlines
• Issues preventing access to reporting details or required filing documentation
• Internal system failures or HMRC system outages when filing online
• Postal issues delaying returns or payments, such as industrial action, extreme weather or other causes out of your control

Unreasonable excuses for missing HMRC tax deadlines

• Payments failing due to a lack of available funds
• Businesses finding HMRC’s online systems too difficult to use
• Not getting a filing/payment reminder from HMRC
• Making mistakes on tax returns

You’ll need to provide evidence (including any documentation and confirmation from third parties) to back up your reason for not meeting the deadline if you think it comes under the umbrella of reasonable excuses.

Will HMRC's late filing or payment penalties affect my business credit rating?

Yes. While late tax return filing can indirectly affect business credit rating, HMRC tax penalties for late payments can negatively impact your credit score. Late tax payments are often the result of missing key filing deadlines, and subsequent penalties or legal action will damage your creditworthiness and business reputation.

The fallout can have knock-on effects, such as difficulties getting future funding support and damaged supplier relationships.

Can I appeal an HMRC Corporation Tax penalty once it has been issued?

Yes. If you disagree with a tax decision or want to appeal a tax penalty for missing deadlines, you can challenge it via their online form and request a review or tribunal.

Here are the main routes of appeal to challenge an HMRC tax penalty:

• Use HMRC online forms to appeal the penalty for your specific tax return type
• Send a signed letter to the HMRC office related to your return, including all relevant details, dates, reason for late filing/payments, reference numbers, etc
• Get a review of your tax penalty decision (once an appeal has been logged) using the review form received in your decision letter
• Request a tax tribunal, which is independent of the Government but takes longer than a penalty review – if your tribunal appeal is accepted, you can apply to HMRC for alternative dispute resolution (ADR) to settle the issue

Acting promptly (within 30 days of receiving the decision/offer of a review), providing ample evidence to support your appeal and demonstrating steps taken to comply with HMRC tax filing rules, will give you the best chance of success.

Tax payment plans and business loans

HMRC offers businesses ways to spread the cost of their tax bills if they can demonstrate legitimate reasons for not being able to pay the whole amount after filing a return. These Time to Pay (TTP) agreements can cover payments outstanding on Corporation Tax, VAT, Self Assessment and PAYE.

Benefits of using an HMRC tax payment plan

• Easing cash flow issues to reduce financial pressure
• Providing manageable monthly payments rather than one large upfront cost
• Preventing further HMRC tax penalties or more severe punishment
• Preserving credit ratings from negative impact and maintaining reputation and supplier/lender confidence for future credit needs
• Offering payment flexibility – plans can be adjusted as circumstances change

When negotiating TTP agreements, such as a VAT payment plan, businesses can offset payments with other tax liabilities or consolidate payments (and penalty charges) within one tax repayment plan.

Why using a business loan can be a good alternative option

Sourcing a business loan to cover your bill and spread costs over monthly repayments is a good alternative to HMRC’s TTP agreements. Like with TTP, you’ll pay interest on the money borrowed throughout the term, but a business loan provides access to capital for various operational uses.

You can use a specific tax loan to pay bills and outstanding liabilities or explore various business loan options, which offer different benefits, terms and flexibility to meet your financial and working capital needs. Interest on loan repayments and other arrangement/service fees are allowable expenses, reducing your overall borrowing costs. 

Comparing a business loan to paying HMRC tax penalties: Is it worth it?

Is a penalty charge during temporary periods of financial difficulty worth the risks, compared with taking out a short-term loan to cover your tax bill? Let’s briefly weigh the pros and cons. 

Applying for a loan does mean paying interest on monthly payments and other processing fees but interest and fees are tax-deductible. Also, it removes the pressure of the tax burden, including preventing outstanding tax amounts from incurring additional penalties and escalating charges which damage your credit record. 

Most small business loan providers, like iwoca, offer flexible options tailored to your needs, to ensure manageable monthly repayments.

Learn about iwoca’s flexible business loans

Our Flexi-Loan solutions are designed to help UK SMEs overcome cash flow challenges and barriers to growth. You can borrow between £1,000 and £1,000,000 and repay the loan in monthly instalments, aligned with your cash flow. 

Use the loan to pay your tax bill and prevent HMRC tax penalties. Any remaining working capital can be applied where it's most needed in your business. Acting like a line of credit, you only pay interest on the money you draw down. 

Applying for a business loan with iwoca takes just minutes and we typically make approval decisions within 24 hours, with funds often transferred on the same day.

Sources:

• 5.4 Million Yet to File Their Tax Return [HMRC Press Release]
• Company Tax Returns: Penalties for Late Filing [Gov.uk]
• Compliance Checks — Penalties for Inaccuracies in Returns or Documents [Gov.uk]
• HMRC Interest Rates for Late and Early Payments [Gov.uk]
• Making Tax Digital for VAT [Gov.uk]
• How Late Payment Penalties Work If You Pay VAT late [Gov.uk]
• Late Payment Penalties for PAYE and National Insurance [Gov.uk]
• Penalties: An Overview for Agents and Advisers [Gov.uk]
• Disagree with a Tax Decision or Penalty: Reasonable Excuses [Gov.uk]
• Use Alternative Dispute Resolution to Settle a Tax Dispute [Gov.uk]

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