Consultation outcome

Reform of behavioural penalties — Summary of responses

Updated 26 November 2025

1. Introduction

The government published a consultation on reform of behavioural penalties on 26 March 2025. This invited comments on proposals to simplify and strengthen HMRC’s inaccuracy and failure to notify penalties. These are 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.

The consultation received 38 written responses, mainly from representative bodies, accountancy firms, law firms, charities and other businesses. The government would like to thank all those who responded in writing or met officials during the consultation period. A list of the respondents, excluding individuals, can be found in Annex A.

The consultation considered options to reform penalties for inaccuracies (Schedule 24, Finance Act 2007) and failures to notify (Schedule 41, Finance Act 2008). It covered the following topics:

• the timing of disclosure and the minimum penalty rate
• the nature of that disclosure (prompted or unprompted) and the quality of disclosure, and how that affects the calculation of the penalty rate
• penalty rates for deliberate and repeated deliberate behaviour
• offshore penalties
• penalty suspension for careless inaccuracies
• whether reform could be delivered through an alternative legislative model
• the role of non-financial penalties

There was a broad consensus among respondents that these penalties are complex and could be improved and simplified. This could make them easier for taxpayers and agents to understand, reduce administrative burdens, and make them a more effective deterrent. Most respondents favoured reform of existing penalties rather than adopting an alternative legislative approach.

There was strong support for removing timing of disclosure as a factor when calculating penalty rates, and some respondents felt it was unfair that inaccuracies which came to light after an arbitrary length of time should be penalised. Some felt that removing this timing element could encourage more voluntary disclosures from taxpayers.

Respondents suggested that HMRC could adopt a more ‘graduated’ approach when considering the type of disclosure made by taxpayers. Some respondents believed that making a disclosure after a nudge letter or message from HMRC should not be treated as a fully prompted disclosure and that the penalty system could better reflect the full range of HMRC’s compliance interventions.

There were mixed views on how or if HMRC should simplify the ways in which it calculates penalty reductions for the quality of disclosure (through the taxpayer ‘telling’, ‘helping’ and ‘giving access’). Respondents were concerned with how these reductions are applied and thought that HMRC needed to balance discretion (treating taxpayers fairly and recognising genuine mistakes) with consistency (ensuring taxpayers in similar situations received similar penalties).

Respondents recognised the rationale for higher penalty rates for deliberate behaviours and their importance in supporting compliance. Most believed that existing rates were sufficient to act as a deterrent and thought that civil sanctions might not represent the best approach to dealing with more serious cases of non-compliance. Some respondents supported higher rates for repeated deliberate behaviour, subject to HMRC establishing a clear definition of ‘repeat’ and making taxpayers aware of the potential consequences beforehand.

There was strong support for simplifying offshore penalties, with many respondents saying that the rationale for a separate penalty regime had diminished now there are better international information-sharing agreements in place. Many respondents believed there was a case for offshore penalties to be equalised with domestic penalty rates. Some thought there was a case for reviewing the need for the additional asset-based and asset move penalties that HMRC can charge in cases of serious non-compliance involving an offshore matter or offshore transfer.

Respondents agreed that penalty suspension for careless inaccuracies could be simplified, though views were split as to whether automatic suspension or a ‘warning’ (with no suspended penalty) would be a better approach.

There was little support for non-financial penalties based around the examples given in the consultation document (removal of drivers’ licences or passports). Most respondents recognised that non-financial interventions could help to address the most serious cases of non-compliance but thought these approaches would be disproportionate.

The following chapters provide a detailed summary of the responses and next steps.

2. Responses

Improving existing penalties

Timing of disclosure

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?

There was broad support among respondents for removing the minimum 10% penalties that currently apply to non-deliberate failures to notify disclosed after 12 months and careless inaccuracies disclosed after 3 years.

A common view was that these fixed minimum penalties did not take sufficient account of taxpayer behaviour, particularly in cases where individuals or businesses acted promptly and transparently once they became aware of an issue. Many respondents noted that applying a minimum penalty in such cases could discourage voluntary disclosure, especially where taxpayers became aware of the error after the 12-month or 3-year period.

Several respondents noted that the 10% minimum inaccuracy penalty was not based in legislation but took the form of a policy decision, reflected in HMRC guidance. This represented an inconsistency between failure to notify and inaccuracy penalties but also made it potentially easier to amend the minimum penalty for the latter of these. Others observed that taxpayers were often unaware of the minimum penalty thresholds, undermining their effectiveness as a behavioural deterrent.

Some respondents suggested penalties should be determined by how quickly a taxpayer acted after becoming aware of an issue, rather than by rigid and seemingly arbitrary time thresholds. Some cautioned that, should a more discretionary approach be adopted by HMRC along these lines, it would be important to also maintain clarity and consistency.

Reductions for type and quality of disclosure

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?

The majority of respondents supported the principle of simplifying penalty reductions for unprompted disclosures and the quality of disclosure. A common view was that the penalty regime should, as far as possible, encourage early and voluntary compliance and not penalise those seeking to do the right thing.

Many respondents thought the current approach could be simplified by HMRC applying a fixed percentage penalty reduction for unprompted disclosures (suggestions for an appropriate rate ranged from 30% to 50%). Several stakeholders believed there should be a nil penalty in cases where the disclosure was complete, unprompted, and related to non-deliberate errors.

Many respondents believed that the distinction between prompted and unprompted disclosures could be clearer. Some raised concerns about inconsistent interpretation and application, particularly where HMRC has issued ‘nudge’ letters, pop-up messages or campaigns to encourage taxpayers to contact HMRC. Several respondents believed that only a formal compliance check should qualify as a prompted disclosure, while others suggested that clearer criteria would be beneficial.

Respondents’ views on options to simplify quality of disclosure criteria (currently ‘telling’, ‘helping’, and ‘giving access’) were more mixed. There was general support for the principle of improving the consistency with which the rules were applied and supporting fairer outcomes, though there were differing views on how best to achieve this.

Many respondents supported merging ‘telling’ and ‘helping’ as they believed there was some overlap between these categories. Some respondents proposed replacing all 3 categories with a single test of ‘cooperation’ or ‘helpfulness’. However, other respondents believed that an overly simplified approach could remove nuance which might be required in assessing penalty reductions for complex or high-value cases.

Several respondents cautioned that any simplification should not lead to overly rigid or automated outcomes, emphasising the importance of HMRC’s ability to apply discretion, such as in cases where taxpayers were actively engaging with HMRC despite technical disagreements.

A small number of respondents suggested more fundamental reforms. These included introducing a materiality threshold below which penalties would not apply, or adopting a more graduated, risk-based model (as used in Ireland), where penalties and interventions were tailored to the taxpayer’s compliance history and behaviour. Others proposed replacing the binary distinction between prompted and unprompted disclosures with a more nuanced scale based on timeliness and intent.

Deliberate and repeated inaccuracies/failures to notify

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?

Respondents had mixed views as to whether the existing penalty ranges were already proportionate and appropriate or whether they should be modified to better address deliberate and repeated instances of deliberate behaviour. There was a broadly even split between those in favour of retaining the current approach and those who suggested ideas for reform. Many respondents emphasised that they supported the underlying principle that deliberate behaviour should be penalised and treated more seriously than careless behaviour, regardless of their opinion on whether reform was necessary.

Respondents who favoured keeping the current penalty ranges believed that they already provided a sufficient incentive for taxpayers to comply. Some respondents were concerned that changes could introduce further complexity and carry a risk that if penalties were too high, they would become unaffordable for taxpayers and uncollectable for HMRC. Several respondents who opposed increasing penalty rates for deliberate behaviour believed HMRC should instead undertake more criminal investigations for serious cases of non-compliance, rather than relying on civil penalties.

Respondents who supported higher penalties for deliberate behaviour believed that intentional attempts to understate tax liabilities should be treated more severely than at present. In particular, some respondents felt that the minimum penalty levels for deliberate and deliberate and concealed behaviours were set too low, particularly in relation to the penalty ranges for careless behaviour, and did not provide a consistently strong deterrent effect.

There was broader support for the concept of higher penalties for taxpayers with repeated instances of deliberate behaviour. Several respondents noted that it was important to define ‘repeat’ behaviour. In particular, some felt that multiple issues that were uncovered simultaneously should not be treated as ‘repeated’. This included, for example, deliberate non-compliance that spanned multiple tax return periods, or occurred across different taxes. Several respondents thought it was important that taxpayers were given a clear warning that they would face enhanced penalties if the behaviour was repeated in future.

Some respondents suggested that the ‘deliberate’ and ‘deliberate and concealed’ behaviours could be merged into one category to simplify the penalty ranges. An equal number of respondents opposed this idea, considering that ‘concealment’ was a helpful distinction to retain.

Offshore penalty rates

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

Most respondents supported the rationale for simplifying penalties for offshore non-compliance. Many suggested that information-sharing between countries had improved (including through international agreements like the OECD Common Reporting Standard). This meant that HMRC now had better information about income and assets held in different territories. Some believed that the offshore penalties were complex and poorly understood, which undermined their effectiveness as a deterrent and in supporting better compliance. Others felt that separate penalties for offshore matters were inherently unfair and had a disproportionate impact on people with foreign assets or sources of income.

Several respondents thought that HMRC should remove the asset-based offshore penalties (Schedule 22, Finance Act 2016 and Schedule 21 Finance Act 2015, respectively). These particular penalties were seen as complicated for taxpayers and agents to understand, felt to be rarely charged by HMRC in practice, and could provide a disincentive for taxpayers to disclose errors to HMRC.

Several respondents suggested that reducing the number of country categories could simplify offshore penalties. A common proposal was to merge the territory 1 and territory 2 categories (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). A similar, variation on this suggestion was to create 2 categories: jurisdictions that routinely shared information with the UK (through agreements such as the Common Reporting Standard), and non-cooperative jurisdictions that did not share information with the UK. Some respondents suggested that inaccuracies or failures to notify in non-cooperative jurisdictions could instead be treated with a simple multiplier, such as 1.25 or 1.5 times the UK penalty rate.

Some respondents thought that offshore penalties should be abolished, and that all penalties for offshore inaccuracies and failures to notify should be identical to those for domestic, UK-based matters.

Some respondents believed that the 12-year assessment time limit for non-deliberate offshore tax non-compliance should be reviewed, due to HMRC’s improved ability to obtain information on offshore matters and transfers. Some respondents wanted HMRC to review and consider retiring the Requirement to Correct and associated Failure to Correct penalties that were introduced in 2017, on the basis that these were disproportionate and unfair to those at the non-deliberate end of the spectrum. Some emphasised that, when considering any reform, HMRC should not forget about other offshore penalties such as 12-month late filing penalties.

Penalty suspension

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

The majority of respondents agreed that penalty suspension could be improved. Several believed that HMRC did not appear to apply penalty suspension in a consistent way and thought that a more standardised approach would be helpful.

The consultation document suggested 2 options for achieving this: an automatically-suspended penalty or a ‘warning’ for a taxpayer’s first, careless inaccuracy. Respondents were broadly split on which of these presented a better approach.

Respondents who supported automatic suspension felt that it created a better incentive for taxpayers to comply in future. The presence of a suspended penalty could encourage the taxpayer to put improvements in place to address the underlying source of the inaccuracy.

Several respondents provided views on how automatic suspension could work in practice. Recommendations for the appropriate suspension period ranged from 12 to 24 months. There were mixed views on whether it should include any conditions for the taxpayer. Some thought that the taxpayer should be obliged to meet the ‘generic’ filing condition, ensuring all relevant filing deadlines are met for the duration of the suspension period. Some thought this could be coupled with an expanded set of general conditions, such as requiring the taxpayer to make all relevant payments on time. Others thought that there should be no conditions at all, and the only relevant factor should be whether the taxpayer remained compliant and did not receive a further penalty during the suspension period.

Respondents who supported a warning believed that it provided an administratively simpler approach, provided an opportunity for taxpayers to put things right before facing any sanction, and could help to build trust between taxpayers and HMRC. Several respondents commented on terminology: the consultation document also referred to this approach as a ‘caution’, and some thought that since this had connotations in criminal law, a more neutral term should be sought.

Several respondents provided views on how the warning could be structured. Some respondents thought it would be helpful if the warning provided a calculation of the penalty that the taxpayer would have been liable for, provided general advice on how to fix things or pointed taxpayers towards appropriate resources such as guidance and educational resources. Some respondents commented that the warning should not hang over a taxpayer’s head indefinitely (since a further infraction would incur a penalty) and the warning should therefore be ‘reset’ after a period. Suggestions on an appropriate timeframe for the warning to remain in place ranged from 1 to 5 years.

Some respondents commented that, whichever approach was taken, it was important to consider appeal rights. In particular, there was a risk that a more widespread and automatic approach to suspension could lead to taxpayers overlooking an opportunity to challenge HMRC’s decision that a penalty was, or would have been, due.

Alternative approaches

A different model for behavioural penalties

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?

The majority of respondents expressed a preference for improving existing behavioural penalties rather than introducing a new legislative model. Many felt that the current framework was broadly understood by taxpayers and advisers and was supported by an established body of case law. In contrast, the proposed alternative was believed to offer limited simplification with the risk of introducing significant administrative costs while taxpayers, agents and HMRC transitioned to a new penalties model.

Many respondents believed that the proposed model went too far in removing behaviour-based distinctions, particularly with its reliance on a ‘reasonable excuse’ defence rather than a specific category of careless behaviour. This was felt to be shifting too much of the burden of proof onto taxpayers and increasing the risk of unfair outcomes.

Some respondents were concerned that broader penalty categories could widen the discretion of HMRC caseworkers, potentially leading to greater inconsistency and more disputes between taxpayers and agents and HMRC.

A small number of respondents believed a new model presented opportunities for greater alignment between inaccuracy and failure to notify penalties. However, most felt these benefits could be achieved more effectively through targeted improvements to the existing regime.

Many respondents believed that transitional costs would represent a significant challenge in moving to a new penalty model. The transitional costs that were cited included those associated with updating IT systems, providing training for HMRC staff and tax agents, developing new guidance, and communicating the new system to taxpayers. Some respondents warned that running 2 regimes in parallel during a transitional period would increase complexity rather than reduce it.

A few stakeholders offered suggestions for minimising these potential costs. These suggestions included: phased implementation, stronger safeguards (such as a ‘2 sets of eyes’ review before penalties were imposed), and clear definitions for concepts such as ‘civil evasion’.

Non-financial penalties and sanctions

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?

The majority of respondents recognised that non-financial sanctions could help to support compliance but many believed that HMRC should focus on improving its existing non-financial penalties before seeking to introduce new ones. Several respondents thought that financial penalties and criminal prosecution were more appropriate levers for dealing with the most serious cases of deliberate and repeated non-compliance, with some citing their responses to question 3. Some respondents suggested that HMRC should review its use of existing powers to counter fraud and evasion before seeking to introduce any new ones.

Many respondents centred their comments on the specific examples that were provided in the consultation document: disqualification from driving and cancellation of passports. The majority of respondents felt that these particular interventions would be disproportionate, would be likely to cause hardship and make it more difficult to recover the tax owed, could lead to concerns over human rights and could damage trust in the tax system. Several respondents commented that such powers should only be considered as a last resort and subject to authorisation by a court or tribunal. Others suggested that this approach could lead to unintended consequences, deter disclosures and prolong disputes.

Some respondents suggested alternative non-financial sanctions and interventions. There was some support, in principle, for HMRC sharing more information with regulators and supervisory bodies for the most egregious cases of non-compliance. Some respondents suggested HMRC should consider further ‘conditionality’ measures (making access to certain services or licences conditional upon meeting specific tax requirements).

3. Government response

Penalties exist to encourage taxpayers to comply with their obligations, to act as a deterrent for those who choose not to, and to reassure the vast majority who do the right thing that they will not be disadvantaged by those who don’t.

It is clear there is a strong case for simplifying and strengthening behavioural penalties, to reduce their complexity and improve their role in supporting compliance. The government intends to build on this consultation and develop proposals to meet these objectives. It will focus on improving HMRC’s existing inaccuracy and failure to notify penalties, rather than seeking to develop an alternative penalty model.

The consultation feedback was clear that behavioural penalties should encourage early, voluntary disclosures and corrections when taxpayers become aware of issues, and not penalise those seeking to do the right thing. The government will explore options to achieve this by reducing or removing penalties in some instances (such as timing of disclosure), alongside strengthening penalties where taxpayers fail to take reasonable steps to correct issues once they are aware of them. Such an approach would support the government’s plans to introduce a general requirement to correct by ensuring there are reasons for people to put things right at the earliest opportunity.

The government will consider replacing HMRC’s ability to suspend penalties for careless errors with the ability to issue warnings for a first, careless inaccuracy. This aims to give taxpayers a clear and simple message of caution, while preserving the opportunity to put things right before financial penalties apply. HMRC will consider when this approach might not be appropriate, and if this could also extend to failures to notify.

The government recognises that information-sharing between jurisdictions has evolved and there may be opportunities to simplify offshore penalties. The government will consider options to achieve this, in line with HMRC’s strategy to address offshore non-compliance.

More broadly, the government intends to strengthen sanctions for taxpayers who seek to evade tax. This will include tougher penalties for deliberate behaviour alongside exploring the practicalities of introducing higher penalties for repeated deliberate behaviour. At Budget 2025, the government announced an intention to introduce a new ‘recklessness’ offence to align criminal offences across direct and indirect taxes, and will consider whether this model could inform the behaviours assessed for civil penalties as well.

Non-financial sanctions will continue to play an important role in HMRC’s approach to tackling non-compliance. The government does not intend to bring forward the specific proposals suggested in this consultation but intends to reform the publication of details of deliberate defaulters, as announced at Budget 2025.

4. Next steps

The government is grateful to those who responded to this consultation and provided considered and detailed feedback on these proposals to strengthen and simplify behavioural penalties for inaccuracies and failures to notify.

The government intends to develop draft legislation to achieve the reform objectives outlined in Chapter 3. HMRC will continue to draw on the feedback to this consultation and work with interested parties on the detail of the policy design.

Annex A: List of stakeholders consulted

The government is grateful to the 4 individuals and following organisations who responded to this consultation:

Association of British Insurers

Association of Chartered Certified Accountants

Association of Tax Technicians

Avalon Tax

Azets

BDO LLP

Chartered Accountants Ireland

Chartered Institute of Taxation

City of London Law Society

Confederation of British Industry

Contentious Tax Group

Crowe UK LLP

Deloitte

DWF Law LLP

EY

Federation of Small Businesses

Freelancer and Contractor Services Association

HaysMac LLP

Institute of Chartered Accountants in England & Wales

Institute of Chartered Accountants in Scotland

KPMG

Law Society Scotland

Legal & General

Low Income Tax Reform Group

Mazars

Moore Kingston Smith

RSM UK Ltd

Shoosmiths LLP

Simmons & Simmons LLP

Slaughter & May

Society of Trust and Estate Practitioners

The Law Society

UK Finance

Vialto Partners