Research and analysis

Effectiveness of Penalty Suspension: Qualitative research and survey feasibility study

Published 26 February 2026

Prepared by Verian for HMRC 

Authors: Alice Coulter, Amy Busby, Sophie Smars, Charlotte Saunders, Lucy Williams and William Herbert

Report Number: 854

November 2025 

Disclaimer: The views in this report are the author’s own and do not necessarily reflect those of HM Revenue and Customs. 

1. Executive Summary

1.1 Background and research design

In 2025, the UK government consulted on reform of behavioural penalties, including alternative approaches to penalty suspension. Currently, taxpayers who receive a penalty for a careless inaccuracy in their tax return may have the penalty suspended if they meet certain conditions, such as introducing measures to avoid similar mistakes. However, HM Revenue and Customs (HMRC) has limited evidence about the effectiveness of penalty suspensions.

This research explored the experiences of taxpayers who have received a penalty for a careless inaccuracy, both with and without a suspension. The research aimed to provide HMRC with evidence to assess whether penalty suspension is effective and to test reactions to alternative options, including automatic suspensions and the use of a caution, as explored by the consultation that ran between March 2025 and June 2025.

The research involved 43 in-depth qualitative interviews with 21 individuals (Income Tax Self Assessment (ITSA) customers who pay income tax via self assessment) and 22 small businesses (Value Added Tax (VAT) customers, with a turnover below £10 million, and fewer than 20 employees) to explore customer experiences of receiving a penalty or a penalty suspension. The interviews were conducted online by Verian moderators, between 14 July 2025 and 28 August 2025, and lasted up to 60 minutes.

The qualitative research was part of a larger piece of research including a feasibility study to determine whether a survey with customers who have received a penalty or suspended penalty would be feasible. The quantitative feasibility study consisted of a small-scale telephone survey with those who had received a penalty or penalty suspension for inaccurate VAT or ITSA tax returns and documents. Computer assisted telephone interviews (CATI) were conducted between 12 September 2025 and 3 October 2025. The results from this strand of the project are included in Appendix 7.3.  The experience of conducting the feasibility study indicated that commissioning a full-scale survey with recipients of penalties and penalty suspensions would be challenging and not offer good value for money.

1.2 Context: experiences of managing tax affairs

Participants were asked about how they manage their tax affairs to provide contextual insight to help interpret their views and experiences of penalty suspensions. ITSA and VAT customers all described some form of systematic approach to the task. These approaches varied and were mainly driven by participants’ levels of knowledge and confidence in dealing with the tax system.

Six key challenges were reported in relation to completing and submitting ITSA and VAT returns. The most common was low tax knowledge and literacy. Others included the accessibility of HMRC communications, the time and effort required to complete returns, technology and software challenges, cash flow issues (VAT customers only), and over-reliance on agents.

1.3 Customer experiences of penalties and penalty suspensions

Throughout the research, differences were observed between VAT and ITSA customers’ reported experiences of penalties and suspensions. Typically, VAT customers viewed them more pragmatically, while ITSA customers experienced them more emotionally.

1.3.1 Penalty suspension customer experiences

Participants’ recall of penalty suspensions was limited. Among those who remembered receiving a suspension, responses were generally positive and appreciative. These participants welcomed what they perceived to be an understanding approach from HMRC, although a few still described their overall experience as unfair or stressful.

Awareness of HMRC caseworkers was mixed across the sample. Many participants did not recall having a caseworker or any contact with them, particularly those who relied on agents to manage their tax affairs. For those who were aware of caseworkers, they were typically described as helpful and empathetic.

While recall was similarly limited, the concept of suspension conditions was seen as a good way to improve future compliance. Where conditions of suspensions were recalled, they were often described in general terms, such as filing future returns correctly and on time, although participants did not always use the term ‘condition’ for this. A small number of participants were able to describe a few specific, action-oriented requirements more clearly.

Most penalty suspension customers reported making some kind of change after receiving the penalty suspension, but typically these changes were limited. The most common responses involved soft actions, such as taking greater care when completing returns or reviewing them more thoroughly. Being identified by HMRC as having made an error appears to have prompted customers to take action, with most changes being motivated by a desire to avoid future mistakes. This mirrors the impacts on behaviour reported by customers who received a penalty without a suspension. The suspension process itself, including the setting of conditions and the suspension of the penalty, does not seem to be the primary driver of these behaviour changes.

Receiving a penalty suspension generally improved customers’ perception of HMRC, who were viewed as taking a fair and understanding approach.

1.3.2 Penalty customer experiences

Participants’ recall of penalties was limited but generally stronger than for penalty suspensions. Reactions to receiving a penalty were mixed. Customers who accepted the reason for the penalty described it as a fair and reasonable consequence of making a mistake. Those who perceived the penalty as unfair often felt HMRC communications were inflexible and unjust. Penalty customers were generally unaware that suspension was possible, unless they had previously received one.

Reported impacts of penalties on future compliance behaviour were similar to those for suspensions. Soft actions, such as checking returns more carefully, were again the most commonly reported and motivated by a desire to avoid future mistakes. The impact of penalties on customers’ views of HMRC depended on the extent to which customers agreed the inaccuracy was their fault.

1.4 Customer views about penalty suspension policy options

During interviews, participants typically responded positively to additional information about the current penalty suspension policy, even when it differed from their own experiences in practice. Participants believed the current suspension policy to be fair, reflecting the belief that most mistakes made in tax returns are unintentional and linked to a lack of tax knowledge. The principle of attaching conditions to suspensions was also welcomed and seen as a sensible way to avoid further mistakes.

Participants were presented with 2 alternative options to the current system of penalty suspensions (more information about these options can be found in Appendix 7.2). The first was an automatic 2 to 4 year penalty suspension for a first-time careless inaccuracy without specific or SMART (Specific Measurable Achievable Realistic Timebound) conditions attached (other than the requirement to submit all required tax returns on time and not to incur another penalty during that time). While seen as simpler, the lack of SMART conditions or personalised interaction with HMRC was viewed as unlikely to change behaviour effectively.

The second option was a caution for a first careless inaccuracy (without a penalty being issued). While viewed as a more proportionate response, the lack of personalised interaction was again considered unlikely to help customers improve their compliance. Overall, this option was the preferred of the 2 as it was considered the most fair and lenient.

Rather than adopting either of the 2 options in favour of the current system, participants expressed a preference for improving implementation of the current policy. This was predominantly linked to concerns in both options about reduced opportunities for communication with HMRC. There was a general consensus that the current system also makes sense as the penalty gets customers’ attention, while the suspension allows for consideration of individual circumstances.

1.5 Conclusions

VAT and ITSA customers were generally positive about the current penalty suspension policy, while also recognising challenges in how it worked in practice. Despite these challenges, penalty suspensions appeared to have a positive effect on customers’ views of HMRC and customer satisfaction.

Customers expressed a preference for improving the current system rather than replacing it with the suggested alternatives. They highlighted the importance of clear communications from HMRC, a stronger focus on education, and more supportive caseworker interactions.

2. Research design

This section sets out the background to the research, the research aims and methodology.

2.1 Background to the research

Between March 2025 and June 2025, the UK government consulted on reform of behavioural penalties, including alternative approaches to penalty suspension. Currently, taxpayers who receive a penalty for a careless inaccuracy in their tax return, may have it suspended if:

• at least one specific condition can be set that would help a person avoid making further careless inaccuracies in the future

• a general condition is applied, requiring the person to file their returns on time during the suspension period, which can last up to 2 years

People may appeal against HMRC’s decision not to suspend a penalty, and against any of the suspension conditions set by HMRC. HMRC’s assessment of whether the conditions have been met cannot be appealed.

HMRC has limited evidence about the effectiveness of this current policy of penalty suspension. Stakeholder feedback (from the 2024 call for evidence) highlighted several challenges, including: low taxpayer awareness, time and resource burdens in setting suspensions, and inconsistent application or follow-up.

This research explored the experiences of taxpayers who have received a penalty for a careless inaccuracy, both with and without a suspension. The research aimed to provide HMRC with evidence to assess whether penalty suspension is effective, along with a basis on which to consider reforms which could make the administration of penalties simpler and more efficient.

2.2 Research objectives

The overall aim of the research was to explore the extent to which the current system works for those who have received a penalty suspension and for those that did not. It also tested alternative options which were included in the 2025 public consultation.

The research questions covered 2 key areas.

The first key objective was to assess whether the current system works. For those that received a suspension this covered the following questions:

• what were the conditions that were set?

• were they able to meet the conditions that were set?

• how easy or difficult was it to meet the conditions?

• have they changed their behaviour as a result of the suspension? In what way?

• did the suspension help them build trust and understanding with HMRC?

• what was their relationship with the caseworker like? How much contact did they have?

• did they prefer suspension to a penalty? If so, why?

• what was the outcome of the suspension?

For those that did not receive a suspension of their penalty, the following research questions were covered:

• did they understand why the penalty was not suspended?

• would they have preferred a suspension to a penalty? If so, why?

• what was the financial impact of receiving the penalty?

• what was the outcome of receiving the penalty?

• how has their behaviour changed?

The second key objective was to test attitudes to 2 alternative options to the current policy, namely receiving an automatic suspension (option one) or a caution (option 2). Details of these alternatives can be found in Appendix 7.2. The following research questions were covered:

• what do respondents see as the advantages and disadvantages of alternative options to the current suspension system?

• which is the preferred alternative (if any) and why?

2.3 Methodology

This qualitative research involved 43 in-depth interviews with individuals (ITSA customers who pay income tax via self assessment) and small businesses (VAT customers, with a turnover below £10 million, and fewer than 20 employees) to explore customer experiences of receiving a penalty or a penalty suspension. 60 minutes and took place over telephone or video call (according to the participants’ preference). The fieldwork was conducted between 14 July 2025 and 28 August 2025. Participants were given the option of a charity donation to thank them for their time.

Participants were recruited from HMRC-provided sample of closed cases (where any suspension period had come to an end) when the error resulting in a penalty or suspension had occurred from 2022 onwards. Recruitment quotas were set to achieve a spread across 4 categories of customer type and penalty experience:

• individuals (ITSA) penalty suspended (15)

• individuals (ITSA) penalty not suspended (6)

• small businesses (VAT) penalty suspended (15)

• small businesses (VAT) penalty not suspended (7)

Secondary recruitment variables were also used to ensure diversity in the type of ITSA customer, as well as business size for VAT customers. A full breakdown of the achieved sample is included in Appendix 7.1.

Two key challenges were noted during the research. First, some participants had difficulty recalling details of their experiences. This is likely to be in part due to interviews relating to closed cases with the error happening from 2022 onwards. In 3 instances, participants had no recollection of the penalty error at all. Second, recruitment proved challenging, with 31 confirmed participants dropping out on the day of their interview who then needed to be replaced.

The findings presented in this report are based on qualitative research methods and are intended to provide in-depth insights into participants’ experiences and perspectives. The sample size and selection methods used in this study do not allow for quantitative analysis or generalisation of results across the population of interest. Readers are advised to interpret the findings within the context of qualitative research and consider them as illustrative rather than representative.

Throughout the report, quotes and pen portraits are used to illustrate key points. Quotes are taken verbatim from participant interviews and are attributed to the customer type (ITSA or VAT) as well as the specific penalty status for which the participant was recruited (penalty vs suspension). Pen portraits provide a concise summary of individual participants, including their background, their customer journey, and the perceived impact of the penalty experience whether suspended or not. Names and any other identifying information have been removed to protect participant confidentiality.

2.4 Survey feasibility study

The qualitative strand of this research was part of a larger piece of research including a feasibility study to determine whether a survey with customers who have received a penalty or suspended penalty would be feasible.

The quantitative feasibility study consisted of a small-scale telephone survey with those who had received a penalty or penalty suspension for inaccurate VAT or ITSA tax returns and documents, between 2021 and 2025.

The sample of 694 taxpayers (400 VAT and 294 ITSA) was selected, using stratified systematic sampling, from the records HMRC provided that were not used for the qualitative research. The sample was deliberately skewed towards businesses and individuals with suspended penalties.

Computer assisted telephone interviews (CATI) were conducted between 12 September 2025 and 3 October 2025.

The results from this strand of the project are included in Appendix 7.3. The experience of conducting the feasibility study indicated that commissioning a full-scale survey with recipients of penalties and penalty suspensions would be challenging and not offer good value for money.

3. Context: experiences of managing tax affairs

This section examines participants’ experiences of managing their tax affairs and the main challenges they reported facing, providing context for their views and experiences with the penalty suspension regime.

3.1 Experiences of managing tax submissions

Participants were asked about how they manage their tax affairs to provide contextual insight to help interpret their views and experiences of penalty suspensions. When asked about their ways of managing their tax returns, ITSA and VAT customers all described some form of systematic approach to the task. These approaches were varied and influenced by participants’ levels of knowledge of the tax system.

Among those that did not use an agent for their tax submissions, 3 types of approaches were identified:

Anxious triers

Individuals with lower tax knowledge who attempted to manage their returns themselves but struggled in doing so. They also sometimes faced challenging personal circumstances (for example, ill health).

Potentially over-confident

Customers who claimed to have moderate tax knowledge, mostly from self-research employed to dispute their penalty case.

Actively engaged

Participants with higher levels of tax knowledge who confidently managed their own tax affairs and who were comfortable using software tools. In these cases (which tended to be ITSA customers) the penalty was more likely to be seen as an exceptional case usually related to a complex tax issue.

Among those customers who did use an agent for their tax submissions, 2 types of approaches were identified:

Delegators

Individuals with lower tax knowledge who relied on their agents almost entirely and trusted them to manage all tax submissions.

Professional and disengaged

Customers with higher tax knowledge, but who still preferred to delegate to their agents usually due to time constraints (these tended to be VAT participants who had busy schedules running businesses).

3.2 Key challenges relating to tax submissions

Six key challenges were reported in relation to completing and submitting ITSA and VAT returns. The most common challenge reported was low tax knowledge and literacy. Many participants reported finding the rules, processes, and occasionally the numeracy required complicated which could lead to mistakes being made. Even when they did attempt to access help, the guidance online was often found to be overwhelming, difficult to find, or hard to understand.

Secondly, letters received from HMRC were described as long and filled with tax ‘jargon’. Moreover, customers found it difficult to access telephone support, at times waiting up to an hour in call queues and not always receiving helpful support when they finally got through to the other end.

“If I’ve got a question, I’ll normally sit on the phone for about an hour waiting to get through and then speak to somebody and it’s hit and miss on whether that person actually understands what you’re talking about.”  (ITSA, Suspension)

A third significant challenge reported was the time and effort required for submitting tax returns. Some found it challenging to fit tax return tasks around their other responsibilities, which often led to delays in submitting returns or having to rush, thus increasing the chance of making errors. This was especially the case for businesses.

“It’s a challenge because you’ve got to realise that I still work every day. So whatever paperwork I do, 9 times out of 10 it’s kind of evenings.” (VAT, Suspension)

Businesses also mentioned cash flow issues as a VAT specific concern. Having to gather a large amount of bills and receipts, while relying on timely customer payments often caused cash flow problems which could contribute to incorrect or incomplete VAT returns.

“Because we have periods that are very, very busy and a lot of that money is used up in cash flow, [in order] to carry on the work that’s in front of us we need to utilise VAT money because you can only have so much cash flow.  For example, I did a project last year for £1.2 million which went up to £1.5 million, we needed cash flow of £400k just to buy materials and pay for contractors as we were moving through the project…” (VAT, Suspension)

Some customers struggled with technology challenges, such as navigating online information, online portals, and tax return software, which were often needed to submit returns correctly.

“There was a lot of logins, online portals, understandably a lot of security (…) but it’s just there was a lot of legacy platforms in place at the time as well, so I had to do one thing on an old portal and another thing on a new portal. It was just strange.” (ITSA, Suspension)

Finally, some customers’ over-reliance on their agents was also seen as a cause for errors by some participants. Some errors were made by the agents themselves, and returns were not reviewed by customers before submission, which often caused frustration as customers did not feel errors were their fault or responsibility.

“I said to [my accountant] what’s going on here, you’re privy to every transaction that we do, and why has it gotten to the stage that there’s people coming to my door and he said he would look into it and sort it out (…) I have literally placed all my trust into him.” (VAT, Penalty)

These challenges formed important aspects of the context in which customers received and responded to receiving penalties and suspensions from HMRC.

4. Customer experiences of penalties and penalty suspensions

This section details participants’ experiences of the current penalty suspension regime and its perceived impact on their future compliance behaviour and views of HMRC.

4.1 Differences between VAT and ITSA customer experiences

Throughout the research, differences were observed between VAT and ITSA customers’ reported experiences. Typically, VAT customers viewed penalties more pragmatically, while ITSA customers experienced them more emotionally. This may be because of their different contexts; for VAT customers, any issues related to tax were usually seen as part of their job, whereas for ITSA customers, the issues were related to them as an individual and therefore viewed as more personal.

ITSA customers tended to describe their experiences as more stressful than VAT customers, reporting that HMRC letters assumed guilt and used overly officious language. These customers also tended to recall the process more clearly (regardless of whether the penalty had been suspended or not). As they tended to have lower reliance on agents than the VAT customers in the sample, this reflected both the stronger emotional impact and their greater direct involvement.

“Definitely when you receive a letter like that your heart sort of sinks.” (ITSA, Penalty Suspended)

In contrast, VAT customers typically viewed penalties as a routine aspect of running a business. The breadth of their financial responsibilities as well as the extent to which others were involved, appeared to lessen the emotional impact of VAT penalties. However, smaller businesses in the sample, where one person handled everything, did report experiencing stress and found the process more challenging, with their experiences more closely aligning to those of ITSA customers. As many VAT customers relied on agents for tax tasks, their recall of the penalty, and suspension where relevant, was typically weaker.

“In our line of business timing is of the essence so spending days over [a penalty amount of] £5,000 or £2,000, that time is too precious.” (VAT, Penalty)

4.2 Drivers of customer experiences

A number of factors affected customer experiences of receiving a penalty or suspension. Six key drivers of customer experience were identified across the sample. Overall, tax knowledge and agreement levels seemed to be the most influential. The 6 drivers were:

• levels of tax knowledge and confidence in the system

• level of agreement for the reason given for the penalty being issued

• degree of understanding of the reason for the penalty

• whether customer has an agent or not

• whether customer had a HMRC caseworker or not and whether they could contact them

• personal circumstances at the time

Whilst most customers presented with a range of circumstances across the drivers, the most positive experiences tended to occur when several factors aligned: they had good levels of tax knowledge and confidence in the system; understood the reason for the penalty being given and agreed with it; had an agent to help them understand the situation (and help answer any questions and deal with the added administrative work); they could contact and had a good relationship with a HMRC caseworker; and, where there were no extenuating personal circumstances creating additional stress for them.

In contrast, the most negative scenarios were where customers: had lower levels of tax knowledge and confidence in the system; did not understand or agree with the reason for the penalty; did not have an agent or contact with a HMRC caseworker to ask questions and gain reassurance; and where they were experiencing challenging personal circumstances (for example ill health).

4.2.1 Customer typology

Customer experiences fell into 4 typologies, driven by their level of tax knowledge and level of agreement with the reason for the penalty being issued. The 4 typologies were:

Confident acceptors

Had higher levels of tax knowledge and accepted the reason for the penalty. These customers tended to acknowledge their mistake and view the penalty as fair, often seeing it as a one-off error.

Passive acceptors

Had lower levels of tax knowledge and accepted the reason for the penalty. These customers tended to accept the penalty due to low confidence in their tax knowledge or lack of time to check in more detail (which was more common among VAT businesses).

Contesters

Had higher levels of tax knowledge and less acceptance of the reason for the penalty. These customers felt more confident in disputing the reason for the penalty and sometimes blamed HMRC or its policies and processes for the error.

Angry rejectors

Had lower levels of tax knowledge and less acceptance of the reason for the penalty. These customers lacked faith in the system and felt they were being unfairly treated and sometimes, for a range of reasons, were more generally anti-government in their wider views.

These typologies can help us understand the range of experiences reported across the sample. In the sample, the Contesters and Angry Rejectors were more commonly those participants who had received penalties.

4.3 Penalty suspension customer experiences

This part of the report outlines the experiences of customers who received a penalty suspension, drawing out any meaningful differences between VAT and ITSA customers throughout.

4.3.1 Awareness, understanding and reactions

There was typically poor recall of penalty suspensions across the sample. Those customers who remembered the experience mainly referred to receiving a letter from HMRC but had little recall of its more detailed content. Many participants could not recall the length of the suspension, and some assumed the penalty was simply cancelled once the owed tax was paid and any errors corrected.

“I genuinely can’t remember (…) when I get a document like this, I have a look at it, kind of really, really briefly and then I just send it to the accountant.” (VAT, Penalty Suspension)

Generally, participants were relieved and appreciative for receiving suspensions, seeing them as a fair and proportionate response to genuine mistakes. Many participants said they appreciated HMRC’s understanding approach to the situation, although a few still felt their overall experience remained unfair or stressful.

“[I was] very pleased that they decided to be kind enough to suspend that.” (ITSA, Penalty Suspension)

4.3.2 Experiences of HMRC Caseworkers

Awareness of caseworkers was mixed across the sample. Many participants did not recall having a caseworker or any contact with them, particularly those who relied on agents to manage their tax affairs. For those who were aware, caseworkers were typically described as helpful and empathetic and their support seen to have made processes, rules, and systems clearer for customers. We note that caseworkers were rarely referred to by this term and were usually referred to as HMRC “agents” or “staff”.

“She was approachable, understanding, appreciative of the fact that I was co-operative.” (VAT, Suspension)

A small number of participants reported more neutral or negative experiences with caseworkers and in these instances, they described their caseworkers as blunt, overly business-like and seeming to lack empathy.

“I’m not suggesting for a second that we should be having nice chats but (…) there was just no reassurance (…) no human element to it.” (ITSA, Suspension)

Pen portrait 1: A positive customer experience of penalty suspension

Typology: Confident Acceptor

Profile: A small business owner in the construction sector, with 6 employees and £750,000 to £1.1 million turnover. The business is family-run, with the owner overseeing operations, while record keeping is managed by their partner and another employee using [named software package].

Journey: 

• during a VAT audit, HMRC identified a software error where [named software package] had incorrectly added VAT to salary payments

• the business owner was notified by letter and understood the issue after discussions with the auditor, who was described as clear, helpful, and positive

• a penalty was issued but suspended, which the business owner was relieved about, especially as the error was unintentional and caused by their software

Impact: 

• the suspension led to practical changes: they updated [named software package] rules to prevent recurrence and now check PAYE files before submitting returns

• the experience increased trust in HMRC, who were seen as fair and compassionate

• they felt the process was handled with common sense and appreciated not being penalised for a genuine mistake, which would have been financially challenging

“[The HMRC auditor] was a genuine person that just wanted to make sure that everything was correct and that the experience was as pleasurable as it could be under the circumstances (…) [it’s] easier to deal with them if you’re not feeling like you’re being attacked all the time.” (VAT customer, Suspended penalty)

4.3.3 Experiences of conditions

Awareness of suspension conditions was limited across the sample. Some participants struggled to recall the details of conditions, while others believed that no conditions had been set or communicated to them. Where conditions of suspensions were recalled, they were often described in general terms, such as filing future returns correctly and on time, although participants did not always use the term ‘condition’ for this.

“I can’t remember the specifics, but basically it’s to make sure you do things properly and then if they find out that I’m trying to do things wrong or give them wrong information or something at a later stage – [then] I could still face a penalty.” (ITSA, Suspension)

A small number of participants were able to describe a few specific, action-oriented requirements more clearly (see pen portraits 2 and 3), whereas less specific requirements, such as being told to ‘take more care’, were remembered less distinctly.

“We had to show them [HMRC] that we were doing it in a more professional manner, following accountants’ instructions basically.” (VAT, Suspension)

Poor recall among participants makes it difficult to assess how easy or challenging the conditions were to meet. However, participants generally reported having met the more action-oriented conditions they could remember and found these conditions helpful for supporting future compliance. The idea of applying clear and specific conditions was generally viewed as a sensible way to help customers avoid future errors.

Pen portrait 2: Positive recall and impact of suspension conditions #1

Typology: Confident Acceptor

Profile: A taxpayer who previously owned a telecommunications franchise. While trading, he managed his ITSA obligations through an accountant, but since closing the business, he completes his own self-assessment returns.

Journey: 

• the penalty arose from a student loan repayment issue: his payroll was set at a minimum, so no deductions were made for 2 years

• HMRC identified the error and notified him by letter. He contacted his accountant, acknowledged the error to HMRC, and agreed to pay the owed amount

• he could recall suspension conditions outlined in the letter, which included keeping records of student loan payments and informing HMRC of any changes

Impact: 

• the conditions prompted immediate actions, ensuring all future submissions were on time, maintaining detailed records, and taking personal responsibility for compliance

• he felt the process was fair and that the HMRC caseworker was understanding

• the experience sparked greater interest in his tax affairs and led him to complete his last 2 submissions independently

“It did kind of trigger this interest in me looking in more detail at the things that I’m submitting, or my accountant was – just to understand it from my perspective a little bit more, which is probably why I did my last 2 submissions myself.” (ITSA customer, Suspended penalty)

Pen portrait 3: Positive recall and impact of suspension conditions #2

Typology: Passive Acceptor

Profile: A small business owner running a carpentry business with £650,000 to £850,000 turnover, no employees, and using subcontractors. They rely on an accountant for tax returns.

Journey:

• A VAT inspection identified errors, mainly from incorrect entries for VAT and non-VAT items, leading to a penalty

• the penalty was suspended on the condition that they improved their record keeping by using a spreadsheet provided by their accountant

• they did not initially see these as formal ‘conditions’ but understood they had to agree to make a specific change

Impact: 

• the suspension and requirement to use the accountant’s spreadsheet led to clear behavioural changes: they became more organised, started entering records earlier, and found the new process less stressful and easier to follow

• they credit the suspension and the conditions for helping them avoid further penalties and improving the accuracy of their returns

“He [the accountant] said to me, look, I want you to do it like this… We had to show them [HMRC] that we was doing it in a more professional manner, following the accountant’s instructions basically.” (VAT customer, Suspended penalty)

4.3.4 Impacts

Most penalty suspension customers in the sample reported making some kind of change after receiving the penalty suspension. These changes were typically limited, with soft actions (such as checking returns more carefully) being the most common change reported. The types of changes reported included:

• agent related action: included those who started using an agent, switched to a new agent, or outsourced more of their tax management to an agent

• specific individual action: specific circumstance-related changes included avoiding buying large items online and introducing manual checks where software was insufficiently flexible to check for errors

• keeping more up to date with HMRC communications: several participants reported paying more attention to HMRC communications now to stay up to date, not miss any payments, and have sufficient time to complete and check returns more thoroughly

• checking and taking more care: many participants claimed they now paid more attention to their tax returns, making sure they double checked all paperwork (including both participants with an agent and those without)

• no changes: some participants said that they had made no changes and generally these participants felt behaviour change was unnecessary; they felt confident and knowledgeable about their returns and that the penalty had resulted from an unfortunate accident rather than a careless mistake

Being identified by HMRC as having made an error appears to have prompted customers to take action, with most changes being motivated by a desire to avoid future mistakes. This mirrors the impacts on behaviour reported by customers who received a penalty without a suspension, which are explored in the next section. The suspension process itself, including the setting of conditions and the suspension of the penalty, does not seem to be the primary driver of these behaviour changes.

4.3.5 Impact on view of HMRC

Participants widely reported that receiving a penalty suspension improved their perception of HMRC as an organisation. They described positive interactions with HMRC staff who demonstrated flexibility, making HMRC seem more ‘human’ to them.

“Well, they showed me that they do have some kind of flexibility, and they actually do try to understand what’s happening instead of just giving us a penalty. And so I guess it maybe shows me that they are willing to try and understand what’s going on and maybe help us do things correctly etc.” (VAT, Suspension)

When comparing scenarios (receiving a penalty versus having it suspended), participants felt compliance would be similar, as both prompted attentiveness to their tax return processes. However, being required to pay a penalty without leniency or the option of suspension would damage their view of HMRC, particularly among those with pre-existing negative views of the organisation.

4.4 Penalty customer experiences

This part of the report explores the experiences of customers who did not receive a penalty suspension, again drawing out any meaningful differences between VAT and ITSA customers throughout.

4.4.1 Awareness, understanding and reactions

Across the sample, there were still issues with recall of the events, but overall there was better awareness and understanding of penalties compared with penalty suspensions. This could be linked to the relatively more negative experiences and impact of having to pay a financial penalty than the situation of receiving a suspension.

There were mixed reactions to receiving a penalty for an inaccuracy. Customers who agreed with the penalty reason described it as a fair and reasonable consequence for making a mistake. However, those who perceived it as unfair often felt HMRC communications were inflexible and unjust. Calculating the penalty for an inaccuracy as a percentage of tax owed, rather than issuing a fixed amount, was seen as fair and proportionate. No major difficulties with actually paying the penalty were reported, aside from a small number who reported facing challenges in securing payment plans for this.

“It was a highly unpleasant experience… He [HMRC agent] said it has gone to default, you have got to pay, you have no option.” (VAT, Penalty)

Penalty customers taking part in the research were asked about their awareness of the possibility of a penalty suspension. These customers were generally unaware that suspension was possible, unless they had previously received one. Those who were aware had usually learned about it while contesting or trying to appeal their penalty.

4.4.2 Impacts

Most penalty customers reported making some kind of change after receiving their penalty. These changes were similar to those reported by customers with penalty suspensions. The changes made were typically quite limited, with soft actions being the most commonly reported (such as checking returns more carefully). There was however less variation in types of behaviour change reported among penalty customers, with the following 3 changes reported in this sub-group:

• agent related action: included those who started using an agent, switched to a new agent, or outsourced more of their tax management to an agent

• checking and taking more care: many participants claimed they now paid more attention to their tax returns, making sure they double checked all paperwork (including both those with an agent and those without)

• no changes: again, these participants felt behaviour change was unnecessary, as the penalty had resulted from an unfortunate accident rather than a careless mistake

In instances where action could be taken to avoid the same error from occurring again, in common with penalty suspensions, most behaviour changes were reportedly motivated by a desire to avoid future mistakes.

Pen portrait 4: Positive changes after being issued a penalty #1

Typology: Angry Rejector

Profile: ITSA taxpayer who had relied on an accountant for several years. They found the tax process challenging, preferring to outsource as much as possible due to a busy work life and low confidence with numbers.

Journey: 

• they received a penalty after their accountant failed to declare some IR35 income, resulting in an extra student loan deduction. This followed a previous suspended penalty for a similar error.

• they were surprised and frustrated, having trusted their accountant.

• HMRC communications were viewed as unclear, with the reason for the penalty ‘buried’ in the letter. Calls to HMRC were felt to be of little benefit.

Impact: 

• the penalty had a financial impact, increasing their monthly student loan repayments.

• the experience prompted them to change accountants and adopt a more careful approach to reviewing returns

• they now intend to compare new returns with previous ones to ensure all necessary information is included

“[I’m going to] double, treble, triple check everything and just make sure that everything is OK… even look at the previous ones where I’ve made a mistake and make sure that those boxes that I’ve missed are correct.” (ITSA customer, Penalty)

4.4.3 Impact on view of HMRC

Participants who had received penalties tended to have more negative views of HMRC (compared to those with suspensions), but this depended on whether they agreed with the penalty reason in the first place. When participants accepted that the mistake was their own, their perception of HMRC remained relatively neutral, with little change before and after receiving the penalty. In contrast, those who disagreed with the penalty reason often felt frustrated and deflated, leading to a decline in trust and a more negative overall perception of HMRC.

“Any time I see a brown envelope from them come through the post now I get nervous and have a mental breakdown even before I open it because I know it’s bad news.” (ITSA, Penalty)

Pen portrait 5: Positive changes after being issued a penalty #2

Typology: Passive Acceptor

Profile: Managing director of a small interior fittings business. The business deals with a high volume of receipts and invoices (around 1,500 per month), and uses [named software package] for admin, with accountants handling VAT. They have received multiple VAT penalties over the years, typically communicated by letter.

Journey: 

• the penalty was discovered during a VAT inspection for late returns. An employee had mistakenly submitted 2 similar invoices.

• they understood why the penalty was issued and accepted responsibility without contestation, describing the process as straightforward but frustrating. 

Impact: 

• the penalty prompted a significant change. Previously, they scanned receipts before sending to accountants but now recognise their accountants did not sufficiently understand their market. Have since doubled their admin staff to improve checking and introduced a more careful process for handling invoices.

• they see these changes as ongoing improvements, not just a reaction to the penalty, and feel they are sustainable.

“At the time I was about to employ someone who could help me because I had quite a few late penalties (…) I don’t have time to deal with it myself and I don’t have the knowledge (…) now we’re constantly learning and improving.” (VAT customer, Penalty)

5. Customer views about penalty suspension policy options

This section outlines participants’ reactions to prompted explanations of the current penalty suspension policy, as well as their thoughts on 2 potential alternatives. The stimulus materials shown to participants are available in Appendix 7.2.

5.1 Views about the current policy

During interviews, participants typically responded positively to additional information about the current penalty suspension policy, even when it differed from their own experiences in practice.

On reviewing the details of the policy, participants saw the current suspension policy as fair, believing that most mistakes made in tax returns are unintentional and linked to a lack of tax knowledge rather than a deliberate attempt at evasion. This meant that they saw individuals as deserving of at least the possibility of a suspension. The policy was seen as particularly helpful for Small and Medium Enterprises (SMEs) which, unlike larger businesses, were seen as less likely to have in-house tax expertise. The idea that conditions are attached to suspensions was also welcomed, as this was seen as a sensible way to encourage behaviour change and future compliance. This being said, customers emphasised that such conditions would have to be fair, relevant and proportionate to the error.

“Yeah, it helps, if you’re well intentioned then what it does is gives you some guidance that you might need to help you not make that mistake again.” (VAT, Suspension)

Despite finding the policy reasonable in principle, many participants felt that their lived experiences did not match the information presented to them. This was mainly due to a perceived lack of information regarding the policy’s details, as explored in previous sections. Among suspension customers, this included not having a dedicated caseworker, being unaware of the suspension period as well as the conditions, or simply insisting that no conditions had been given to them by HMRC. For penalty customers, many were not aware of the possibility of a suspension or, if they were, felt that they had unfairly not been granted one.  

“I found it extremely unfair because when you look at the situation and their guidance, I made an honest mistake, and I immediately corrected it, and I was very careful and meticulous in my record keeping and reading of all documentation (…). With all that in mind I don’t think they should have found that I was careless.” (ITSA, Penalty)

There were mixed views on the use of the term ‘careless’ as some participants felt it assumed guilt or fault, when they felt most mistakes were not in reality due to individuals’ lack of care. Some participants also wanted clearer information on appeals processes and whether an independent arbiter exists as they did not want to see HMRC acting as ‘both judge and jury’. There was also some concern that the 2-year suspension period was too long, especially for VAT customers filing quarterly. Lastly, there was a small number of participants that opposed the idea of suspensions altogether, believing that penalties should always be paid, but this remained a minority view in the sample.

5.2 Views about option 1: automatic suspension

The first alternative option participants were presented with was automatic penalty suspension for a first-time careless inaccuracy without specific or SMART conditions. Under this option, the general suspension condition of submitting all required tax returns on time during the suspension period would still apply, and the suspension period would last between 2 and 4 years. If the taxpayer incurred another penalty during the suspension period, the original suspended penalty would become payable. There would not necessarily be a discussion with HMRC to identify and address the source of the inaccuracy. The full wording shown to participants can be found in Appendix 7.2.

While seen as simpler, this option was viewed as unlikely to change behaviour effectively. Customers felt that this would generally be a simpler process as well as a more lenient response to genuine first-time errors. They assumed the process would be quicker, as an automatic suspension would avoid the need to wait anxiously for a suspension decision or engage in lengthy and cumbersome communication with HMRC.

“It gives the taxpayer notice that they’ve made a mistake and gives them the opportunity to fix that mistake and look back on their returns without having to worry too much about meeting certain conditions because [not all conditions are the same] and there might be conditions they’re not able to meet in that specific time so this will just give them a bit of breathing room.” (ITSA, Suspension)

This being said, participants also acknowledged that this option risked being too easy to ignore, especially if there was no follow up procedure with a first-time error. The main concern participants brought up was the issue with potentially not even being made aware of what the error was. They felt it was counterintuitive as this was HMRC’s ‘duty’ as an organisation to explain errors in order to help customers rectify them and avoid making the same mistakes again in the future. It was mentioned that there would be a reputational risk if HMRC was unable to provide this information. Customers preferred having direct contact with HMRC to have clearer guidance and transparent discussion.

“Not having a discussion is a major disadvantage. That’s one of the best things that I did have was a person from HMRC address the source of the inaccuracy and give me guidance…. education is definitely the best policy.” (VAT, Suspension)

Views were mixed about what should occur after the 2 to 4-year suspension period. Preferences varied between a ‘reset’ and increased consequences for repeat mistakes. However, there was a consensus that individual circumstances should be taken into account (such as efforts to comply or proactive behaviour, if the error was entirely different to the previous mistake). Generally, 4 years was seen as too long for a suspension period, with 1 to 2 years seen as more realistic and reasonable.

5.3 Views about option 2: caution

Option 2 consisted of a caution for a first careless inaccuracy instead of issuing a penalty (and there was no time period attached to this in the materials shown to participants). The full wording shown to participants can be found in Appendix 7.2. While seen as more proportionate, this option was considered unlikely to be effective in compliance behaviour change.

Overall, this option was the preferred of the 2 as it was considered the most fair and lenient. Most appreciated the terminology as they found it more accessible and understandable.

“It’s less formal, less invasive if it achieves what HMRC want which is eradication of an inaccuracy, it would also consume much less resources on the part of the company.” (VAT, Suspension)

“I quite like that because I think people understand caution — you use that language in sport, law, in everything — you sort of know that it’s your first yellow card.” (ITSA, Suspension)

There was some concern that a simple caution without a penalty was too lenient to have a positive effect on compliance, though customers welcomed the idea of a tax awareness course as an educational requirement under this option. This being said, most queried whether a tax awareness course could be sufficiently tailored to be useful, as every customer would be receiving cautions for different types of errors.

Once again, the main issue reported for this option was the lack of conversation with HMRC and customers not being made aware of the details of the specific error. In order for this option to be effective, customers would need to know what the error was and what the penalty would have been.

“I guess that’s a lot less admin work [for HMRC] but it probably wouldn’t have much impact in terms of compliance and changing people’s behaviours, especially if there’s no conversation with HMRC.” (ITSA, Penalty)

Again, there were mixed views on what should happen in the future, in the same way as after the suspension period ends in option 1.

5.4 Preferences

Rather than changing the system to either of the options, participants reported a preference for improving implementation of the current policy. This was predominantly linked to concerns with both options about reduced opportunities for communication with HMRC. There was a general consensus that the current system also makes sense as the penalty gets customers’ attention, while the suspension allows for consideration of individual circumstances.

The main suggestions to improve the effectiveness of the current policy focused on communication, by providing more accessible language, clearer policy, and easier access to caseworkers.

“I would stay with the penalty and the potential suspension (…) because people would understand how much they are supposed to pay, and then they will understand that they have to sort it out by being in touch with HMRC etc.” (VAT, Suspension)

Thus, unless option 2 could provide clarity on the cautioned error or some form of communication with HMRC, participants preferred to keep and improve the current policy.

6. Conclusions

This concluding section sets out a summary of the key findings against the research objectives and potential implications to emerge from those findings.

6.1 Does the current system of penalty suspension work?

VAT and ITSA customers were broadly positive about the current policy. The overall consensus was that:

• penalties are reasonable and proportionate

• suspensions are fair and humanise HMRC​

• conditions are a sensible way to guide future behaviour and aid compliance

• caseworker contact and involvement are largely positive and helpful

However, challenges had been experienced in practice across the sample and lived experiences rarely reflected the theory. In particular:

• recall was poor, particularly about suspensions and this brings the effectiveness of the policy into question ^{[footnote 1]}.

• limited engagement with the process was reported, particularly among customers using agents, which lessens learning opportunities

• recipients of suspensions do make changes, but these are limited and similar in nature to those prompted by penalties; this suggests that suspensions are not the main driver of change and being identified as having made an error by HMRC is sufficient to drive behaviour change

Despite these challenges, penalty suspensions appear to influence perceptions of HMRC’s fairness and generally had a positive effect on overall views of HMRC and on customer satisfaction.

6.2 How do customers think the current system should be improved?

As reported in chapter 5, discussions about customers’ experiences of penalties and suspensions and 2 alternative policy options highlighted a preference for improving the current system rather than replacing it.

Customers highlighted the need for:

• clearer communications from HMRC: including clearer explanations of reasons for penalties, conditions, and suspension periods being made more explicit

• a stronger focus on education: there was a desire for the process to build understanding of requirements, rather than just penalise

• more supportive caseworker interactions: customers wanted to see empathy and human support to help put things right and improve compliance in the future

In conclusion, VAT and ITSA customers recognise the need to be made aware of mistakes when they occur and value HMRC’s flexibility in acknowledging that these are accidental errors and HMRC’s support to put things right.

7. Appendix

7.1 Sample 1 breakdown

Eligibility criteria for participants:

Table 1: The number of participants in the achieved sample, against the primary recruitment variables of customer type and penalty experience  

Customer type and penalty experience	Number of participants
Individuals (ITSA) penalty suspended	15
Individuals (ITSA) penalty (not suspended)	6
Businesses (VAT) penalty suspended	15
Businesses (VAT) penalty (not suspended)	7

Table 2: The number of participants in the achieved sample, against the secondary recruitment variable of ITSA type  

ITSA type	Number of participants
I filed a return for self-employed income	14
I filed a return from rental income (landlord)	3
I filed a return for Capital Gains	4
Other	0

Table 3: The number of participants in the achieved sample, against the secondary recruitment variable of business size (VAT)  

Business size (VAT	Number of participants
Nano (0 employees)	2
Micro (1-9 employees)	17
Small (10-19 employees)	3

Table 4: The number of participants in the achieved sample, against the tertiary recruitment variable of gender 

Gender	Number of participants
Male	34
Female	9
Other	0
Prefer not to say	0

Table 5: The number of participants in the achieved sample, against the tertiary recruitment variable of turnover 

Turnover	Number of participants
£12,571-£50,270 (basic rate ITSA)	16
£50,271-£90,000 (higher rate ITSA, up to VAT threshold)	6
£90,000+ (VAT threshold)	21

Table 6: The number of participants in the achieved sample, against the tertiary recruitment variable of sector 

Sector	Number of participants
Agriculture, forestry and fishing	1
Mining, quarrying and utilities	1
Manufacturing	3
Construction	8
Motor trades	1
Wholesale	2
Retail	2
Transport and storage (inc. postal)	1
Accommodation and food services	0
Information and communication	4
Finance and insurance	1
Property	5
Professional, scientific and technical	1
Business administration and support services	4
Public administration and defence	0
Education	1
Health	2
Arts, entertainment, recreation and other services	2
Other SPECIFY	4

Table 7: The number of participants in the achieved sample, against the tertiary recruitment variable of time registered 

Time registered	Number of participants
1-4 years	9
5-9 years	12
10+ years	22

Table 8:  The number of participants in the achieved sample, against the tertiary recruitment variable of location 

Location	Number of participants
Greater London	6
South East	10
South West	3
West Midlands	3
North West	4
North East	1
Yorkshire and the Humber	3
East Midlands	2
East of England	3
Scotland	6
Wales	1
Northern Ireland	1

7.2 Stimulus materials

In the section of the interview where participants were asked for their views on current suspension policy, the following stimulus was shown.

HMRC may suspend a penalty for a careless inaccuracy if:

• at least one specific condition can be set that would help a person avoid making further careless inaccuracies in the future

• a general condition is applied, requiring the person to file their returns on time during the suspension period, which can last up to 2 years

People may appeal against HMRC’s decision not to suspend a penalty, and against any of the suspension conditions set by HMRC. HMRC’s assessment of whether the conditions have been met cannot be appealed.

In the section of the interview where participants were asked for their views on alternatives to the current suspension policy, the following stimulus materials were shown.

7.2.1 Option 1: Automatic penalty suspension, without specific or SMART conditions

Under this approach:

• all penalties for a first careless inaccuracy would be automatically suspended for a defined period

• there would be no specific or SMART conditions given

• a general suspension condition would still apply: the taxpayer must  all required tax returns on time during the suspension period

• the suspension period would last between 2 and 4 years

• if the taxpayer incurs another penalty during the suspension period, the original suspended penalty would become payable

• there would not necessarily be a discussion with HMRC to identify and address the source of the inaccuracy

7.2.2 Option 2: Caution for a first careless inaccuracy

Instead of issuing a penalty, HMRC would issue a ‘caution’ for a first careless inaccuracy.

7.3 Survey feasibility study  

The qualitative strand of this research was part of a larger piece of research including a feasibility study to determine whether a survey with customers who have received a penalty or suspended penalty would be feasible.  

The quantitative feasibility study consisted of a small-scale telephone survey with those who had received a penalty or penalty suspension for inaccurate VAT or ITSA tax returns and documents, between 2021 to 2025.  

The sample of 694 taxpayers (400 VAT and 294 ITSA) was selected, using stratified systematic sampling, from the records HMRC provided that were not used for the qualitative research. The sample was deliberately skewed towards businesses and individuals with suspended penalties. 

Computer assisted telephone interviews (CATI) were conducted between 12 September 2025 and 3 October 2025. 

7.3.1 Questionnaire 

The questionnaire, reviewed by HMRC policy stakeholders to align with research aims, covered taxpayers’ general understanding of penalties, their experiences with penalties and suspensions, the support they received, and the impact of penalties and suspensions. Ten cognitive interviews were conducted between 15 August 2025 and 22 August 2025 to improve the questionnaire. The results showed some respondents were unaware of suspended penalties and did not understand ‘careless inaccuracy’, so extra codes and clearer wording were added. 

Table 9: Sample performance 

The primary aim of the feasibility study was to explore sample performance and achieve a final outcome code. Each sampled taxpayer was called up to 5 times. The final achieved outcomes are shown in the table below. 

Final outcome code	VAT	ITSA
Complete	7	7
Screened out (not eligible to complete the survey for example name or business name did not match sample records)	103	17
Unobtainable (invalid or inactive number)	79	67
Refused (not interested in participating)	38	35
Business closed down	5	0
Unavailable during fieldwork	24	1
Did not answer after 5 calls	144	167

7.3.2 Response rate  

Overall, 14 interviews were completed, resulting in an unweighted response rate of circa 2%. Given this, achieving the desired number of interviews for a full-scale survey with recipients of penalties and penalty suspensions would be challenging, and commissioning such a survey would not offer value for money.

1. We note that research effect may play a role here given that the research involved closed cases with the error happening from 2022 onwards, meaning it could have been more than a year since the events happened which can affect participant ability to recall details in a research setting. ↩