HMRC Late Payment Penalties and Interest

Interest and penalties are two different things, and only one of them can be argued away. Interest runs automatically from the due date and has no reasonable excuse defence. Penalties are a sanction, can be appealed, and can often be prevented entirely by acting before the next trigger date.

Interest and Penalties Are Two Different Things

Almost every conversation about a late tax bill confuses them, and the distinction matters because one can be challenged and the other, for practical purposes, cannot.

Late Payment Interest

Interest on tax paid late runs from the due date to the date of payment. The rate is set by reference to the Bank of England base rate under a statutory formula, and it changes when base rate changes, so a long-running dispute will attract several different rates across its life.

Two features are worth understanding:

• It runs during an appeal. Appealing does not stop interest. If you succeed, interest falls away with the tax; if you lose, it has been accruing throughout. This is why a postponement application under s55 TMA 1970 does not solve the interest problem, postponement defers collection, not the interest clock.
• Repayment interest is lower. Where HMRC has held your money, the rate paid to you is set at a materially lower level than the rate charged on late payment. That asymmetry is a policy choice, not an error, and it is not appealable.

The practical consequence in a long investigation is significant. A dispute running four or five years over a substantial liability can accrue interest amounting to a large fraction of the tax. Where a client accepts that some tax will ultimately be due, paying that element on account, while formally maintaining the appeal on the disputed balance, stops interest on the amount paid and is very often the single most valuable piece of advice in the case.

Late Payment Penalties

The penalty regimes differ by tax, and the differences are not intuitive.

Income tax and capital gains tax (Schedule 56 FA 2009)

For self-assessment balancing payments the structure is a series of penalties triggered by the passage of time after the due date: commonly at 30 days, six months and twelve months, each calculated as a percentage of the tax unpaid at that point. The cumulative effect is substantial, and each trigger is a separate opportunity to act before it bites.

The new points-based and two-stage regime

A reformed regime applies for VAT and is being rolled out for income tax self-assessment alongside Making Tax Digital. Its architecture is different in two ways:

• Late submission is dealt with by points. A point accrues for each missed deadline, and a fixed penalty is charged only when a threshold is reached. Points expire after a period of compliance.
• Late payment is dealt with in two stages: a first penalty calculated by reference to the amount outstanding at defined intervals after the due date, and a second penalty which accrues on an ongoing basis while the tax remains unpaid.

The rollout is staged by taxpayer type and income level. Because the timetable and the percentages have been revised more than once, the current position should be checked against HMRC’s published guidance rather than assumed. Our guide to the Making Tax Digital penalty regime covers the architecture in more detail.

PAYE, NICs and CIS

Employer late payment penalties operate on a different basis again, geared to the number of defaults in a tax year, with the first default in a year typically not penalised. Employers who habitually pay a few days late therefore accumulate exposure across the year without necessarily noticing.

Inheritance tax

IHT has its own interest and penalty rules, and the interaction with instalment options on qualifying property is a common source of error.

Reasonable Excuse Against Late Payment Penalties

Reasonable excuse is available against late payment penalties, and the framework is the four-stage approach in Perrin v HMRC [2018] UKUT 156 (TCC): establish the facts relied on, decide which are proven, decide whether objectively (taking account of this taxpayer’s experience, knowledge and situation) they amount to a reasonable excuse and when it ceased, and then decide whether the failure was remedied without unreasonable delay after that.

Insufficiency of funds

The statutory rule is that an insufficiency of funds is not a reasonable excuse unless attributable to events outside the person’s control. That qualification is where the argument lives. An unexpected bad debt from a major customer, a bank withdrawing facilities without notice, fraud by an employee, or a sudden and unforeseeable market collapse can all bring an insufficiency within the exception. Ordinary trading difficulty, over-optimistic cash flow planning, or a decision to pay other creditors first will not.

Customs and Excise Commissioners v Steptoe [1992] STC 757 remains the touchstone: the question is whether the underlying cause of the insufficiency was outside the taxpayer’s control and was something a reasonable taxpayer conducting their business would not have been able to avoid.

Evidence that works

• Bank statements and facility correspondence showing the withdrawal of funding.
• Correspondence with the defaulting customer, and evidence of steps taken to recover.
• Medical evidence, dated, where illness is relied on.
• Evidence of the attempt to pay: a failed transfer, a returned payment, a call to HMRC.
• Evidence of what was done once the excuse ended, which is where most claims fail.

Special Reduction

Separate from reasonable excuse, HMRC may reduce a penalty because of special circumstances. This is a distinct statutory power and a distinct ground of appeal. The tribunal can only interfere with HMRC’s decision if that decision was flawed in the judicial review sense, but HMRC frequently fails to consider special circumstances at all, which is itself a flaw and opens the tribunal’s jurisdiction.

Always plead it in the alternative, and always ask HMRC in writing whether special circumstances have been considered and what conclusion was reached.

What To Do About a Late Payment Position

1. Separate interest from penalties in your own analysis and in every letter.
2. Check the tax is actually due. If it rests on a determination or an assessment, the underlying liability may be reducible, which reduces the tax-geared penalties and the interest with it.
3. Pay the undisputed element now. This stops interest on that amount and does not concede the disputed balance.
4. Get a Time to Pay arrangement in place before the next trigger date. The timing determines whether the next penalty arises at all.
5. Appeal the penalties within 30 days, with grounds, and apply for postponement of the tax where appropriate.
6. Build the reasonable excuse case around the four Perrin stages, and in particular fix the date the excuse ceased and show what happened next.
7. Plead special circumstances in the alternative and ask HMRC to confirm it has considered them.
8. Check the notices. A penalty that was not validly assessed or notified fails without any need for an excuse.

Frequently Asked Questions