Ignoring or failing to comply with an HMRC Schedule 36 information notice is not a neutral choice. The penalty regime under Schedule 36 Finance Act 2008 imposes automatic financial penalties for initial non-compliance and escalating daily charges for continued refusal. More seriously, persistent non-compliance signals deliberate behaviour to HMRC, which can feed into higher penalty rates on the underlying tax and, in extreme cases, trigger criminal referral. This guide explains the penalty regime in full.
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The initial £300 penalty
Paragraph 39 of Schedule 36 Finance Act 2008 provides for a fixed penalty of £300 where a person fails to comply with an information notice without a reasonable excuse. This penalty is levied by HMRC; it does not require an application to the First-Tier Tribunal or any court order. HMRC issues the penalty by notice, typically alongside or shortly after the compliance deadline in the original information notice has passed without production.
The £300 penalty is a flat amount, it does not increase based on the size of the underlying tax liability, the number of documents not produced or the length of the compliance period. For large businesses with significant tax liabilities, this amount may seem trivial. That is intentional: the fixed penalty is a formality that triggers the more significant escalation powers. The real financial risk lies in the daily penalties and, more importantly, in the interaction with the underlying tax investigation.
Importantly, the paragraph 39 penalty can be levied on both taxpayers who fail to comply with taxpayer notices and third parties (such as banks or accountants) who fail to comply with third-party notices. Both are subject to the same penalty framework.
Daily default penalties: £60 per day
If a person continues to fail to comply after an initial paragraph 39 penalty has been imposed, HMRC can apply to the First-Tier Tribunal for daily penalties under paragraph 40. The daily penalty rate is up to £60 per day for each day on which the person remains in default.
Unlike the initial penalty, daily penalties require FTT approval before they can be imposed. HMRC must make an application to the Tribunal setting out the history of non-compliance, the initial penalty that has already been imposed and why HMRC believes continued non-compliance is wilful or unjustified. The Tribunal can set the daily rate at any amount up to £60.
The requirement for FTT involvement in daily penalties is both a safeguard for the taxpayer and an escalation mechanism: the hearing itself places non-compliance on the public record and demonstrates to the Tribunal (which may later hear the substantive tax appeal) that the taxpayer has been uncooperative.
At £60 per day, continued non-compliance over several months can accumulate significant penalty exposure, over £7,000 for six months of daily penalties, on top of the initial fixed penalty. More significant than the daily rate, however, is the signal that FTT-approved daily penalties sends about the seriousness with which HMRC is treating the refusal.
The £3,000 inaccuracy penalty
Paragraph 40A of Schedule 36 (inserted by Finance Act 2009) provides for a separate penalty of up to £3,000 where a document produced in response to a Schedule 36 information notice contains an inaccuracy that is deliberate. This penalty targets taxpayers who nominally comply with a notice but produce falsified or materially inaccurate documents in an attempt to mislead HMRC.
The inaccuracy penalty is distinct from the non-compliance penalties and can be levied in addition to them. It applies only where HMRC can establish that the inaccuracy was deliberate, not merely careless or inadvertent. The burden of establishing deliberate inaccuracy is on HMRC and the standard requires more than a mistake. Evidence of falsification, alteration or selective redaction of documents may be sufficient.
The “reasonable excuse” defence
Paragraph 45 of Schedule 36 provides a defence for both the initial fixed penalty and the daily penalties where the person had a reasonable excuse for non-compliance. A reasonable excuse is not defined in the legislation but has been developed through case law and HMRC guidance.
What constitutes a reasonable excuse
- Serious illness affecting the taxpayer or the person responsible for compliance, provided the illness was serious enough to prevent compliance and the taxpayer acted promptly once recovered
- Genuine loss or destruction of records through circumstances beyond the taxpayer’s control, fire, flood, theft, provided the taxpayer took reasonable precautions to keep or recover the records and notified HMRC promptly
- Reliance on incorrect professional advice from a competent professional, provided the taxpayer gave the adviser accurate instructions and had no reason to doubt the advice
- Genuine dispute about legal privilege , where a taxpayer withholds documents in good faith on the basis of an arguable privilege claim, this is unlikely to give rise to a valid non-compliance penalty even if HMRC ultimately disagrees with the privilege assessment
What does NOT constitute a reasonable excuse
- Ignorance of the law or of the obligation to comply
- Pressure of business or lack of time to deal with the notice
- Inability to afford the cost of compliance
- Reliance on an employee or agent who failed to act (unless the taxpayer took all reasonable steps to ensure compliance)
- Deliberate decision to refuse compliance pending an appeal, without obtaining a stay
Appealing Schedule 36 penalties
Paragraph 47 of Schedule 36 gives the recipient of a penalty notice the right to appeal to the First-Tier Tribunal. The grounds of appeal are:
- No failure: the person did in fact comply with the notice within the compliance period or the documents produced satisfied the notice’s requirements
- Reasonable excuse: the failure to comply was excused within the meaning of paragraph 45
- Special circumstances: the Tribunal has a residual power to reduce the penalty where there are special circumstances that make the statutory amount disproportionate or unjust
A penalty appeal can be combined with an appeal against the underlying notice itself (paragraph 29), provided both appeals are lodged in time. If the appeal against the notice succeeds, the penalty falls away automatically. If the notice appeal is partially successful (e.g. specific requirements are set aside), penalties for non-compliance with those requirements will also fall away.
Interaction with tax-geared penalties
The Schedule 36 penalty regime operates independently of the tax-geared penalties under Schedule 24 Finance Act 2007, which apply to inaccuracies in tax returns and documents. However, the two regimes interact in an important way: persistent non-compliance with a Schedule 36 notice is likely to feed into HMRC’s assessment of the taxpayer’s behaviour for Schedule 24 purposes.
Under Schedule 24, penalties for inaccuracy depend on whether the taxpayer’s behaviour is characterised as “careless,” “deliberate,” or “deliberate and concealed.” Where HMRC ultimately raises a discovery assessment following a period of non-compliance with Schedule 36 notices, it will argue that the non-compliance is itself evidence of deliberate and concealed behaviour, pushing the penalty towards the higher end of the range (up to 100% of the unpaid tax or up to 200% for offshore matters).
This means that non-compliance with Schedule 36 can have a multiplier effect: not only does it generate standalone penalties, it can significantly increase the penalty rate on the underlying tax liability. For taxpayers under income tax investigation or any investigation managed by the Fraud Investigation Service, this interaction is one of the most important reasons to comply (or to appeal and obtain a stay) rather than simply ignoring notices.
HMRC’s escalation route
HMRC’s enforcement pathway for non-compliance with Schedule 36 notices follows a predictable sequence:
- Compliance deadline passes without production. HMRC issues the £300 fixed penalty under paragraph 39.
- Continued non-compliance. HMRC applies to the FTT for daily penalties under paragraph 40.
- Persistent non-compliance. HMRC uses its discovery assessment powers (s29 TMA 1970 for income tax or equivalent provisions for other taxes) to raise assessments based on best estimates, without the benefit of the taxpayer’s own records.
- Evidence of deliberate concealment. Where HMRC concludes that non-compliance is part of a deliberate strategy to conceal fraud, it may refer the case to its Fraud Investigation Service for potential criminal investigation under COP9 or Code of Practice 8 procedures.
Each step in this sequence is more difficult and more expensive to manage than responding to the original notice. The cost of specialist representation to deal with a discovery assessment, FTT penalty proceedings, and a COP9 investigation will far exceed the cost of responding to the original Schedule 36 notice with specialist assistance. Early intervention is almost always the right approach.
Frequently asked questions
Can I be imprisoned for not complying with a Schedule 36 notice?
Not for the non-compliance itself. The penalties are financial, £300 initial and up to £60 per day. However, if HMRC treats persistent non-compliance as part of a deliberate fraud and refers the case for criminal investigation, the underlying conduct (not the non-compliance) could ultimately lead to prosecution. Obstruction of an HMRC inspection under paragraph 42 of Schedule 36 is separately a criminal offence.
What is a reasonable excuse for non-compliance?
A reasonable excuse must be something that genuinely prevented compliance despite taking reasonable care. Accepted examples include serious illness, loss of records through fire or flood and reliance on incorrect professional advice. Ignorance of the law, pressure of business and general lack of time do not qualify. If you believe you have a reasonable excuse, assert it in writing to HMRC before the compliance deadline if possible.
Can HMRC penalise me if I appeal the notice?
If you have lodged an appeal and obtained a stay of the compliance deadline from the FTT, HMRC cannot levy penalties during the stay period. If you appealed without obtaining a stay, the compliance deadline continues to run and penalties can accrue. Always apply for a stay at the same time as filing an appeal under paragraph 29.
What happens if the documents I was asked to produce no longer exist?
Documents that genuinely no longer exist cannot be produced, and you cannot be penalised for failing to produce them. You should write to HMRC promptly, identifying which documents no longer exist and explaining why. Where documents have been destroyed in the ordinary course of business (e.g. after the statutory retention period) and before the notice was issued, this is a strong position. Deliberate destruction after receiving the notice is an entirely different matter.