HMRC cancels record 46,266 late tax return penalties

HM Revenue and Customs (HMRC) cancelled 46,266 tax return penalties last year, the highest number on record, according to its latest annual accounts.

The surge in cancellations—up 29% from the previous year—relates to automatic fines issued for missed self-assessment and VAT deadlines. Taxpayers can appeal penalties if they filed late through no fault of their own or were mistakenly asked to complete a tax return.

HMRC attributed the increase in overturned penalties to the introduction of a new VAT penalty regime in January 2023, which made it easier for businesses to appeal through their online accounts.

Andrew Park of Price Bailey said delays in banking, administrative failings by HMRC, and poor customer service contributed to taxpayers filing late.

In the first half of 2024–25, HMRC failed to answer 35% of phone calls, missing its 85% target. Its customer service levels have since improved due to the deployment of extra advisers.

Many of the cancelled fines were issued to individuals who ultimately owed no tax. Park said: “Late filing penalties are disproportionately levied on people on low incomes, many of whom have no tax to pay.”

Recent data obtained via freedom of information request revealed that 600,000 penalties have been issued in the past five years to people earning below the tax-free personal allowance.

Think tank Tax Policy Associates has called on HMRC to scrap late penalties for those earning under £12,570.

HMRC has introduced a new points-based penalty system for taxpayers in the Making Tax Digital programme. Under the new system, immediate £100 fines no longer apply, and penalties are capped at £200 per tax return.

Those outside the programme remain under the previous regime.

In total, HMRC issued nine million penalties last year, up from over eight million the year before.

Park added: “When two-thirds of appealed penalties are overturned, yet only a small fraction of the nine million issued are challenged, it suggests a significant number of taxpayers may be paying penalties they could successfully contest.”

HMRC asks individuals who no longer need to submit a tax return to inform them before the 31 January deadline.

A spokesperson for HMRC said: “Our penalty reforms enable customers to appeal easily and quickly online against both penalties and penalty points. Our new points-based system means only those who persistently miss deadlines will incur a financial penalty.”