Failure-to-notify penalties should not be calculated simply by applying a percentage to the gross tax appearing on a late Self Assessment return. For Income Tax and Capital Gains Tax, the penalty is driven by the potential lost revenue arising from the failure, and tax already deducted or paid can materially change that figure.
There is also a more fundamental question: if sufficient tax had already been deducted at source to satisfy the individual’s net liability, there may have been no obligation to notify chargeability in the first place, subject to specific exceptions.
When failure-to-notify penalties can arise
An individual who is chargeable to Income Tax or Capital Gains Tax and has not received a notice requiring a return will ordinarily need to notify HMRC by 5 October following the end of the tax year.
However, the notification obligation does not generally arise where there is no remaining Income Tax or Capital Gains Tax liability or sufficient tax has already been deducted at source to meet the net liability, subject to matters such as higher-rate tax still being due or liability to the High Income Child Benefit Charge.
The notification rules where tax has already been deducted therefore need to be checked before assuming that late registration automatically creates a penalty.
This is particularly important for employees whose main salary has been taxed correctly under PAYE but who later discover a smaller untaxed source such as rental income, foreign interest or a taxable benefit.
Failure-to-notify penalties are based on unpaid tax
Where there has been a failure to notify, failure-to-notify penalties for Income Tax and Capital Gains Tax are based on potential lost revenue.
For these taxes, the relevant potential lost revenue is broadly the amount of tax remaining unpaid on 31 January following the end of the tax year. The potential lost revenue calculation for Income Tax and CGT specifically measures the amount unpaid at that date.
This can produce a very different figure from the total tax liability.
If the final Self Assessment calculation shows £18,000 of Income Tax but £15,500 has already been deducted under PAYE, the relevant balance may be £2,500 rather than £18,000, before considering payments made by the 31 January date and the precise circumstances.
A payment made before 31 January can therefore reduce the potential lost revenue even where notification itself was late.
Foreign tax affects the calculation differently from PAYE
Foreign tax should not simply be deducted from a penalty computation because money has been paid abroad. The first question is whether Foreign Tax Credit Relief is legally available against the UK liability.
The relevant treaty, income category, overseas taxing right and UK credit limit must be established. Only then can the correct net UK liability be determined.
If £10,000 of UK tax arises on foreign income but £7,000 of admissible foreign tax credit is available, the underlying UK liability associated with that income may effectively be £3,000. If the foreign tax does not qualify for credit, the fact that £7,000 was paid overseas does not itself reduce UK potential lost revenue.
The penalty schedule should therefore reconcile foreign income and available credit before the percentage is applied.
Behaviour determines the penalty range
Once potential lost revenue has been established, the penalty percentage depends on whether the failure was non-deliberate, deliberate, or deliberate and concealed. Offshore matters can carry different penalty rules and potentially higher ranges.
The quality and timing of the disclosure also matter. Telling HMRC about the issue, helping quantify the unpaid tax and giving appropriate access to records can reduce the percentage within the applicable range.
An unprompted disclosure before HMRC has begun looking at the issue can therefore have a materially different penalty outcome from waiting until after contact has been received.
Reasonable excuse is considered before the penalty is finalised
No failure-to-notify penalty is due where the individual had a reasonable excuse for the failure and remedied it without unreasonable delay once that excuse ended. Reasonable excuse depends on the circumstances and abilities of the person concerned rather than a closed statutory list.
A penalty review should therefore establish the notification obligation, net liability, payments by 31 January, foreign tax credit, behaviour and reasonable excuse separately.
Where HMRC has already opened enquiries, the response should form part of a structured HMRC tax investigation strategy. Where the omission is discovered first by the taxpayer, an appropriate tax disclosure may preserve a stronger unprompted-disclosure position.
Disclaimer: This article is provided for general guidance only and does not constitute personal tax, legal or financial advice. The correct tax treatment depends on the specific facts, applicable legislation and HMRC practice at the relevant time. You should contact us for advice tailored to your circumstances before taking or refraining from any action.
