The use of HMRC's harshest penalties has more than doubled in five years.

HMRC imposed 31,500 of the toughest penalties at its disposal on taxpayers last year, more than double the amount imposed five years ago (14,400).

HMRC is clearly becoming more trigger happy with these penalties, so what do taxpayers need to know? 

These penalties are imposed for “deliberate” errors on tax returns and can be for as much as 100% of the tax HMRC believes it is owed. This means taxpayers effectively owe double the amount which can put serious financial pressure on some individuals with more modest incomes.

Unfortunately, these penalties also have other connotations. Taxpayers who receive “deliberate” penalties may find themselves being tracked by HMRC for several years afterwards. This increases the chances that HMRC will spot an error in the future which could lead to an investigation and even further penalties.

It is easy to see why HMRC would use these penalties as a way to access compounded returns, with one penalty imposed potentially resulting in more further down the line.

Taxpayers need to be aware of what acts as a red flag to HMRC when filing tax returns in order to avoid be subjected to investigations and penalties.

For example, HMRC says the following would be considered as deliberate behaviour which would result in a “deliberate” penalty being imposed:

• Overstating your business expenses
• Understating your income
• Paying wages without accounting for Pay As You Earn and National Insurance contributions

HMRC’s aggressive approach to imposing penalties is further highlighted when looking at other categories of penalty, such as those for “failure to take reasonable care”. This is a slightly less serious penalty which enables HMRC to charge up to 30% of the amount of tax it believes is owed. These penalties are imposed for failing to keep records updated and accurate.

Last year, HMRC imposed 82,000 of these penalties of which 43% had to be suspended on appeal, up from 33% that had to be suspended five years ago (28,600 of 85,600).

HMRC has imposed over 715,000 penalties over the last five years and this upward trend looks set to continue. It is therefore crucial that taxpayers take care when filing their returns and seek advice if they are unsure of anything.

Investigations can be costly, time consuming and stressful for taxpayers with penalty charges further asdding to this. PFP are tax specialists and can provide protection against the cost of most tax investigations with our Fee Protection offering.