What happens if HMRC applies penalties incorrectly?

Understanding what it means when a penalty is “applied incorrectly”

When people say HMRC has applied a penalty “incorrectly”, they can mean several different things. Sometimes it’s a straightforward mistake: the penalty amount is wrong, a payment has been allocated to the wrong tax year, or HMRC’s records show a return as late when it was actually filed on time. Other times, “incorrect” is about the legal basis—HMRC has issued a penalty that the law doesn’t allow in the circumstances, or it has not followed the proper process. There are also situations where the penalty might be technically valid on paper, but unfair in practice because HMRC has ignored information, misread dates, or failed to take account of a reasonable excuse.

It’s important to separate three ideas that often get conflated:

First, a penalty can be wrong because the facts are wrong (for example, you did file on time). Second, a penalty can be wrong because HMRC has used the wrong rule or the wrong procedure (for example, it issued a penalty outside the time limits or without the correct notice). Third, a penalty can be contestable because the law gives you a defence (for example, you had a reasonable excuse for the default and you remedied it without unreasonable delay). Each of these leads to slightly different practical steps, but the overall theme is the same: an incorrectly applied penalty is not necessarily the end of the story, and you usually have routes to challenge it.

Common ways HMRC penalties can end up being wrong

HMRC issues a wide range of penalties: for late filing, late payment, inaccuracies in returns, failure to notify, and more. Because the systems and rules are complex, errors can happen. Here are patterns that frequently crop up.

Penalty issued despite compliance

This is the simplest category. You filed, paid, or submitted the information required, but HMRC’s systems did not recognise it. This can occur where:

• a return was filed but attached to the wrong UTR or reference;

• an agent filed on your behalf but the submission acknowledgement is not properly linked;

• a payment was made but allocated to the wrong period or tax type;

• HMRC’s internal processing delays made it look like a submission was late;

• postal submissions were sent in time but logged late.

If the penalty is based on a factual error, the remedy is often to provide evidence: submission receipts, bank statements, proof of posting, screenshots of online confirmations, or correspondence showing the correct position. HMRC may cancel the penalty once its records are corrected.

Penalty amount calculated incorrectly

Even where some penalty is due, the amount may be miscalculated. This can happen when HMRC uses an incorrect start date, applies the wrong percentage, doubles up penalties for overlapping periods, or fails to account for payments already made. With late payment penalties, for example, the effective date can depend on when the tax was legally due and how payments were allocated. With late filing penalties, there may be flat-rate amounts, daily penalties, or tax-geared penalties depending on the regime involved, and mistakes occur when systems assume a higher tier than actually applies.

In these cases, you may not be arguing “no penalty at all” but rather “not this amount”. The practical aim becomes to isolate the error and present a clear alternative calculation.

Penalty issued under the wrong regime or for the wrong obligation

HMRC administers different penalty regimes for different taxes and different periods. For example, the rules for Self Assessment late filing penalties are not the same as the rules for PAYE penalties, VAT default surcharges (historic) or newer VAT penalties, or penalties linked to Making Tax Digital requirements. If HMRC has issued a penalty based on an obligation you did not have—for example, assuming you were required to file a return when you were not—then the penalty may be invalid from the outset.

A related issue is where HMRC has not properly recorded a de-registration, cessation, or change of status, and it continues to expect filings or payments that are no longer due. That can lead to automated penalties being generated repeatedly.

Failure to follow the correct process or notice requirements

Penalty rules often require HMRC to issue certain notices, specify reasons, or follow a sequence before penalties become legally due. In some contexts, HMRC must issue an assessment or penalty notice within a set time limit. In others, HMRC must set out the grounds clearly enough for you to understand what is alleged and how the amount has been calculated. If the required process is not followed, you may have grounds to argue the penalty is not properly payable.

In practice, this is one of the harder arguments to run without careful reading of the penalty notice and an understanding of the relevant rules. But even without being a specialist, you can still take practical steps: ask HMRC to explain the legal basis, the dates used, and the calculation method. If HMRC cannot provide a coherent explanation, that often reveals a problem.

Ignoring “reasonable excuse” or treating evidence unfairly

Many penalty regimes allow a penalty to be cancelled if you had a reasonable excuse for the failure and you put things right as soon as you reasonably could. Common examples can include serious illness, bereavement, unexpected hospitalisation, loss of records due to fire or flood, system failures outside your control, or significant HMRC errors that prevented compliance.

Sometimes HMRC rejects reasonable excuse claims too quickly, asks for evidence that is disproportionate, or fails to engage with the specific timeline of events. An incorrect penalty in this context might be “incorrectly maintained” rather than “incorrectly issued”: the penalty exists initially, but should be cancelled once reasonable excuse is accepted.

What actually happens when HMRC has applied a penalty incorrectly

The real-world outcome depends on the nature of the error and how you respond. In broad terms, one of four things tends to happen: the penalty is cancelled entirely; it is reduced; it is put on hold while HMRC reviews or while an appeal is considered; or it remains in place until you take further steps (for example, escalation or tribunal).

Cancellation and correction of records

If the penalty is wrong because HMRC’s records are wrong, the main “event” is a correction. HMRC updates its systems, reallocates payments, records the correct submission date, or amends your filing obligation. The penalty is then withdrawn. In many cases HMRC will issue a letter confirming the cancellation, and any amounts already paid against the penalty should be repaid or set against other liabilities (depending on what is outstanding).

In practice, the experience can vary. Sometimes the cancellation is quick, especially if you can provide clear evidence. Other times, corrections take time because different teams handle different taxes, and the penalty might remain visible on your online account while back-office processing catches up. It’s wise to keep a paper trail of everything you submit and any confirmation you receive.

Reduction or recalculation

If the penalty is partially right but the amount is wrong, HMRC may replace the original figure with a revised one. That can feel frustrating—people often want the entire penalty “gone”—but a recalculation can still be a positive result if it removes an inflated charge.

Where the penalty is linked to an underpayment and interest has been accruing, the recalculation may also affect the interest or the way payments are allocated. If you are disputing amounts, it can be helpful to ask HMRC to provide a breakdown showing what the revised penalty relates to, and which dates and figures were used.

Suspension or “stand over” during appeal

In many cases, if you appeal a penalty, you can ask for the penalty to be stood over—effectively paused—so you are not forced to pay it while the dispute is ongoing. Whether and how this happens can depend on the type of penalty and the stage of the dispute, but the key practical point is that you should not assume that “it’s under appeal” automatically stops collections. If you receive payment demands while you are actively challenging a penalty, you can contact HMRC to explain and ask for collection action to be paused, ideally with reference to your appeal.

Escalation and tribunal outcomes

If HMRC does not agree that the penalty was applied incorrectly, the dispute can escalate. This can lead to formal review within HMRC, alternative dispute resolution in some contexts, or an appeal to the tax tribunal. If a tribunal finds HMRC has applied the penalty incorrectly, the tribunal can cancel or amend it. This is a more formal route and may require more preparation, but it exists precisely because HMRC decisions are not meant to be final when they are wrong.

The immediate risks of leaving an incorrect penalty unchallenged

Even if you are confident a penalty is wrong, ignoring it is rarely a good idea. HMRC systems can continue to chase the debt, and an unresolved penalty can create knock-on issues.

Debt collection pressure and further charges

If a penalty remains on your account, HMRC may issue reminders, add interest (where applicable), and take collection steps. What HMRC can do depends on the tax and the nature of the amount due, but the general risk is that matters can escalate if you do nothing. That escalation can make the situation feel more serious than it needs to be, particularly when the underlying penalty is actually wrong.

Impact on future compliance and “risk” signals

Penalties can affect how your account is viewed. A history showing repeated late filing or late payment penalties may trigger more scrutiny, more reminders, or quicker escalation in future interactions. Even where the penalties are wrong, leaving them on record can create an unhelpful narrative. Getting incorrect penalties removed is therefore not only about the money—it can also be about keeping your compliance history accurate.

Cashflow and psychological drag

Wrong penalties can tie up money if you pay first and argue later. They can also create ongoing worry, particularly for small businesses and individuals who are already juggling deadlines. The longer a dispute drags on, the harder it can feel to gather documents and reconstruct timelines. Prompt action usually makes it easier to prove your case.

How to tell whether a penalty might be incorrect

You don’t need to be an expert to do an initial sense-check. A good approach is to treat it like debugging: confirm the basic facts, check the dates, and request the calculation breakdown.

Step 1: Identify exactly what the penalty is for

Look at the notice or your online account and pin down:

• which tax (Self Assessment, VAT, PAYE, Corporation Tax, etc.);

• which period or tax year;

• whether it relates to filing, payment, accuracy, or another obligation;

• the date HMRC says the failure occurred;

• the date HMRC says the obligation was due.

Errors often reveal themselves at this stage. For example, the notice might refer to a period you were not trading, or it might assume you were registered when you were not.

Step 2: Check your evidence and timeline

Gather what you have: submission confirmations, receipts, bank statements, emails with your accountant, screenshots from your tax account, or proof of posting. If you rely on an agent, ask them for their filing receipt or confirmation. Write down a timeline of key dates: when you attempted to file, when you actually filed, when you paid, when you discovered the issue, and what steps you took to remedy it.

Step 3: Ask for the calculation and legal basis

If the notice is unclear or the figures don’t make sense, request a breakdown. A simple request can be powerful: ask HMRC to explain how the penalty was calculated, what dates were used, and which rule or regime it is under. If the penalty is automated, the person you speak to may need to refer it to another team, but the goal is to force clarity. Vague explanations often indicate an underlying error.

Step 4: Consider reasonable excuse and proportionality

Even if you think you were late, ask yourself whether there was a reasonable excuse and whether you acted promptly once the obstacle was removed. Many disputes turn on the detailed circumstances, not on broad statements like “I was busy” or “I forgot.” The more specific and evidenced your explanation, the stronger your position tends to be.

What you can do if HMRC has applied a penalty incorrectly

The appropriate response depends on what you want to achieve (cancellation, reduction, time to pay, record correction) and the stage you are at (new penalty notice versus ongoing dispute). But there are some practical principles that apply widely.

Appeal promptly, even if you’re still gathering evidence

Many penalties have time limits for appealing. If you miss the deadline, you may still be able to appeal late, but you’ll need a reason for the delay and you risk extra friction. A sensible approach is to appeal within time and state that you will provide supporting evidence shortly. The important thing is to register your disagreement formally rather than hoping it resolves itself.

Be precise and structured

When challenging a penalty, structure helps. Explain in plain language:

• what you believe is wrong (for example, “HMRC records show the return was filed late, but it was filed on 25 January and the acknowledgement number is X”);

• what evidence you have (attach copies where possible);

• what outcome you want (cancel the penalty, amend the amount, correct the filing obligation);

• what you want HMRC to do next (confirm cancellation in writing, update your online account, refund amounts paid).

A focused request is easier for HMRC to action and easier for you to escalate if needed.

Use the right channel and keep a full record

Depending on the tax and the penalty, you may be able to appeal online, by post, or by phone (with later written confirmation). Online routes can be faster and provide an audit trail, but not all penalties have an easy online appeal option. If you post anything, keep copies and proof of posting. If you phone, note the date, time, name of the adviser, and what they said. If you upload evidence, keep a copy of what you uploaded and the submission confirmation.

Ask for collection action to be paused where appropriate

If the penalty is being chased while under dispute, you can ask HMRC to pause collection action. Make the request clearly, referencing that you have appealed and giving any reference numbers. This is especially important if you are receiving automated demands or if the penalty is causing hardship.

Request a review if HMRC refuses your appeal

If HMRC rejects your challenge, you may be entitled to ask for an internal review by a different HMRC officer. A review can be worthwhile where the first decision feels rushed or where you believe key facts were missed. Use the refusal letter to identify what HMRC thinks the dispute is about, then address those points directly.

Consider independent appeal routes if needed

If you remain dissatisfied after HMRC’s decision (and any review), you may be able to appeal to the tribunal. This is more formal but can be the correct route when the issue is clearly one of law, process, or evidence that HMRC is refusing to accept. Even preparing for tribunal can clarify the strengths and weaknesses of your case because it forces you to line up the timeline, documents, and arguments.

What if you’ve already paid the incorrect penalty?

Paying a penalty does not necessarily mean you have accepted it. People often pay because they want to stop letters, avoid escalation, or protect cashflow planning. If the penalty is later cancelled or reduced, HMRC should adjust your account accordingly.

Repayments versus reallocations

If you have other tax liabilities, HMRC may offset the overpaid penalty against those amounts rather than issuing a cash refund. That can be fine if it reflects what you want, but it can also create confusion if you were expecting money back. If you are due a refund and you need it paid out rather than reallocated, you may need to request that explicitly.

Interest and knock-on adjustments

Where interest is involved, cancelling or reducing a penalty can affect the interest position as well. Similarly, if a payment was wrongly allocated, fixing the allocation can change what HMRC thinks is outstanding, which can then change later charges. It’s worth checking your statements after any adjustment to ensure the correction has fully flowed through.

When the issue is HMRC delay or HMRC error

A recurring frustration is when HMRC mistakes create the very problem that triggers a penalty. For example, HMRC might issue a notice to file late, fail to process a de-registration, lose correspondence, or provide incorrect information that leads you to miss a deadline. In these situations, it can feel doubly unfair to be penalised.

Where HMRC error is a key driver, it is especially important to document it: keep letters, screenshots of guidance given to you, and any call notes you made at the time. The more you can show that you acted reasonably and relied on what HMRC did or said, the stronger the argument tends to be that the penalty should not stand.

Practical examples of incorrectly applied penalties and what the outcomes look like

Seeing how these disputes play out can make the process less abstract. Here are some typical scenarios.

Example 1: You filed on time but HMRC shows it late

You submit your Self Assessment return online before the deadline and receive an on-screen confirmation. A month later, a late filing penalty appears. In many cases, the fix is to provide the submission receipt or the acknowledgement reference and ask HMRC to reconcile the record. Outcome: penalty cancelled once HMRC matches the submission to your account, and your compliance record updates.

Example 2: Payment allocated to the wrong tax year

You pay your tax on time, but you accidentally use an old payment reference or HMRC allocates it incorrectly. HMRC issues a late payment penalty based on an “unpaid” balance. The solution is to show the payment date and reference, and request reallocation. Outcome: the penalty may be cancelled or recalculated depending on whether the payment date was genuinely on time and whether any balance remained outstanding.

Example 3: You were not required to file

HMRC issues a penalty because it believes you were required to file a return, but you had ceased trading and had notified HMRC, or you were never actually in Self Assessment for that year. The remedy is to challenge the underlying filing obligation and provide evidence of cessation or correspondence. Outcome: the filing obligation is withdrawn and the penalties fall away.

Example 4: Reasonable excuse due to serious illness

You miss a deadline because you were seriously ill and in hospital, and you file as soon as you are able. HMRC issues a penalty and initially refuses to cancel it, saying you should have arranged someone else to file. You provide evidence of the severity and timeline and request a review. Outcome: HMRC may cancel the penalty if it accepts the excuse and that you remedied the default promptly, or you may need to escalate if HMRC remains rigid.

How to communicate with HMRC to maximise your chances of success

There is a difference between being “right” and getting the system to reflect that you are right. Good communication can shorten the time it takes to resolve an incorrect penalty.

Use simple language and avoid side disputes

Stick to the issue. If the penalty is wrong because you filed on time, don’t dilute your message with unrelated grievances. If the penalty is wrong because the amount is miscalculated, focus on the calculation. You can always raise service complaints separately if needed, but mixing a complaint with an appeal can muddy the waters.

Make it easy for the reader

HMRC staff deal with large volumes of cases. Help them help you. Include your identifying information, the penalty reference, the period, and a short summary at the top. Attach evidence with clear labels. If you are posting, use copies not originals.

State your requested outcome clearly

Don’t assume HMRC will infer what you want. Say, “Please cancel the penalty and confirm in writing,” or “Please amend the penalty amount to £X based on the enclosed calculation,” or “Please withdraw the notice to file and remove associated penalties.” A clear ask reduces miscommunication.

What if you genuinely can’t pay while the penalty is disputed?

Sometimes the dispute is only one part of the problem: the penalty is causing financial strain. Even if you believe the penalty is wrong, you may still need to manage cashflow risk while it is being resolved.

In those circumstances, it can be sensible to engage with HMRC early about affordability, rather than waiting for enforcement pressure. You can explain that you are disputing the penalty but also want to avoid escalation. The key is to keep the dispute and the payment conversation aligned so you don’t accidentally undermine your appeal.

Service complaints versus appeals: knowing the difference

An appeal is about whether the penalty is legally due or should be cancelled under the rules (including reasonable excuse). A complaint is about the quality of service: delays, poor communication, lost documents, rude treatment, or repeated administrative errors. You can do both, but they achieve different outcomes.

If HMRC applied a penalty incorrectly because of poor handling—such as ignoring evidence or repeatedly misallocating payments—you may want to complain as well as appeal. Complaints can sometimes lead to apologies or modest compensation for poor service, but they do not replace the need to challenge the penalty through the proper appeal route.

Key takeaways and a calm way forward

If HMRC applies penalties incorrectly, the most common practical outcome is that the penalty is cancelled, reduced, or paused once the error is identified and properly challenged. But that doesn’t always happen automatically. The safest approach is to treat any unexpected penalty as time-sensitive: check the facts, gather your evidence, appeal within the relevant time limit, and ask HMRC to explain the calculation and legal basis if anything is unclear.

Most importantly, try not to let the presence of a penalty notice convince you that you must have done something wrong. Automated systems can produce incorrect charges, and human errors can compound them. A structured response—focused on dates, evidence, and clear requests—gives you the best chance of getting an incorrect penalty removed and your account corrected so you can move on without the issue resurfacing later.