Reform of behavioural tax penalties

Simplification to the tax system has long been a priority for both the public and professionals. In response to a 2024 call for evidence as part of the “The Tax Administration Framework Review”, many agreed there was potential for fewer, simpler penalties and there was scope to simplify the way in which the behaviours resulting in those penalties were assessed. 

The Government launched a consultation on 26 March 2025 to gather views on proposals to simplify and strengthen behavioural penalties, considering both reform of the current system and possible alternatives. The consultation addressed issues such as:

• the timing, nature and quality of disclosure;
• penalty rates for deliberate or repeated behaviour; 
• the impact of offshore activities; 
• the potential for suspending penalties; and 
• the use of non-financial penalties. 

The current penalties position

To understand the context for reform, it is important to consider how the current penalties regime operates. 

HMRC’s existing penalties apply to most taxes when inaccuracies are found in returns and documents submitted to HMRC, and where taxpayers do not meet their obligations to notify HMRC of circumstances that affect their tax liability.

Penalties arising from an inaccuracy are set out in Schedule 24 Finance Act 2007. The penalty is a percentage of the potential lost revenue to HMRC (the tax due because of the inaccuracy) which falls into one of 6 penalty ranges based on the behaviour of the taxpayer. This considers whether the taxpayer took reasonable care, was careless, deliberate or deliberate and concealed their actions, whether the error was a result of a prompted or unprompted disclosure and the quality of their disclosure. Penalties can be mitigated by telling, helping or giving HMRC access to records. 

Penalties arising from failure to notify are set out in Schedule 41 of the Finance Act 2008. This penalty regime applies across most taxes where a taxpayer fails to notify HMRC on time of circumstances concerning their tax liability. Again, the penalty is assessed on the behaviour of the taxpayer and quality of disclosure and the appropriate rate is then multiplied by the potential lost revenue to HMRC.

For both types of penalty, determining the correct rate to apply can be complex and timely, requiring a full assessment of behaviours and mitigation.

The Government’s consultation

With this background in mind, the outcome of the Government’s consultation provides insight into the direction of future reforms. The consultation outcome, published on 26 November 2025 confirms that there is a strong case for simplifying and strengthening the current behavioural penalties, to reduce their complexity and improve their role in supporting compliance.

As such, the Government has confirmed that it intends to develop draft legislation to achieve these reform objectives (although has not yet provided a timeline to do so). 

In particular, the Government intends to consider the following measures:

• Encourage early disclosure: The Government will explore options to encourage early, voluntary disclosures and corrections by reducing or removing penalties in some instances (such as timing of disclosure), alongside strengthening penalties where taxpayers fail to take reasonable steps to correct issues once they are aware of them.
  
  
• Reform of the penalty suspension regime: The Government will consider replacing HMRC’s ability to suspend penalties for careless errors with the ability to issue warnings for a first, careless inaccuracy.  HMRC will consider when this approach might not be appropriate, and if this could also extend to failures to notify.
  
  
• Strengthen sanctions for tax evasion: The Government intends to strengthen sanctions for taxpayers who seek to evade tax. This will include tougher penalties for deliberate behaviour alongside exploring the practicalities of introducing higher penalties for repeated deliberate behaviour. At Budget 2025, the Government announced an intention to introduce a new ‘recklessness’ offence to align criminal offences across direct and indirect taxes, and will consider whether this model could inform the behaviours assessed for civil penalties as well.
  
  
• Reform publication of deliberate defaulters: On non-financial sanctions, the Government does not intend to bring forward the sanctions proposed in the consultation (such as disqualification from driving or cancellation of passports) but will introduce changes to the publication of details of deliberate defaulters (otherwise known as the “Name and Shame” regime), as announced at Budget 2025.
  
  
• Improve offshore compliance: The Government will consider considering options to improve information-sharing between jurisdictions and simplify offshore penalties.

Insights and next steps

The outcome of the Government’s consultation on reform of behavioural penalties confirmed the Government’s decision to enhance, rather than replace, the existing behavioural penalties regime for inaccuracies and failure to notify.  

Notably, the introduction of a warning for a first careless inaccuracy is a promising proposal, as it removes the need to establish and agree SMART (specific, measurable, achievable, relevant, time-bound) conditions for suspending penalties in such cases. This pragmatic approach is expected to provide greater clarity and predictability for taxpayers, while reducing administrative burden and minimising operational disruption.

Considering these forthcoming changes, taxpayers are advised to monitor legislative developments and proactively review their tax governance and compliance processes (where appropriate) and position themselves to benefit from any reductions for early disclosure, although noting that the Government has not provided a timeframe in which they plan to implement any such changes.